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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES Washington, D.C. 20549 FORM
10-KSB [X]
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. For
the fiscal year ended June 30, 2003 OR [
] 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 (IRS
Employer Identification No.) Incorporation
or Organization) 151
E. Columbine Avenue, Santa Ana, California 92707 (Address
of Principal Executive Offices) Issuer's
telephone number: (714) 241-4411 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
1 Check whether the issuer (1) has filed all reports required by Section 13
or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes
[X] No [ ] Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its
most recent fiscal year were $11,990,000. The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price as of September 17, 2003 was $10,997,000. For the purpose of this calculation, shares owned by officers, directors
and 10% stockholders known to the registrant have been deemed to be owned by
affiliates. This determination of affiliate status is not a determination for
other purposes. Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock outstanding as of the latest practicable date: 8,776,600 shares of Common Stock, no par value, as
of September 17, 2003. DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates by reference
certain information from the registrant's definitive proxy statement (the
"Proxy Statement") for the 2003 Annual Meeting of Shareholders.
Certain exhibits are set forth in the Exhibit Index. The Exhibit Index begins
on sequentially numbered page 40. Transitional Small Business
Disclosure Format: Yes [ ] No [X] Cautionary
statement pursuant to safe harbor provisions of the Private Securities
Litigation reform act of 1995. When used in this report on Form 10-KSB, the words "expects,"
"anticipates," "estimates," "believes,"
"hopes," "intends," "forecasts" and similar
expressions are intended to identify "forward-looking statements."
These statements which are not historical or current facts are made pursuant to
the safe harbor provisions of Section 27a of the Securities Act of 1933, as
amended and Section 21e of the Securities Exchange Act of 1934, as amended, and
the Company intends that such forward-looking statements be subject to those
safe harbor provisions for such statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date of this report. While forward-looking
statements represent management's best judgment as to what may occur in the
future, they are subject to risks, uncertainties and important factors beyond
the control of the Company that could cause actual results and events to differ
materially from historical results of operations and events as well as those
presently anticipated or projected. These factors include adverse economic
conditions, entry of new and stronger competitors, capital availability, unexpected
costs, failure to capitalize upon access to new customers, and marketplace
delisting. Other risks and uncertainties which may affect forward-looking
statements about the Company's business and prospects include, but are not
limited to, the ramifications of the continued industry consolidation of dental
dealers and distributors, managed health care, increasingly limited acquisition
opportunities, the Company's ability to effectively integrate operations of
acquired companies, dealer acceptance and support of new products, maintaining
favorable supplier relationships, the inability to engage qualified human
resources as needed, the possibility of marketplace delisting, and general
economic conditions. The Company disclaims any obligations subsequently to revise
any forward-looking statements to reflect events or circumstances after the
date of such statement or to reflect the occurrence of anticipated or
unanticipated events. 2 PART I Item 1. Business Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-KSB, including discussions of the
Company's product development plans, business strategies and market factors
influencing the Company's results, are forward-looking statements that involve
certain risks and uncertainties. Actual results may differ from those
anticipated by the Company as a result of various factors, both foreseen and
unforeseen, including, but not limited to, the Company's ability to continue to
develop new products and increase systems sales in markets characterized by
rapid technological evolution, consolidation within the Company's target
marketplace and among the Company's competitors, and competition from larger,
better capitalized competitors. Many other economic, competitive, governmental
and technological factors could impact the Company's ability to achieve its
goals. Interested persons are urged to review the risks described herein, as
well as in the Company's other public disclosures and filings with the
Securities and Exchange Commission. Company Overview Pro-Dex, Inc. ("Pro-Dex" or the "Company") is a Colorado
corporation, organized in 1978, currently doing business through two wholly
owned operating subsidiaries, Micro Motors, Inc. ("Micro Motors") and
Oregon Micro Systems, Inc. ("OMS"). Micro Motors, headquartered in
Santa Ana, California, designs, develops and manufactures electric, air, and
battery powered rotary drive systems for the medical device industry, electric
and air devices for the dental industry, and miniature pneumatic motors for
industrial applications. OMS is headquartered in Beaverton, Oregon, where it
designs and manufactures embedded multi-axis motion controllers used to
regulate the motion of servo and stepper motors, predominantly for the
semiconductor and medical analysis equipment industries. Over the past
three years, the Company has evolved significantly in response to changing
market conditions. This evolution includes the strategic refocusing of the
Company's subsidiaries, the development of new products, technologies and
customer relationships, the re-casting of operational infrastructure, the
divestiture of segments of the Company's operations, and the consolidation of
the Company's executive offices and staff. In addition, the Company is
aggressively pursuing opportunities to lever the strategic synergies of the
subsidiaries, increasing the interaction between the subsidiaries and better
aligning the overall strategic direction of the Company. Pro-Dex Pro-Dex has
continued to evolve since the divestiture of the Company's Biotrol and
Challenge subsidiaries in June of 2001. The proceeds from that transaction
were used to retire all of the Company's then existing bank debt, leaving the
Company virtually debt free as of June 30, 2001, and less than half its former
size. In response to the reduction in the Company's operations, the Company's
executive operations in Colorado were consolidated into the Micro Motors
facilities in Santa Ana, California. This effort to reduce corporate overhead saved
the Company approximately $980,000 in fiscal year 2003 as compared to fiscal
year 2002. The Company's principal headquarters are located at 151 E. Columbine
Avenue, Santa Ana, California 92707 and its phone number is 714-241-4411.
The Company's internet address is www.pro-dex.com.
The Company's annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K, amendments to those reports and other Securities
and Exchange Commission ("SEC") filings are available free of charge through
our website as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the SEC. 3 Description of Business of the Subsidiaries Micro Motors Micro Motors, headquartered in Santa Ana, California, designs, develops
and manufactures electric, air, and battery powered rotary drive systems for
the medical device industry, electric and air devices for the dental industry,
and miniature pneumatic motors for industrial applications. Micro Motors also
distributes its own line of pneumatic and electric dental hand pieces sold
under the trademarks Dynatorq™, Dynasurg™, and Micro Handpiece™ through a
network of independent sales representatives across North America. In addition,
Micro Motors has developed and sells numerous private label rotary drive
systems for use in dental, cranial, spinal, arthroscopic and orthopedic
surgery. Micro Motors also designs and manufactures miniature pneumatic motors
for industrial applications in the automotive, aerospace, apparel and
entertainment industries. Significant
aspects of the Micro Motors subsidiary have changed in the last three years.
Historically known as a precision manufacturer of dental hand pieces, Micro
Motors has shifted its focus to the development and exclusive supply of rotary
drive systems for strategic partners in the medical, dental and industrial
segments of the commercial marketplace. This new approach to the market has
proved to be effective in generating new revenue streams with gross margins
significantly higher than Micro Motor's historical business. Company funded research and development supports the development of
rotary drive platforms. Micro Motors then seeks customer funded projects to
customize these platforms to specific customer requirements. Company funded
research and development projects generally are expected to convert to
customer-funded projects within six months,. Company funded project costs are expensed as
incurred. In customer funded development projects, costs are capitalized and
recognized as a cost of goods sold as specific deliverables within the
development contracts are made, matching the costs to the revenue and reducing
the performance and collection risk to the Company. The results of the
development work are intended to provide the Company with long-term exclusive
manufacturing agreements and provide the customer with retention of the
intellectual property developed. The identity of the customer is generally
protected by a non-disclosure agreement. Internally, Micro Motors has consolidated its operations and reduced the
expenses related to those operations, while continuing to grow overall sales
and develop new products. Since 1999, such measures include reducing its
workforce by 30% and consolidating its manufacturing operations to a 20,000
square foot facility from a 38,000 square foot facility. At the same time,
Micro Motors has increased the size of its Engineering and Product Development
Group, further enabling it to respond to market demands for new products and
new technologies. Micro Motors'
revenue is derived from three main market segments. Micro Motors dental
products are sold to original equipment manufacturers and dental product
distributors. An independent dealer network was established in 2003 to market
its own branded line of dental products in a more effective manner. Micro
Motors medical products sales represent the manufacture of proprietary designs
developed by Micro Motors under exclusive design and supply agreements. Micro
Motors pneumatic motors for industrial applications are marketed directly to
end-users and through industrial supply distributors. The increase in the
percent of sales of medical products and the decrease in the percentage of
sales of dental product sales is a direct result of the shift in the focus of
the Company's research and development efforts away from dental products and
toward the Company's capabilities in the medical product market. The
proportion of Micro Motors total sales to each market segment is noted in the
table below; 4 Micro Motors Market
Segment 2003
2002
Dental 56%
68%
Medical 31% 15%
Industrial 8%
11%
Other 5% 6% Of Micro Motors sales in 2003, over 30% were shipments of products
developed in the last 12 months and 45% were shipments of products developed in
the last 24 months as a result of Research and Development contracts with new
or existing customers. In 2003, 20 customers accounted for 85% of Micro Motors sales, up from 79%
in 2002. Micro Motors' three largest customers accounted for 34% of such sales
and no single customer accounted for over 15% of sales. Micro Motors' larger
customers include Smith and Nephew and Medtronics. Disclosure of other larger
customer names is prohibited by confidentiality agreements with such entities.
Sales to medical customers tend to be to relatively larger companies, as
compared to customers for dental products that are typically to smaller
companies. Micro Motors has no plans to discontinue the sales relationships,
and has no knowledge that these customers have any plans to discontinue their
relationships with Micro Motors, although the relationships may change over
time to reflect a different mix of engineering and manufacturing. All of the raw materials used by Micro Motors in the manufacture of its
products are purchased from various suppliers and are available from several
sources. Precipart Corporation and Hi-Tech Electronic Manufacturing Inc. are
two of its key suppliers. Micro Motors considers its relationships with its
various suppliers and manufacturers to be good. Micro Motors does not intend
to terminate any relationship at this time, nor does management have knowledge
that any supplier or manufacturer will terminate its relationship with Micro Motors.
Micro Motors has no exclusive arrangements with any of its suppliers or
manufacturers. Micro Motors' commitment to quality manufacturing is demonstrated by its
many independently verified certifications for maintaining quality processes
and products. Micro Motors holds the following certifications: ISO 9001:2000,
ISO 13485 revised 1998, and Medical Device Directive 93\42\EEC Annex II
company. At the present time, Micro Motors is generally able to fill orders within
sixty (60) days. At June 30, 2003, Micro Motors had backorders of $267,000 and
future orders of $4.3 million compared with backorders of $173,000 and future
orders of approximately $2.1 million at June 30, 2002. Micro Motors expects to
fill all of its future orders during the current fiscal year. Micro Motors
does not typically experience seasonal fluctuations in its orders. Oregon Micro Systems OMS is headquartered in Beaverton, Oregon, where it designs and
manufactures embedded multi-axis motion controllers used to regulate the motion
of servo and stepper motors, predominantly for the semiconductor and medical
analysis equipment industries. OMS' motion controllers are used in a wide
range of applications including semiconductor wafer handling equipment, medical
diagnostic equipment, photon accelerators and observatories. The OMS
controllers support the platforms for PCI, VME, ISA, and cPCI busses as well as
standalone requirements. Other products sold by OMS include motors, drivers,
cables, software and a variety of accessories to meet most embedded motion
control requirements. During the past five
years, OMS has benefited and suffered from the rapidly changing environment of
the semiconductor industry. It is characterized by dramatic changes in demand
for products. While recording two of its best operational performances in
fiscal years 1999 and 2000 with revenues in each year exceeding $7 million, OMS
was impacted severely by the downturn in the semiconductor industry beginning
in November of 2000. Comparatively, in the most recent fiscal years of 2002
and 2003, revenues for OMS have been $2.2 and $2.7 million, respectively. In
2003, OMS began to improve revenues both in the semiconductor and
non-semiconductor business as those markets have begun to regain strength. 5 In response to
the rapidly changing market conditions, OMS also significantly reduced its
number of employees, made deep cuts in operational expenses and focused on
maximizing the sales of existing product to existing customers. At the same
time, OMS accelerated the development of a new generation of motion control
technology, based on the PowerPC processor. This new servo/stepper controller
became available in fiscal year 2003 and will be expanded to create a full line
of new products. OMS continues to develop new customer relationships and sales
with companies outside the semiconductor industry. OMS' revenue is
derived from predominately four market segments, including semiconductor
equipment, medical diagnostic equipment and instrumentation, distribution and
government. The semiconductor equipment markets have accounted for up to 60%
of OMS' sales in recent years, however due to the technology down cycle, OMS
has implemented sales strategies to penetrate other markets. The increase in
the percentage of semiconductor market sales in 2003 is due to resurgence in
demand in the semiconductor industry. The proportion of total sales to each
market segment is noted in the table below: OMS Market Segment 2003
2002
Semiconductor 38%
29%
Medical 21% 30%
Distribution 17%
24%
Government 15%
6%
Other 9% 11% OMS distributes
its product directly to original equipment manufacturers (OEM's) and through a
network of high technology distributors within the United States.
Internationally, OMS has agreements with foreign distributors of electronic and
motion control products. OMS' largest
customer accounts for 13% of its sales, with the second through fourth-largest
customers accounting for the next 27% of sales. These relationships are well
established. OMS has no plans to discontinue the relationships, and has no
knowledge that these customers have any plans to discontinue their
relationships with OMS. OMS purchases
raw printed circuit boards and electronic components used to manufacture its
products. OMS is a certified ISO9001:2000 company and uses only qualified
assemblers, component manufactures and distributors in the manufacture of its
products. Two of OMS' key suppliers are Insight Electronics, LLC and Avenet
Electronics Marketing. These relationships are well established, and OMS has
no current plans to discontinue the relationships, and has no knowledge that
these suppliers have any plans to discontinue their relationship with OMS. OMS
holds no franchises and has no exclusive arrangements with any of its suppliers
and manufacturers. At the present time, OMS is generally able to fill orders within
forty-five (45) days. At June 30, 2003, OMS had no backorders and had future
orders of $914,000 compared with no backorders and future orders of $540,000 at
June 30, 2002. OMS does not typically experience seasonal fluctuations in its
orders, although there are significant fluctuations in the market demand of
products in the industries it serves. 6 Competition
The
markets for healthcare and semiconductor industries are intensely competitive,
and the Company faces significant competition from a number of different
sources. Several of the Company's competitors have significantly greater name
recognition as well as substantially greater financial, technical, product
development and marketing resources than the Company. The
Company competes in all of its markets with other major healthcare and
semiconductor related companies. Competitive pressures and other factors, such
as new product or new technology introductions by the Company or its
competitors, may result in price or market share erosion that could have a
material adverse effect on the Company's business, results of operations and
financial condition. Also, there can be no assurance that the Company's
products and services will achieve broad market acceptance or will successfully
compete with other products targeting the same customers. Research
and Development The Company maintains research and development programs in its two
subsidiaries. The Company considers these product development programs to be of
importance in both maintaining and improving its market position. The net
amounts spent on research and development activities in 2003 and 2002 were
approximately $1.46 million and $1.55 million, respectively. Micro Motors'
research and development effort involves the design and manufacture of products
that perform specific applications for its customers. During the year ended June 30, 2003, Micro Motors continued to successfully target its research and development
expenses to expanding its customer base in the medical device industry. Micro
Motors was also successful in increasing the amounts of its research and
development costs recovered by billing its customers for non-recurring engineering
expenses. The fees received for non-recurring engineering expenses do not
represent a significant portion of Micro Motors' revenue. OMS' research and
development investment was reduced, as the MAX product line was substantially
completed in 2003. The remaining investment was in general technical advances,
along with continued enhancements of current product lines. OMS makes no
specific billings for its research and development efforts. Employees At June 30, 2003, the Company had 85 full-time and 1 part-time employees
(excluding independent contractors) compared to 83 full-time and 3 part-time
employees at June 30, 2002. Micro Motors employed 71 persons, OMS employed 15
persons, and there were no employees assigned to corporate headquarters. None of the Company's employees are a party to any collective bargaining
agreements with the Company. The Company considers its relations with its
employees to be good. Government
Regulations The manufacture and distribution of dental and medical devices such as
the Micro Motors products are subject to a number of state and federal
regulatory bodies, including state dental boards and the Food and Drug
Administration ("FDA"). The statutes, regulations, administrative
orders, and advisories that affect the Company's businesses are complex and
subject to diverse, often conflicting, interpretations. While the management of
each of the Company's operating subsidiaries makes every effort to maintain
full compliance with all applicable laws and regulations, the Company is unable
to eliminate an ongoing risk that one or more of its activities may at some
point be determined to have been non-compliant. The penalties for
non-compliance could range from an administrative warning to termination of a
portion of the Company's business. Further, even if the Company is
subsequently determined to have fully complied with applicable law or
regulation, its costs to achieve such a determination and the intervening loss
of business could adversely affect or even terminate a portion of the Company's
business. Further, a change in such laws or regulations at any time may have an
adverse effect on the Company's operations. Notwithstanding the risks inherent
in the Company's business sectors, management believes that each of the Company's
subsidiaries is in compliance with applicable laws and regulations. 7 The FDA regulates Micro Motors dental and medical handpieces as Class 1
and Class 2 medical devices. The FDA has broad enforcement powers to recall
and prohibit the sale of products, which do not comply with federal
regulations, and to order the cessation of non-compliant processes. No claim
has been made to date by the FDA regarding any Micro Motors products or
processes. Nevertheless, as is common in the industry, certain of Micro Motors
products and processes have been the subject of routine governmental reviews
and investigations. While the Company's management is confident that Micro
Motors' products and processes fully comply with applicable laws and
regulations, the Company is unable to predict the outcome of any such
investigation or review, pending its completion. Management believes that Micro
Motors follows Good Manufacturing Practices (GMP). Management believes that OMS' business in the assembly and distribution
of multi-axis motion control circuit boards, including the processes and
materials, is conducted in a manner consistent with EPA regulations governing
disposition of industrial waste materials. Although the semiconductor and
computer chip industries are significantly impacted by EPA regulations
applicable to the processes and materials used in production of computer chips
and computer chip components, OMS' management has undertaken measures, where
possible, to reduce OMS' exposure to the risk of non-compliance. Most
significantly, OMS acquires pre-manufactured printed circuit boards as
platforms upon which to place OMS technology. While the Company's management is
confident that OMS products and processes fully comply with applicable laws and
regulations, the Company is unable to predict the outcome of any investigation
or review which may in the future be undertaken respecting OMS or its products
or processes. Management believes that OMS follows GMP. Patents, Trademarks, and
Licensing Agreements The Company holds patents relating to the multi-axis motion controllers
manufactured by OMS. In addition, Micro Motors holds patents relating to its
miniature pneumatic motor products. Patents held by the Company and Micro
Motors have varying expiration dates, beginning in 2005. The Company conducted a limited review of the patents acquired in
connection with the OMS and Micro Motors acquisitions and believes that the use
of such patent is neither infringed upon by any third party, nor infringes on
any prior art of any third party. The Company is unable to assess the validity,
scope, or defensibility of its patents, and any challenge to or claim of
infringement relating to the Company's patents could materially and adversely
affect the Company's business and results of operations. The Company's Micro Motors subsidiary has certain trademarks relating to
its miniature pneumatic motor products, including Dynatorq™, Dynasurg™, and
Micro Handpiece™. OMS has filed for federal trademark protection for OMS-EZ™. Except as noted above, the Company has not entered into any licensing or
franchising agreements for revenue generating purposes. Funds held in escrow, Net,
Business Divestitures and Discontinued Operations On June 12, 2001, the Company sold substantially all of the assets of its
wholly owned subsidiaries, Biotrol International, Inc. and Challenge Products,
Inc. to Young Colorado, LLC ("Young"), for a purchase price of $9 million (the
"Young Transaction"). The assets sold comprised the Company's line of infection
control and preventive chemical products for the dental industry. The full
remaining escrow balance of $790,000, associated with such asset sale was
collected by October 2002, resulting in no additional gain or loss, and
completing the distribution of funds in escrow. 8 During the year ended June 30, 2002, the Company received indemnification
notices from Young, to recover alleged losses and costs as they are incurred
for certain alleged breaches of representations and warranties contained in the
Young Transaction Asset Purchase Agreement related to compliance issues with
the Food, Drug, and Cosmetic Act ("FDCA"), Federal Insecticide, Fungicide and
Rodentcide Act ("FIFRA"), and other related laws. In February 2002, the
Company settled a complaint with the Environmental Protection Agency ("EPA")
set forth in Young's indemnification notice for alleged violations of FIFRA and
FDCA. Pursuant to the settlement, the Company agreed to pay $150,000 to the
EPA, over a 15-month period, commencing March 2002. The full $150,000
settlement had been paid by April 30, 2003, leaving, in the opinion of
management, no additional liability under either Act. RISK FACTORS Competition
The
markets for healthcare and semiconductor industries are intensely competitive,
and the Company faces significant competition from a number of different
sources. Several of the Company's competitors have significantly greater name
recognition as well as substantially greater financial, technical, product
development and marketing resources than the Company. The
Company competes in all of its markets with other major healthcare and
semiconductor related companies. Competitive pressures and other factors, such
as new product or new technology introductions by the Company or its
competitors, may result in price or market share erosion that could have a
material adverse effect on the Company's business, results of operations and
financial condition. Also, there can be no assurance that the Company's
products and services will achieve broad market acceptance or will successfully
compete with other products. Fluctuation
in Quarterly Operating Results The
Company's revenues have fluctuated in the past, and may fluctuate in the future
from quarter to quarter and period to period, as a result of a number of
factors including, without limitation: the size and timing of orders from
customers; the length of new product development cycles; market acceptance of
new technologies; changes in pricing policies or price reductions by the
Company or its competitors; the timing of new product announcements and product
introductions by the Company or its competitors; the financial stability of
major customers; the Company's success in expanding its sales and marketing
programs; deferrals of customer orders in anticipation of new products; changes
in Company strategy; personnel changes; and general market/economic factors. Because
a significant percentage of the Company's expenses are relatively fixed, a
variation in the timing of sales can cause significant variations in operating
results from quarter to quarter. As a result, the Company believes that interim
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, the Company's historical operating results are not necessarily
indicative of future performance for any particular period. Due
to all of the foregoing factors, it is possible that in some future quarter(s)
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. 9 Dependence
on Principal Product and New Product Development The
Company currently derives a substantial part of its net revenues from sales of
its core healthcare and motion control products and services. The Company
believes that a primary factor in the market acceptance of its product and
services is the value that is created for its customers by those products and
services. The Company's future financial performance will depend in large part
on the Company's ability to continue to meet the increasingly sophisticated
needs of its customers through the timely development, successful introduction
and implementation of new and enhanced products and services. The Company has
historically expended a significant percentage of its net revenues on product
development and believes that significant continued product development efforts
will be required to sustain the Company's growth. Continued investment in the
Company's sales and marketing efforts will also be required to support future
growth. There can be no
assurance that the Company will be successful in its product development
efforts, that the market will continue to accept the Company's existing
products, or that new products or product enhancements will be developed and
implemented in a timely manner, meet the requirements of its customers, or
achieve market acceptance. If new products or product enhancements do not
achieve market acceptance, the Company's business, results of operations and
financial condition could be materially adversely affected. Technological
Change The
healthcare and semiconductor markets are generally characterized by rapid
technological change, changing customer needs, frequent new product
introductions, and evolving industry standards. The introduction of products
incorporating new technologies and the emergence of new industry standards
could render the Company's existing products obsolete and unmarketable. There
can be no assurance that the Company will be successful in developing and
marketing new products that respond to technological changes or evolving
industry standards. New
product development depends upon significant research and development
expenditures that depend ultimately upon sales growth. Any material weakness in
revenues or research funding could impair the Company's ability to respond to
technological advances in the marketplace and to remain competitive. If the
Company is unable, for technological or other reasons, to develop and introduce
new products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, results of operations and financial
condition may be materially adversely affected. In response to
increasing market demand, the Company is currently developing new products.
There can be no assurance that the Company will successfully develop these new
products or that these products will operate successfully, or that any such
development, even if successful, will be completed concurrently with or prior
to introduction of competing products. Any such failure or delay could
adversely affect the Company's competitive position or could make the Company's
current products obsolete. Litigation The
Company continually faces the possibility of litigation as either a plaintiff
or a defendant. It is not reasonably possible to estimate the awards or
damages, or the range of awards or damages, if any, that the Company might
incur in connection with such litigation. The uncertainty associated with
potential litigation may have an adverse impact on the Company's business. In
particular, such litigation could impair the Company's relationships with
existing customers and its ability to obtain new customers. Defending such
litigation may result in a diversion of management's time and attention away
from business operations, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Such
litigation may also have the effect of discouraging potential acquirers from
bidding for the Company or reducing the consideration such acquirers would
otherwise be willing to pay in connection with an acquisition. There
can be no assurance that such litigation will not result in liability in excess
of its insurance coverage, that the Company's insurance will cover such claims
or that appropriate insurance will continue to be available to the Company in the
future at commercially reasonable rates. 10 Proprietary
Technology The
Company is dependent on the maintenance and protection of its intellectual
property and relies on exclusive development and supply agreements,
confidentiality procedures, and employee nondisclosure agreements to protect
its intellectual property. There
can be no assurance that the legal protections and precautions taken by the
Company will be adequate to prevent misappropriation of the Company's
technology or that competitors will not independently develop technologies
equivalent or superior to the Company's. Further, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States and are often not enforced as vigorously as
those in the United States. The Company does not
believe that its operations or products infringe on the intellectual property
rights of others. However, there can be no assurance that others will not
assert infringement or trade secret claims against the Company with respect to
its current or future products or that any such assertion will not require the
Company to enter into a license agreement or royalty arrangement with the party
asserting the claim. Ability to
Manage Growth The
Company has in the past experienced periods of growth that have placed, and may
continue to place, a significant strain on the Company's resources. The Company
also anticipates expanding its overall development, marketing, sales,
management and training capacity as market demand requires. In the event the
Company is unable to identify, hire, train and retain qualified individuals in
such capacities within a reasonable timeframe, such failure could have a
material adverse effect on the Company. In
addition, the Company's ability to manage future increases, if any, in the
scope of its operations or personnel will depend on significant expansion of
its research and development, marketing and sales, management, and
administrative and financial capabilities. The failure of the Company's
management to effectively manage expansion in its business could have a
material adverse effect on the Company's business, results of operations and
financial condition. Dependence
Upon Key Personnel The
Company's future performance also depends in significant part upon the
continued service of its key technical and senior management personnel, many of
who have been with the Company for a significant period of time. The Company
does not maintain key man life insurance on any of its employees. Because the
Company has a relatively small number of employees when compared to other
leading companies in the same industry, its dependence on maintaining its
relationship with key employees is particularly significant. The Company is
also dependent on its ability to attract and retain high quality personnel,
particularly in the areas of product development and operations management. A
high level of employee mobility and the aggressive recruiting of skilled
personnel characterize the healthcare and semiconductor industries. There can
be no assurance that the Company's current employees will continue to work for
the Company. Loss of services of key employees could have a material adverse
effect on the Company's business, results of operations and financial
condition. Furthermore, the Company may need to grant additional stock options
to key employees and provide other forms of incentive compensation to attract
and retain such key personnel. The Company
experienced changes in some of its key management positions in the past two
years as it has streamlined its operations. In the year ended June 30, 2002, Kent Searl retired as President and Chief Executive Officer of the Company
and was replaced on an interim basis by Frank Zagar. Mr. Zagar completed a
substantial part of the corporate reorganization and in September 2002,
resigned his operating position, while remaining a Director through the
shareholder's meeting held in November 2002. Patrick Johnson, Micro Motors
President, assumed the role of the President and Chief Executive Officer of the
Company in addition to retaining his role as President of Micro Motors. In May
2002, George Isaac resigned his operating position as Treasurer and Chief
Financial Officer of the Company, while remaining Corporate Secretary and a
Director, and Jeffrey J. Ritchey assumed the role of the Treasurer and Chief
Financial Officer of the Company in addition to retaining his role as
Controller of Micro Motors. The Company believes that the new Chief Executive
Officer and Chief Financial Officer have the background and experience
necessary to be able to perform the duties required for these positions. 11 Product
Liability The
Company maintains insurance to protect against claims associated with the use
of its products, but there can be no assurance that its insurance coverage
would adequately cover any claim asserted against the Company. A successful
claim brought against the Company in excess of its insurance coverage could
have a material adverse effect on the Company's business, results of operations
and financial condition. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can be no
assurance that the Company will not be subject to product liability claims,
that such claims will not result in liability in excess of its insurance
coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. Such claims could have a material adverse
affect on the Company's business, results of operations and financial
condition. Marketplace Delisting In June 2002,
the Company received a notice from NASDAQ indicating that unless its stock
price maintained a $1.00 per share closing bid price for ten consecutive
trading sessions, the Company's stock would be delisted on December 3, 2002. As the Company maintained $5,000,000 of stockholders' equity, meeting one of the
qualifications to remain listed, the Company received notice in December 2002
that the delisting was extended for 180 days. On March 24, 2003 the SEC approved a NASDAQ marketplace rule change that would extend the delisting date an
additional 90 days or until September 2, 2003 contingent upon the Company
continuing to meet the qualifications noted above. On June 19, 2003, the Company received notice from NASDAQ indicating that the stock price had
maintained a closing bid price of over $1.00 for at least 10 consecutive
trading days and had regained compliance with the listing requirements. There
is no assurance that the Company's shares will maintain a sufficiently high
price to eliminate future delisting notices and subsequent delisting. Item 2.
Properties The Company's executive office and Micro Motors' office and manufacturing
facility are located at 151 East Columbine Avenue, Santa Ana, California 92707.
On July 1, 2001, Micro Motors consolidated its operations at the Santa Ana
location into one of the two buildings it had been occupying. The building is
a two-story building of concrete tilt-up construction, approximately 25 years
old and in good condition. Micro Motors leased those buildings under a
previously existing lease from Mr. Ronald G. Coss, currently a director of the
Company, at a monthly rental of $29,816 that expired March 31, 2001 and continued to lease the buildings on a month-to-month basis until June 30, 2001. A new lease for one of those buildings commenced July 1, 2001 for five years at a monthly rent of $12,285, before yearly inflation adjustments. The building
was sold and the lease assigned to an unrelated third party in January, 2002.
The Company's management believes that the monthly rental is comparable to
rents charged for comparable properties in the market area. Micro Motors took
action in its fiscal year 2001 and fiscal year 2002 to remediate hazardous
waste contamination on the property, which was completed in June of 2002 at a
cost of approximately $60,000. Micro Motors and the Company require full
compliance by the lessor with applicable California and EPA environmental
standards. OMS' offices and manufacturing facilities are located at 1800 N.W. 169th
Place, Building C100, Beaverton, Oregon 97006. OMS leases the 11,000 square
foot facility from an unrelated third party, at a base monthly lease rate of
$9,100, which lease has been extended through October 2007. The building is a
one story suite in a 15-year-old industrial office complex and is in good
condition. 12 Item 3. Legal
Proceedings The manufacture and distribution of certain products by subsidiaries of
the Company involves a risk of legal action, and, from time to time, the
Company and its subsidiaries are named as defendants in lawsuits. While the
Company's management believes that these matters will not have a material
adverse impact on the financial condition of the Company, there can be no
certainty that the Company may not ultimately incur liability or that such
liability will not be material and adverse. The Company is a party to various legal proceedings incidental to its
business, none of which are considered by the Company to be material at this
time. Item 4.
Submission of Matters to a Vote of Security Holders During the Year Ended June 30, 2003 No matter was submitted to a vote of the Company's shareholders during
the fourth quarter ended June 30, 2003. PART
II Item 5. Market
for Registrant's Common Stock and Related Stockholder Matters The Company's no par value common stock is quoted under the symbol
"PDEX" on the automated quotation system of the National Association
of Securities Dealers Small Cap Market ("NASDAQ"). The following
table sets forth for the quarters indicated the high and low sales prices as
reported by NASDAQ. The quotations reflect inter-dealer prices, without retail
markup, markdown, or commissions, and may not necessarily represent actual
transactions. Quarter Ended High
Low
September 30, 2001 1.16
1.03
December 31, 2001 1.10
0.73
March 31, 2002 1.34
0.81
June 30, 2002 1.15
0.51
September 30, 2002 0.70
0.34
December 31, 2002 0.69
0.38
March 31, 2003 0.76
0.47
June 30, 2003 1.32
0.47
On September 17, 2003, the last sale price of the common stock as
reported by NASDAQ was $1.70 per share. In June 2002,
the Company received a notice from NASDAQ indicating that unless its stock
price maintained a $1.00 per share closing bid price for ten consecutive
trading sessions, the Company's stock would be delisted on December 3, 2002. As the Company maintained $5,000,000 of stockholders' equity, meeting one of the
qualifications to remain listed, the Company received notice in December that
the delisting was extended for 180 days. On March 24, 2003 the SEC approved a NASDAQ marketplace rule change that would extend the delisting date an
additional 90 days or until September 2, 2003 contingent upon the Company
continuing to meet the qualifications noted above. On June 19, 2003, the Company received notice from NASDAQ indicating that the stock price had
maintained a closing bid price of over $1.00 for at least 10 consecutive
trading days and had regained compliance with the listing requirements. There
is no assurance that the Company's shares will maintain a sufficiently high
price to eliminate future delisting notices and subsequent delisting. 13 At June 30, 2003, there were approximately 341 holders of record of the
Company's common stock. This number does not include beneficial owners
including holders whose shares are held in nominee or "street" name. The Company has not paid a cash dividend with respect to its common
stock, and has no present intention to pay cash dividends in the foreseeable
future. The current policy of the Company's Board of Directors is to retain
earnings to provide funds for the operation and expansion of its business. The
Board of Directors, in light of the circumstances then existing, including the
Company's earnings and financial requirements and general business conditions,
will determine future dividends. There are no restrictions on the Company in
issuing dividends associated with the credit line with Wells Fargo Business
Credit, Inc. (WFBCI). Equity Compensation Plan
Information Plan Category Number
of Shares to be Weighted
Average Number
of Securities Plans Approved by Stockholders 1,363,405 $1.11 636,595 Plans Not Approved by
Stockholders 402,000 1.45 ---
14
SECURITIES AND EXCHANGE COMMISSION
For the transition period from to
.
(Title of class)
Issued Upon Exercise
Exercise Price
Available for Issuance
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition for each of the two years ended June 30, 2002 and 2003, respectively. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Report. This Report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. The Company's actual future results could differ materially from those discussed herein. The Company's critical accounting policies relate to inventory valuation for slow moving items, allowance for funds in escrow, impairment of goodwill, and recoverability of deferred income taxes.
Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-KSB, including discussions of the Company's product development plans, business strategies and market factors influencing the Company's results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by the Company as a result of various factors, both foreseen and unforeseen, including, but not limited to, the Company's ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation within the Company's target marketplace and among the Company's competitors, and competition from larger, better capitalized competitors. Many other economic, competitive, governmental and technological factors could impact the Company's ability to achieve its goals. Interested persons are urged to review the risks described herein, as well as in the Company's other public disclosures and filings with the Securities and Exchange Commission.
Selected Financial Data
The following table sets forth selected financial data regarding the Company's financial position and operating results. This data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(All amounts in thousands)
Year Ended June 30, |
||
2003 |
2002 |
|
Statement of Operations Data |
||
Net sales |
$11,990 |
$10,526 |
Cost of sales |
7,075 |
6,426 |
Gross profit |
4,915 |
4,100 |
Operating expenses |
4,609 |
6,235 |
Net operating profit (loss) |
306 |
(2,135) |
Net other expense |
51 |
240 |
Income tax expense (credit) |
122 |
(1,210) |
Income (loss) from continuing operations |
133 |
(1,165) |
(Loss) from discontinued operations |
-- |
(401) |
Net income (loss) |
$133 |
$(1,566) |
15
RESULTS OF OPERATIONS
Results of Operations for Fiscal Year Ended June 30, 2003, Compared to Fiscal Year Ended June 30, 2002
The following table sets forth for the periods indicated the percentage of net revenues represented by each item in the Company's Consolidated Statements of Income.
Year Ended June 30, |
||||
2003 |
2002 |
|||
Net Revenues: |
100.0% |
100.0% |
|
|
|
||||
Cost of Goods Sold |
59.0 |
61.0 |
|
|
Gross Profit |
41.0 |
39.0 |
|
|
|
||||
Selling, General and Administrative Expenses |
26.0 |
40.0 |
|
|
Research and Development Costs |
12.2 |
14.7 |
|
|
Amortization |
0.2 |
4.6 |
|
|
Income (loss) from Operations |
2.6 |
(20.3) |
|
|
|
||||
Net interest and other (loss) |
(0.5) |
(2.3) |
|
|
Net after tax (loss) from discontinued operations |
-- |
(3.8) |
|
|
|
||||
(Provision) credit for Income Taxes |
(1.0) |
11.5 |
|
|
Net Income (Loss) |
1.1% |
(14.9%) |
|
|
Net Sales. Consolidated sales increased 14% for the year ended June 30, 2003, compared to the year ended June 30, 2002, due to increased sales at both Micro Motors and OMS. At Micro Motors, sales increased 12% due to increased volume of medical product shipments that rose 133% compared to the previous year. The increase in medical products more than offsets the decline of sales in the other product lines. Revenue at Oregon Micro Systems increased 21% for the year ended June 30, 2003 compared to the same period of the previous year. The revenue increase at OMS was caused by the resurgence of orders from customers in the semiconductor fabrication equipment industry, as they are beginning to replenish inventories with new products. Sales to customers outside the semiconductor industry were flat. Selective price increases and decreases are implemented at Micro Motors and OMS in response to market conditions. The majority of the sales growth and declines for each product line is due to increased or decreased sales volume, not the effect of these price changes.
Net sales by subsidiary and type of customer were as follows:
2003 2002 |
Increase/ |
||||
Dental |
$ |
5,213,000 |
$ |
5,594,000 |
(7%) |
Medical |
2,851,000 |
1,226,000 |
133% |
||
Industrial |
730,000 |
949,000 |
(23%) |
||
Repair & Other |
487,000 |
516,000 |
(6%) |
||
Micro Motors |
$ |
9,281,000 |
8,285,000 |
12% |
|
Oregon Micro Systems |
2,709,000 |
2,241,000 |
21% |
||
Total |
$ |
11,990,000 |
$ |
10,526,000 |
14% |
16
Gross Profits. The Company's consolidated gross profit for the year ended June 30, 2003 increased $815,000 or 20% over the gross profit in the previous year due to increased sales at both operating subsidiaries and higher margins at OMS. Gross profit as a percentage of sales increased to 41% for the year ended June 30, 2003 compared to 39% for the year ended June 30, 2002, as the gains made by increased sales, the ongoing Company-wide cost reduction efforts and a richer product mix favoring medical shipments at Micro Motors were dampened by the initial costs associated with first run production for new products. Gross Profit at Micro Motors decreased from 36% of sales in 2002 to 30% of sales in 2003 due to inefficiencies associated with the manufacturing of certain new products. Gross Profit at OMS increased from 50% of sales in 2002 to 78% of sales in 2003 due to higher volume and a reduced cost base.
Gross profits by subsidiary were as follows:
Increase/ |
|||||
2003 |
2002 |
(Decrease) |
|||
Micro Motors |
2,808,000 |
2,982,000 |
(6%) |
||
Oregon Micro Systems |
2,107,000 |
1,118,000 |
88% |
||
Total |
$ |
4,915,000 |
$ |
4,100,000 |
20% |
Selling, General and Administrative Costs (S, G&A). S, G & A expenses decreased 33% to $3,152,000 for the year ended June 30, 2003 from $4,690,000 for year ended June 30, 2002. The decrease is mainly due to reduced amortization and cost saving measures implemented at the corporate and subsidiary level offset by increased selling expense at Micro Motors. The main cost decreases at Corporate were equipment leasing costs that were reduced by $370,000 and management expense which decreased $360,000. At OMS the largest decrease was in reduced amortization of $400,000 in 2003.
S, G & A expenses by subsidiary were as follows:
Increase/ |
|||||
2003 |
2002 |
(Decrease) |
|||
Micro Motors |
1,626,000 |
1,543,000 |
5% |
||
Oregon Micro Systems |
700,000 |
1,344,000 |
(48%) |
||
Corporate |
826,000 |
1,803,000 |
(54%) |
||
Total |
$ |
3,152,000 |
$ |
4,690,000 |
(33%) |
In 2002, in accordance with FAS 121 "Accounting for the Impairment of Long-Lived Assets," management reviewed the remaining goodwill recorded at OMS and determined that the remaining fair value of the asset was impaired. Management's decision was based on the fact that future cash flows at OMS will not exceed the carrying value of the asset and that OMS generated current year losses. As such, management determined that the carrying value should be zero; expensing the remaining $154,000 as general and administrative expense in the statement of operations. The balance of goodwill is related to the Micro Motors subsidiary and as of June 30, 2002, remaining goodwill net of accumulated amortization totaled $1,110,000.
On July 1, 2002 the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company has compared the carrying value of the Micro Motors subsidiary with the estimated fair value of the reporting unit and determined that none of the goodwill recorded as of June 30, 2002 or as of April 1, 2003 was impaired. The Company's goodwill amortization expense for the year ended June 30, 2003 was $0, and for the year ended June 30, 2002 was approximately $85,000, excluding the $154,000 that was written off in fiscal year 2002.
17
Research and Development Costs. Research and development expenses decreased to $1,458,000 for the year ended June 30, 2003 from $1,545,000 for the year ended June 30, 2002, a decrease of 6%. The decrease is due to cost cutting at OMS concurrent with the completion of the MAX system product line development.
The Company engages in two types of research and development efforts. The first is funded by the Company itself, intended to develop generic rotary drive technologies and products that will subsequently be modified to meet the needs of individual customers. In this initial phase, there are generally no revenues generated and the associated costs are expensed as incurred.
Company funded research and development costs by subsidiary were as follows:
Increase/ |
|||||
2003 |
2002 |
(Decrease) |
|||
Micro Motors |
782,000 |
765,000 |
2% |
||
Oregon Micro Systems |
675,000 |
780,000 |
(13%) |
||
Total |
$ |
1,457,000 |
$ |
1,545,000 |
(6%) |
The second type of research and development efforts are those performed for and funded by specific customers under the terms of a formal development agreement. These efforts are generally for specific modifications to the generic products developed by the Company funded research. These projects are usually performed under the terms of a development agreement and typically take place within 12 months of the generic development work being completed. The Company recognizes revenue under these research and development agreements as certain deliverables are met as specified in each development contract. The research and development costs associated with these efforts are capitalized and recognized as costs of goods sold (COGS") when the contracted deliverable is made.
The following table segments the Company's research and development efforts for the year ended June 30, 2003 into two specific applications and three sub-categories of the type of work performed.
Motion Control Systems |
Rotary Drive Systems |
|
Technology research and development |
$ 371,000 |
$ 122,000 |
Design development |
236,000 |
857,000 |
Process development |
68,000 |
245,000 |
Total R&D |
675,000 |
1,224,000 |
Less R & D recognized as COGS |
---- |
(442,000) |
Total Company funded R&D |
$ 675,000 |
$ 782,000 |
Disclosure of customer names, project status and economic impact of those projects which are fundamental to the Company's business strategy, is prohibited in each specific case by confidentiality agreements.
Net Interest Expense. Net interest expense was $87,000 in the year ended June 30, 2003 compared to $117,000 for the year ended June 30, 2002. The expense was lower as debts to a stockholder and a debt associated with the Company's prior real estate holdings in Missouri were paid off in 2002 and early 2003.
Provision for Taxes. The Company's effective tax rate on income (loss) from operations is 48% for the year ended June 30, 2003, and was 39% in the year ended 2002. In 2002, the Company realized the benefit from the resolution of tax contingencies of approximately $289,000. The Company's effective tax rate for discontinued operations was approximately 39% for fiscal 2002. The Company's effective tax rate of 48% differs from the expected rate of 39% due primarily to the change in tax asset valuation allowance.
18
For the year ended June 30, 2003, management has recorded a valuation allowance of $227,000 against deferred tax assets. Management believes that it is more likely than not that the deferred tax assets will be fully recovered. A valuation allowance has been provided for state tax credits, as management believes that the amount of future state taxable income necessary to utilize these credits is not more likely than not to be realized. Net realizable deferred tax assets could be reduced if estimates of future profitability are reduced or if future changes in the ownership of the Company occur.
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include inventory valuations for slow moving items, allowances for funds in escrow, impairment of goodwill and the recovery of deferred income tax assets.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. The most significant tax assets are future deductions from the amortization of intangibles over the next ten years. Tax assets also result from net operating losses and research and development tax credits. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, the impact will be included in the tax provision in the statement of operations.
Net Income. The Company made a profit from continuing operations of $133,000 or $0.02 per share, basic and $0.01 per share diluted for the year ended June 30, 2003 compared to a (loss) from continuing operations of ($1,165,000) or ($0.13) per share basic and diluted for the year ended June 30, 2002.
Net income (loss) for the year ended June 30, 2003 was $133,000 or $0.02 per share, basic and $0.01 per share diluted compared to ($1,566,000) or ($0.18) per share basic and diluted for the year ended June 30, 2002. Loss from discontinued operations for the year ended June 30, 2002 was ($401,000) or ($0.05) per share.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the periods indicated:
2003 |
2002 |
|
Cash and cash equivalents |
$795,000 |
$236,000 |
Net cash provided by (used in) operations |
$503,000 |
($1,757,000) |
Working Capital |
$4,584,000 |
$3,999,000 |
Credit Line outstanding balance |
$432,000 |
$638,000 |
Tangible book value/common share (undiluted) |
$0.72 |
$0.70 |
Number of days of sales
outstanding in accounts |
50 |
57 |
The Company's working capital at June 30, 2003 increased to approximately $4.6 million compared to approximately $4.0 million at June 30, 2002 as cash generated from operations was used to reduce accounts payable and accrued expenses in 2003. Cash Flow provided by (used in) Operations was $503,000 in the year ended June 30, 2003 compared to ($1,757,000) for the year ended June 30, 2002. Cash was provided through returning the Company to profitability and improved working capital management. Management believes that the Company's working capital needs over the next twelve months can be adequately supported by current operations.
19
The Company has increased its backlog and future orders to $5.5 million at June 30, 2003 compared to $2.8 million at June 30, 2002. This increase is attributed to booking significant orders in the fourth quarter that were related to production contracts from the previous year's development efforts. The backlog and future orders are expected to be fully shipped over the next 12 months.
The subsidiaries of the Company entered into a credit facility with Wells Fargo Business Credit Inc. (WFBCI) in May 2002 for borrowings up to the lesser of $3,000,000 or the total of the eligible accounts receivable. The terms of the credit facility expire May 2005 and require monthly interest payments at the prime rate (4.00% at June 30, 2003) plus 1.00% to 1.75% based on outstanding borrowings, with a minimum interest charge of $12,500 per quarter. The outstanding borrowings are secured by all assets of the Company's two subsidiaries, Micro Motors and OMS, and are guaranteed by the Company. The outstanding balance under the terms of this credit facility as of June 30, 2003 was $432,000. The total additional eligible borrowing capacity based on the receivables balances at June 30, 2002 was $562,000. There are certain financial and non-financial covenants that the Company must meet to be in compliance with the terms of the credit facility. There was one amendment to the loan agreement made subsequent to June 30, where a technical correction was made to the definition of "Net Income" as it applied to the covenant calculations.
As of June 30, 2003, Micro Motors and OMS were not in compliance with the net income (loss) and tangible net worth covenants, for which it received a waiver from WFBCI on September 17, 2003.
In September 2002, the Company's Board of Directors authorized the repurchase on the open market of up to 500,000 shares of the Company's outstanding Common Stock, subject to compliance with applicable laws and regulations. There is no requirement that the Company repurchase all or any portion of such shares. The maximum total value of the repurchase is not to exceed $500,000. This repurchase is to be financed both with cash generated by operations and through the utilization of the Company's credit facility. From the inception of the repurchase authorization through the year end date of June 30, 2003, the Company repurchased 75,700 shares of Common Stock for $43,741, at an average price of $0.58 per share.
At June 30, 2003, the Company had cash and cash equivalents of $795,000. The Company believes that its cash and cash equivalents on hand at June 30, 2003, together with cash flows from operations, if any, and amounts available under the credit facility will be sufficient to meet its working capital and capital expenditure requirements for fiscal 2004.
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. In addition, suppliers pass along rising costs to the Company's subsidiaries in the form of higher prices. 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.
20
Item 7. Financial Statements and Supplemental Data
23 |
|
24 |
|
25 |
|
26 |
|
27 |
|
28 |
Item 8. Changes and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
Item 8A. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2003 ("Evaluation Date"), that the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.
There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.
21
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with 16(a) of the Securities Exchange Act of 1934
Information concerning the Company's Directors and Executive Officers is incorporated by reference from the information contained in the Company's definitive Proxy Statement for the Company's 2003 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission (the "Proxy Statement").
Item 10. Executive Compensation
Information required by this Item is included by reference from the section entitled "Compensation of Executive Officers and Management" contained in the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is included by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
Information required by this Item is included by reference from the information contained in the section entitled "Certain Relationships and Related Transactions" contained in the Proxy Statement.
Item 13. Exhibits, and Reports on Form 8-K
(a)
Exhibits (1)
(b) No reports on Form 8K were filed in the fourth quarter of the Company's
most recently completed fiscal year.
(1) See Exhibit Index
22
To the Board of Directors
Pro-Dex, Inc.
Santa Ana, California
We have audited the accompanying consolidated balance sheet of Pro-Dex, Inc. and Subsidiaries (the "Company") as of June 30, 2003, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2003, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 2 to the financial statements, effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets"
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
August 8, 2003, except as to the last paragraph of Note 3 as to which the date is September 17, 2003.
Irvine, California
23
PRO-DEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
June 30, 2003
ASSETS |
|
Current assets: |
|
Cash and cash equivalents |
$ 795,000 |
Accounts receivable, net of allowance for doubtful accounts |
|
of $30,000 |
1,620,000 |
Inventories, net |
2,835,000 |
Prepaid expenses |
81,000 |
Deferred taxes |
770,000 |
Total current assets |
6,101,000 |
Equipment and leasehold improvements, net |
1,040,000 |
Other assets: |
|
Other |
20,000 |
Deferred taxes |
833,000 |
Goodwill |
1,110,000 |
Total other assets |
1,963,000 |
Total assets |
$ 9,104,000 |
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
Current liabilities: |
|
Current portion of long term debt to shareholder |
$ 65,000 |
Credit line payable |
432,000 |
Accounts payable |
642,000 |
Accrued expenses |
349,000 |
Income taxes payable |
29,000 |
Total current liabilities |
1,517,000 |
Long-term debt to a shareholder, net of current portion |
145,000 |
Total liabilities |
1,662,000 |
Commitments and contingencies |
|
Shareholders' equity: |
|
Series A convertible preferred shares; no par value; liquidation preference of |
|
$3.60 per share; 10,000,000 shares authorized; 78,129 shares issued and outstanding |
283,000 |
Common shares; no par value; 50,000,000 shares authorized; 8,711,600 shares issued |
|
and outstanding, |
14,999,000 |
Accumulated deficit |
(7,789,000) |
7,493,000 |
|
Receivable for stock purchase |
(51,000) |
Total shareholders' equity |
7,442,000 |
Total liabilities and shareholders' equity |
$ 9,104,000 |
See notes to consolidated financial statements.
24
PRO-DEX,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years ended June 30, 2003 and 2002
2003 |
|
2002 |
|
Net sales |
$ 11,990,000 |
$ 10,526,000 |
|
Cost of sales (includes rent paid to a director of $62,000 in 2002) |
7,075,000 |
6,426,000 |
|
Gross profit |
4,915,000 |
4,100,000 |
|
Operating expenses: |
|||
Selling |
710,000 |
551,000 |
|
General and administrative expenses |
2,410,000 |
3,650,000 |
|
Research and development costs |
1,457,000 |
1,545,000 |
|
Amortization |
32,000 |
489,000 |
|
Total operating expenses |
4,609,000 |
6,235,000 |
|
Income (loss) from operations |
306,000 |
(2,135,000) |
|
Other income (expense): |
|||
Other income, net |
36,000 |
36,000 |
|
Interest (expense) |
(87,000) |
(117,000) |
|
Loss on disposal of equipment and leasehold improvements |
- |
(159,000) |
|
Total |
(51,000) |
(240,000) |
|
Income (loss) from continuing operations before provision for |
|
||
income taxes (credits) |
255,000 |
(2,375,000) |
|
Provision for income taxes (credits) |
122,000 |
(1,210,000) |
|
Income (Loss) from continuing operations |
133,000 |
(1,165,000) |
|
(Loss) on disposal of discontinued operations net of |
|||
(tax credits) of ($267,000) |
- |
(401,000) |
|
Net Income (loss) |
$ 133,000 |
$ (1,566,000) |
|
|
|||
Net Income (loss) per share from continuing operations: |
|||
Basic |
$ 0.02 |
$ (0.13) |
|
Diluted |
$ 0.01 |
$ (0.13) |
|
Net Income (loss) per share from discontinued operations: |
|||
Basic |
$ - |
$ (0.05) |
|
Diluted |
$ - |
$ (0.05) |
|
Net Income (loss) per share: |
|||
Basic |
$ 0.02 |
$ (0.18) |
|
Diluted |
$ 0.01 |
$ (0.18) |
|
Weighted average shares outstanding - basic |
8,743,575 |
8,787,300 |
|
Weighted average shares outstanding - diluted |
9,040,893 |
8,787,300 |
|
See notes to consolidated financial statements.
25
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||
Preferred Shares |
Common Shares |
|||||||||||
Receivable |
||||||||||||
Number |
Number |
Accumulated |
for Stock |
|||||||||
of Shares |
Amount |
of Shares |
Amount |
Deficit |
Purchase |
Total |
||||||
____________________________________________________________________________________ |
||||||||||||
Balance, June 30, 2001 |
78,129 |
$283,000 |
8,787,300 |
$15,020,000 |
($6,356,000) |
($101,000) |
$8,846,000 |
|||||
Stock based Compensation |
-- |
-- |
-- |
13,000 |
-- |
-- |
13,000 |
|||||
Services Received |
-- |
-- |
-- |
-- |
-- |
25,000 |
25,000 |
|||||
Net (loss) |
-- |
-- |
-- |
-- |
(1,566,000) |
-- |
(1,566,000) |
|||||
_____________________________________________________________________________________ |
||||||||||||
Balance, June 30, 2002 |
78,129 |
283,000 |
8,787,300 |
15,033,000 |
(7,922,000) |
(76,000) |
7,318,000 |
|||||
Stock based Compensation |
-- |
-- |
-- |
10,000 |
-- |
-- |
10,000 |
|||||
Treasury stock purchased |
-- |
-- |
(75,700) |
(44,000) |
(44,000) |
|||||||
Services Received |
-- |
-- |
-- |
-- |
-- |
25,000 |
25,000 |
|||||
Net income |
-- |
-- |
-- |
-- |
133,000 |
-- |
133,000 |
|||||
_____________________________________________________________________________________ |
||||||||||||
Balance, June 30, 2003 |
78,129 |
$283,000 |
8,711,600 |
$14,999,000 |
($7,789,000) |
($51,000) |
$7,442,000 |
|||||
See notes to consolidated financial statements.
26
PRO-DEX,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years ended June 30, 2003 and 2002
2003 |
|
2002 |
|
Cash Flows from Operating Activities: |
|||
Net Income (loss) |
$ 133,000 |
$ (1,566,000) |
|
Adjustments to reconcile net income (loss) to net cash provided |
|||
by (used in) operating activities: |
|||
Depreciation and amortization |
375,000 |
865,000 |
|
(Gain) loss on disposal of discontinued operations |
- |
401,000 |
|
Loss on sale of real estate available for sale |
- |
37,000 |
|
Loss on disposal of equipment and leasehold improvements |
- |
159,000 |
|
Impairment of intangible assets |
- |
154,000 |
|
(Recovery) Provision for doubtful accounts |
4,000 |
(18,000) |
|
Non-cash compensation |
35,000 |
38,000 |
|
Deferred taxes |
177,000 |
(902,000) |
|
Changes in: |
|||
(Increase) in accounts receivable |
(4,000) |
(216,000) |
|
Decrease in inventories |
89,000 |
83,000 |
|
Decrease in prepaid expenses |
3,000 |
12,000 |
|
Decrease in other assets |
17,000 |
75,000 |
|
(Decrease) in accounts payable and accrued expense |
(584,000) |
(549,000) |
|
(Increase) decrease in income taxes receivable |
330,000 |
(330,000) |
|
(Decrease) in income taxes payable |
(72,000) |
- |
|
Net Cash provided by (used in) Operating Activities |
503,000 |
(1,757,000) |
|
Cash Flows From Investing Activities: |
|||
Proceeds from sale of discontinued operations |
790,000 |
875,000 |
|
Proceeds from sale of real estate available for sale |
- |
434,000 |
|
Proceeds from sale of equipment |
6,000 |
- |
|
Payments related to sale from discontinued operations |
- |
(168,000) |
|
Purchases of equipment and leasehold improvements |
(364,000) |
(296,000) |
|
Net Cash provided by Investing Activities |
432,000 |
845,000 |
|
Cash Flows from Financing Activities: |
|||
Principal payments on long-term borrowings |
(126,000) |
(188,000) |
|
Net borrowings (payments) on line of credit |
(206,000) |
638,000 |
|
Common stock repurchases |
(44,000) |
- |
|
Net Cash provided by (used in) Financing Activities |
(376,000) |
450,000 |
|
Net Increase (decrease) in Cash and Cash Equivalents |
559,000 |
(462,000) |
|
Cash and Cash Equivalents, beginning of period |
236,000 |
698,000 |
|
Cash and Cash Equivalents, end of period |
$ 795,000 |
$ 236,000 |
|
Supplemental Information |
|||
Cash payments for interest |
110,000 |
117,000 |
|
Cash payments (refunds) for income taxes |
(313,000) |
387,000 |
|
See notes to consolidated financial statements.
27
PRO-DEX,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2003 and 2002
NOTE 1 - DESCRIPTION OF BUSINESS
Pro-Dex, Inc. ("Pro-Dex" or the "Company") is a Colorado corporation, organized in 1978, currently doing business through two wholly owned operating subsidiaries, Micro Motors, Inc. ("Micro Motors") and Oregon Micro Systems, Inc. ("OMS"). Micro Motors, headquartered in Santa Ana, California, designs, develops and manufactures electric, air, and battery powered rotary drive systems for the medical device industry, electric and air devices for the dental industry, and miniature pneumatic motors for industrial applications. OMS is headquartered in Beaverton, Oregon, where it designs and manufactures embedded multi-axis motion controllers used to regulate the motion of servo and stepper motors, predominantly for the semiconductor and medical analysis equipment industries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principals generally accepted in the United States of America.
Revenue Recognition
Revenue on product sales is recognized upon shipment to the customer. The Company sells some of its products with a warranty that provides for repairs or replacement of any defective parts for a period after the sale. At the time of the sale, the Company accrues an estimate of the cost of providing the warranty based on prior experience. The Company recognizes revenue under research and development agreements as certain deliverables are met as specified in each development contract.
Management recognizes shipping costs as incurred as a part of the costs of goods sold. The Company incurred shipping charges of approximately $112,000 and $111,000 for the years ended June 30, 2003 and 2002, respectively.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectable. Recoveries of trade receivables previously written off are recorded when received.
28
A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 90 days. Interest is not typically charged on trade receivables. Changes in allowance for doubtful accounts as of June 30, 2003 and 2002 were as follows:
2003 |
2002 |
|
Balance at the beginning of the year |
$ 26,000 |
$ 44,000 |
Provision charged to income,
net of |
4,000 |
(18,000) |
Balance at the end of the year |
$ 30,000 |
$ 26,000 |
Stock Options and Warrants
Accounting for Stock-based Compensation
The Company accounts for stock-based employee compensation under the requirements of Accounting Principles Board (APB) Opinion No. 25, which does not require compensation to be recorded if the consideration to be received is at least equal to fair value at the measurement date. Nonemployee stock-based transactions are accounted for under the requirements of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which requires compensation to be recorded based on the fair value of the securities issued or the services received, whichever is more reliably measurable.
SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options with vesting restrictions which significantly differ from the Company's stock option awards. These models require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated value. The Company's calculations for the options granted were made using the Black-Scholes option-pricing model.
The calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. The following table illustrates the effect on net income and earnings per share had compensation cost for employee stock-based compensation been determined based on the grant date fair values of awards for the year ended June 30, 2003 and 2002, respectively.
The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend rate for all years; price volatility of 67% to 73% in 2003, of 62% to 69% in 2002; risk-free interest rates of approximately 2.8% to 4.1% in 2003 and 4.3% to 4.6% in 2002; and expected lives of five years.
29
2003 |
2002 |
||
Net income (loss) As reported: |
$ 133,000 |
$ (1,566,000) |
|
Add stock-based employee compensation expense included in reported net income, net of related tax effects |
--- |
--- |
|
(Deduct) total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
|
|
Pro-forma net (loss): |
|
$ (63,000) |
$ (1,789,000) |
Basic earnings (loss) per |
|||
share: |
As reported |
$ 0.02 |
$ (0.18) |
Pro forma |
$ (0.01) |
$ (0.20) |
|
Diluted earnings (loss) |
|
|
|
per share: |
As reported |
$ 0.01 |
$ (0.18) |
Pro forma |
$ (0.01) |
$ (0.20) |
Inventories
Inventories are stated at the lower of cost (the first-in, first-out method) or market and consist of the following:
Raw materials |
$ 1,443,000 |
Work in process |
340,000 |
Development costs under contract |
181,000 |
Finished goods |
1,263,000 |
Total |
3,227,000 |
Reserve for slow moving items |
(392,000) |
Total inventories, net |
$ 2,835,000 |
Changes in reserve for slow moving inventory as of June 30, 2003 were as follows:
Balance at the beginning of the year |
$ 592,000 |
Inventory disposed |
(200,000) |
Balance at the end of the year |
$ 392,000 |
Changes in allowance for warranty expense as of June 30, 2003 and 2002 were as follows:
2003 |
2002 |
|
Balance at the beginning of the year |
$ 28,000 |
$ 21,000 |
Provision charged to income |
2,000 |
7,000 |
Balance at the end of the year |
$ 30,000 |
$ 28,000 |
30
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and consist of the following:
Equipment |
$ 3,541,000 |
Leasehold Improvements |
106,000 |
Total Cost |
3,647,000 |
Accumulated Depreciation |
(2,607,000) |
Total Equipment and leasehold improvements, net |
$ 1,040,000 |
Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: equipment -- 3-10 years; leasehold improvements -- 7 years. Leasehold improvements are depreciated over the shorter of the term of the lease or their estimated useful lives.
Goodwill
On July 1, 2002 the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Amortization expense related to the Company's goodwill for the year ended June 30, 2002 was $85,000.
Management has determined that each of the Company's subsidiaries is a reporting unit. Upon adoption of SFAS No. 142, The Company assigned all the assets and liabilities to the reporting units and has recorded no impairment charge in 2003. The Company prepares its annual impairment testing on April 1 of each year. The Company has compared the estimated carrying value of the Micro Motors subsidiary with the estimated fair value of the subsidiary and determined that none of the goodwill recorded as of June 30, 2002 and as of April 1, 2003 was impaired.
In accordance with FAS 121 "Accounting for the Impairment of Long-Lived Assets," management reviewed the remaining goodwill recorded at OMS as of June 30, 2002 and determined that the remaining fair value of the asset was impaired. Management's decision was based on the fact that future cash flows at OMS will not exceed the carrying value of the asset and that OMS generated year losses in 2002. As such, management determined that the carrying value should be zero; expensing the remaining $154,000 as general and administrative expense in the statement of operations.
A reconciliation of previously reported net income (loss) applicable to common stock and basic income (loss) per share to the amounts adjusted for the exclusion of the amortization of goodwill follows (the amortization of goodwill was not deductible for tax purposes and as such, has not been shown net of tax on the schedule):
31
2003 |
2002 |
|
Reported net income (loss) applicable to common stock |
|
|
Add back: |
||
Goodwill amortization |
-- |
85,000 |
Adjusted net income (loss) applicable to common stock |
|
|
|
|
|
Net income (loss) per share applicable to common stock: |
||
Basic |
$ 0.02 |
$ (0.18) |
Diluted |
$ 0.01 |
$ (0.18) |
Add back: |
||
Goodwill amortization |
-- |
0.01 |
Adjusted net income (loss) per common share: |
|
|
Basic |
$ 0.02 |
$ (0.17) |
Diluted |
$ 0.01 |
$ (0.17) |
Stock Repurchase Plan
In September 2002, the Company's Board of Directors authorized the repurchase on the open market of up to 500,000 shares of the Company's outstanding Common Stock, subject to compliance with applicable laws and regulations. There is no requirement that the Company repurchase all or any portion of such shares. The maximum total value of the repurchase is not to exceed $500,000. This repurchase is to be financed both with cash generated by operations and through the utilization of the Company's credit facility. From the inception of the repurchase authorization through the year end date of June 30, 2003, the Company repurchased 75,700 shares of Common Stock for $43,741, at an average price of $0.58 per share.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating losses, and tax credit carry forwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
32
The Company's operations are affected by numerous factors including market acceptance, changes in technologies and new laws and government regulations and policies. The Company cannot predict what impact, if any, the occurrence of these or other events might have on the Company's operations. Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, the reserve for slow moving or obsolete inventories, the carrying value of long-lived and intangible assets, goodwill, and the recoverability of deferred tax assets.
Significant management judgment is required to determine the provision for income taxes and the recoverability of deferred tax assets. It is based on estimates of future taxable income by jurisdiction in which the Company operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or adjustments are made to these estimates in future periods, there may need to be an adjustment in the valuation allowance which could result in an additional tax provision up to the net carrying value of the deferred tax assets.
Earnings per Share
Basic earnings per common share data has been computed on the basis of the weighted-average number of common shares outstanding during each period presented. 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.
Fair Value of Financial Instruments
The method and assumptions used to estimate the fair value of notes payable, which approximates the carrying value, is based on interest rates for instruments with similar terms and remaining maturities.
Research and Development
The Company recognizes revenue under research and development agreements as certain deliverables are met as specified in each development contract. The Company accounts for research and development expenses in two methods. If the development work is customer funded and associated with future deliverables, the costs are capitalized and recognized as costs of goods sold when the contracted deliverable is made. All other research and development costs are expensed as incurred.
NOTE 3 - LINE OF CREDIT
The subsidiaries of the Company entered into a credit facility with Wells Fargo Business Credit Inc. (WFBCI) in May 2002 for borrowings up to the lesser of $3,000,000 or the total of the eligible accounts receivable. The terms of the credit facility expire May 2005 and require monthly interest payments at the prime rate (4.00% at June 30, 2003) plus 1.00% to 1.75% based on outstanding borrowings, with a minimum interest charge of $12,500 per quarter. The outstanding borrowings are secured by all assets of the Company's two subsidiaries, Micro Motors and OMS, and are guaranteed by the Company. The outstanding balance under the terms of this credit facility as of June 30, 2003 was $432,000. The total additional eligible borrowing capacity based on the receivables balances at June 30, 2003 was $562,000. There are certain financial and non-financial covenants that the Company must meet to be in compliance with the terms of the credit facility. There was one amendment to the loan agreement made subsequent to June 30, where a technical correction was made to the definition of "Net Income" as it applied to the covenant calculations.
As of June 30, 2003, Micro Motors and OMS were not in compliance with the net income (loss) and tangible net worth covenants, for which they received a waiver from WFBCI on September 17, 2003. Had the waiver not been received, under Section 7.2 of the loan agreement, WFBCI had the right to terminate its commitment and declare the loan immediately due. If this was to occur, the Company had sufficient cash reserves on hand as of June 30, 2003 to repay the outstanding amount of the loan in full, satisfying its obligation without disrupting the operations of the Company.
33
NOTE 4 - LONG TERM DEBT
Long-term debt is comprised of a $600,000 Not to Compete liability offset by a $365,000 Note Receivable asset. The interest rate on both is 7% annually. The Note Receivable is collateralized by the Not to Compete liability. The following tables summarize the remaining net principal values of these instruments classified as long-term debt:
Total Not to Compete payable |
$ 600,000 |
Less: interest portion |
63,000 |
Net Not to Compete payable |
$ 537,000 |
Total Note Receivable |
$ 365,000 |
Less: interest portion |
38,000 |
Net Note Receivable |
$ 327,000 |
Net Not to Compete payable |
$ 537,000 |
Less: Net Note Receivable |
327,000 |
Total Net Debt to shareholder |
$ 210,000 |
The following table is a summary of the remaining net principal values of these instruments classified as long-term debt:
Unsecured Net Debt to a shareholder, bearing interest at 7%, payments of $19,600 quarterly, including interest to June 30, 2006 |
$ 210,000 |
Less net current portion |
65,000 |
Net Long-term debt |
$ 145,000 |
This debt is subordinated to the line of credit with WFBCI.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Micro Motors leased office and warehouse facilities from the Company's largest shareholder until January 2002. The Company and their subsidiaries lease its existing office and warehouse facilities from unrelated parties under lease agreements expiring through October 2007. These leases generally require the Company to pay insurance, taxes, and other expenses related to the leased space. Total rent expense in 2003 and 2002 was $264,000 and $257,000, respectively, including approximately $74,000 paid to the Company's largest shareholder for the year ended June 30, 2002. Future minimum lease payments for the years ending June 30, are:
2004 |
$265,000 |
2005 |
264,000 |
2006 |
264,000 |
2007 |
113,000 |
2008 |
38,000 |
Total |
$944,000 |
The manufacture and distribution of certain products by subsidiaries of the Company involves a risk of legal action, and, from time to time, the Company and its subsidiaries are named as defendants in lawsuits. While the Company's management believes that these matters will not have a material adverse impact on the financial condition of the Company, there can be no certainty that the Company may not ultimately incur liability or that such liability will not be material and adverse.
34
NOTE 6 - INCOME TAXES
The provision for income taxes (credits) for the years ended June 30, 2003 and 2002 is as follows:
2003 |
|
2002 |
||
Current taxes provision (credits) |
$ |
(55,000) |
$ |
(308,000) |
Deferred taxes provision (credits) |
177,000 |
(902,000) |
||
Provision (credits) for income taxes |
$ |
122,000 |
$ |
(1,210,000) |
A reconciliation of expected tax (credit) to the amount computed by applying the federal statutory income tax rates to income (loss) before income taxes (credits) is as follows:
2003 |
|
2002 |
||
Federal income taxes (credits), |
||||
Computed at the statutory rate |
$ |
87,000 |
$ |
(807,000) |
State income taxes (credits) |
13,000 |
(69,000) |
||
Non-deductible items, primarily goodwill in 2002 |
4,000 |
90,000 |
||
Tax credits, primarily research and development |
-- |
(135,000) |
||
Favorable resolution of tax contingency |
-- |
(289,000) |
||
Other |
18,000 |
-- |
||
$ |
122,000 |
$ |
(1,210,000) |
Deferred income tax assets and liabilities in the accompanying balance sheet at June 30, 2003 consisted of the following:
Assets: |
||
Accrued expenses |
$ |
67,000 |
Intangible assets |
1,013,000 |
|
Inventories |
233,000 |
|
Net operating loss carry forward |
70,000 |
|
Income tax credit carry forward |
633,000 |
|
Total |
2,016,000 |
|
Less Valuation Allowance |
(227,000) |
|
Total deferred tax assets |
1,789,000 |
|
Liabilities; Equipment |
(186,000) |
|
Net deferred tax assets |
$ |
1,603,000 |
The Company has net operating loss carry forwards of $27,000 for Federal and $2,012,000 for State income tax purposes. Federal loss carry forwards expire in 2023 and State carry forwards expire in 2012. Tax credit carry forwards totaling $421,000 for federal tax purposes and $213,000 for state tax purposes do not expire. The components giving rise to the net deferred tax assets described above have been included in the accompanying balance sheet as of June 30, 2003 and 2002 as follows:
Non-current assets |
$ 833,000 |
Current assets |
770,000 |
Net deferred tax assets |
$ 1,603,000 |
Management believes that it is more likely than not that deferred tax assets other than state credits will be fully recovered. A valuation allowance has been provided for State tax credits, as management believes that the amount of future state taxable income necessary to utilize these credits is not more likely than not to be realized. Net realizable deferred tax assets could be reduced if estimates of future profitability are reduced or if future changes in the ownership of the Company occur.
35
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Options
The Board of Directors and the shareholders of the Company have approved and adopted two plans, pursuant to which options to purchase an aggregate of 2,000,000 shares of common stock that can be granted to officers, directors, and employees expected to provide significant services to the Company. There are 636,595 shares remaining in the option plans which are available for grant in future years.
Transactions involving the Company's stock options are summarized as follows:
2003 |
2002 |
|||
Fixed Options |
Shares |
Weighted-Average
|
Shares |
Weighted-Average
|
_____________________________________________________________________________ |
||||
Outstanding at beginning of year |
1,619,505 |
$1.28 |
1,284,361 |
$2.16 |
Granted |
460,000 |
0.64 |
1,066,000 |
0.85 |
Exercised |
- - |
- - |
- - |
- - |
Forfeited |
(716,100) |
1.13 |
(730,856) |
2.17 |
Outstanding at end of year |
1,363,405 |
$1.11 |
1,619,505 |
$1.28 |
Exercisable at end of year |
843,063 |
$1.22 |
586,005 |
$1.96 |
Weighted-average fair value per |
||||
Option granted during the year |
$0.20 |
$0.48 |
A further summary concerning fixed options outstanding June 30, 2003, is as follows:
Options Outstanding |
Options Exercisable |
||||
Range
of |
Number |
Weighted- |
Weighted |
Number |
Weighted- |
______________________________________________________________________________ |
|||||
$0.35 to $0.66 |
360,000 |
9.1 years |
$ 0.42 |
280,000 |
$ 0.40 |
$0.80 to $1.12 |
569,900 |
8.5 years |
0.85 |
244,558 |
0.86 |
$1.40 to $2.06 |
180,000 |
7.7 years |
1.58 |
70,000 |
1.84 |
$2.12 to $2.99 |
253,505 |
5.2 years |
2.32 |
248,505 |
2.32 |
_________ |
__________________________________ |
||||
1,363,405 |
7.9 years |
$ 1.11 |
843,063 |
$ 1.21 |
The option plans are substantially similar, call for vesting as approved by the Board of Directors, and allow for the options to be outstanding for a period of ten years.
36
Stock Warrants
In prior years, the Company issued warrants to acquire shares of common stock. At June 30, 2003, warrants to acquire 402,000 shares of common stock were outstanding. These warrants are fully vested, have a weighted-average exercise price of $1.45, and a weighted-average remaining life 2.9 years.
During the year ended June 30, 2003, the Company granted 165,000 warrants to acquire common shares of stock incurring a charge of $10,000. The fair value of the warrants was estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend rate for all years; price volatility of 72%; a risk-free interest rate of approximately 2.75%; and expected life of three to five years. The warrants were fully vested as of October 31, 2002.
Preferred Shares
Holders of Series A preferred shares have no voting, dividend, or redemption rights. In the event of liquidation or dissolution, preferred shareholders are entitled to receive $3.60 per share. Each preferred share is convertible into one common share at the option of the holder.
NOTE 8 -BUSINESS DIVESTITURES AND DISCONTINUED OPERATIONS
On June 12, 2001, the Company sold substantially all of the assets of its wholly owned subsidiaries, Biotrol International, Inc. and Challenge Products, Inc. to Young Colorado, LLC, for a purchase price of $9 million. The assets sold comprised the Company's line of infection control and preventive chemical products for the dental industry. The $401,000 loss from discontinued operations in 2002 was due to reductions in the expected net proceeds from the sale due to various claims by Young resolved in 2002. The full remaining escrow balance of $790,000 was received by the Company by October 2002, resulting in no additional gain or loss, completing the distribution of funds in escrow.
During the year ended June 30, 2002, the Company received indemnification notices from Young, to recover alleged losses and costs as they are incurred for certain alleged breaches of representations and warranties contained in the Young Asset Purchase Agreement related to compliance issues with the Food, Drug, and Cosmetic Act ("FDCA"), Federal Insecticide, Fungicide and Rodentcide Act ("FIFRA"), and other related laws. In February 2002, the Company settled a complaint with the Environmental Protection Agency ("EPA") set forth in Young's indemnification notice for alleged violations of FIFRA. Pursuant to the settlement, the Company agreed to pay $150,000 to the EPA, over a 15-month period, commencing March 2002. The full $150,000 settlement had been paid by April 30, 2003, leaving, in managements' opinion, no additional liability under either Act.
NOTE 9 - SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires different technology and marketing strategies.
There are two reportable segments within Pro-Dex: Micro Motors and Oregon Micro Systems. The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Interest expense is allocated based upon the specific identification of debt incurred by the individual segment. Corporate overhead, the provision for income taxes, and loss from discontinued operations are included in corporate profit, and are not allocated to the individual reported segments. Intersegment sales and transfers are accounted for at amounts that management believes provides the transferring segment with fair compensation for the products transferred, considering their condition, market demand, and, where appropriate, a reasonable profit that recognizes which segment will be responsible for marketing costs. Management evaluates the performance of each segment based on operating income (loss) before interest and income taxes.
37
Operating Segment data for 2003 and 2002 is as follows (in thousands):
2003 |
Micro |
Oregon |
Corporate |
Total |
Sales to external customers |
$9,281 |
$2,709 |
-- |
$11,990 |
Depreciation and amortization |
298 |
77 |
-- |
375 |
Interest expense |
87 |
-- |
-- |
87 |
Segment operating profit (loss) |
400 |
732 |
(826) |
306 |
Segment assets |
5,918 |
1,376 |
1,810 |
9,104 |
Goodwill |
1,110 |
-- |
-- |
1,110 |
Expenditure for segment assets |
298 |
66 |
-- |
364 |
2002 |
Micro |
Oregon |
Corporate |
Total |
|
Sales to external customers |
$8,285 |
$2,241 |
-- |
$10,526 |
|
Depreciation and amortization |
371 |
454 |
40 |
865 |
|
Interest expense |
75 |
-- |
42 |
117 |
|
Segment operating profit (loss) |
678 |
(1,005) |
(1,808) |
(2,135) |
|
Segment assets |
5,505 |
1,070 |
3,393 |
9,968 |
|
Goodwill |
1,110 |
-- |
-- |
1,110 |
|
Expenditure for segment assets |
266 |
30 |
-- |
296 |
Note 10 - NET INCOME (LOSS) PER SHARE
The following table reconciles the weighted average shares outstanding for basic and diluted net income per share for the periods indicated.
2003 |
2002 |
|
Net income (loss) |
$ 133,000 |
$ (1,566,000) |
Basic net income (loss) per common share: |
||
Weighted average of common shares outstanding |
8,743,575 |
8,787,300 |
Basic net income (loss) per common share |
$ 0.02 |
$ (0.18) |
Diluted net income (loss) per share: |
||
Weighted average of common shares outstanding |
8,743,575 |
8,787,300 |
Effect of potentially dilutive securities (options) |
194,940 |
-- |
Effect of potentially dilutive securities (warrants) |
24,249 |
-- |
Effect of potentially dilutive securities
(convertible |
|
-- |
Weighted average number of common shares outstanding - Diluted |
9,040,893 |
8,787,300 |
Diluted net income (loss) per common share |
$ 0.01 |
$ (0.18) |
Common shares issuable upon conversion of 78,129 shares of preferred stock have not been included in the 2002 computation because their inclusion would have been anti-dilutive. In addition, the dilutive effect of 78,100 and 224 shares of stock options and warrants, respectively, have not been included in the 2002 computation because the inclusion would have also been anti-dilutive.
38
Note 11 - MAJOR CUSTOMER
The Company had one Major Customer (defined as a customer that represents greater than 10% of the Company's total revenues) during the year ended June 30, 2003. Net sales to this customer amounted to $1,323,000 and at June 30, 2003 the accounts receivable include a balance of $14,000 due form this customer. There were no major customers for the year ended June 30, 2002.
39
PRO-DEX, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. |
Document |
2.2 |
Merger Agreement between Pro-Dex, Inc., Micro Systems Acquisition Corporation, and Micro Motors, Inc., dated July 26, 1995 (incorporated herein by reference to the Company's Form 8-K dated July 26, 1996) |
2.3 |
Acquisition Agreement between Pro-Dex, Inc., Oregon Micro Systems, Inc. and L. Wayne Hunter dated July 26, 1996 (incorporated herein by reference to Exhibit 7.2 to the Company's Form 8-K dated July 26, 1996). |
3.1 |
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Pro-Dex, Inc. Registration Statement No. 33-74397). |
3.2 |
Bylaws (incorporated herein by reference to Exhibit 3.2 to Pro-Dex, Inc. Registration Statement No. 33-74397). |
10.16 |
Prophy Ring Patent License Agreement dated and effective July 1, 1993 between Challenge Products, Inc. and Charles L. Bull (incorporated herein by reference to Exhibit 10.17 to Pro-Dex, Inc. Registration Statement No. 33-74397). |
10.17*x |
1994 Employees Stock Option Plan |
10.18* x |
1994 Directors Stock Option Plan as amended |
10.26 |
Audit Committee Charter (incorporated herein by reference to Company's Form 10-KSB filed October 1, 2002). |
10.27 |
Real Property Sale by Challenge subsidiary (PDMI subsidiary C) Settlement Statement (incorporated herein by reference to Company's Form 10-KSB filed October 1, 2002). |
10.28 |
Acquisition Agreement between Pro-Dex, Inc., Oregon Micro Systems, Inc. and L. Wayne Hunter dated July 26, 1996 (incorporated herein by reference to Exhibit 7.2 to the Company's Form 8-K dated July 26, 1996). |
10.29 |
Asset Sale Agreement dated June 12, 2001, by and among Young Colorado, LLC, Pro-Dex, Inc., Pro-Dex Management, Inc., Biotrol International, Inc., and Challenge Products, Inc. (incorporated herein by reference to the Form 8-K filed July 30, 2001). |
10.30 |
Micro Motors Credit and Security Agreements with WFBCI (incorporated herein by reference to Company's Form 10-KSB filed October 1, 2002). |
10.31 |
OMS Credit and Security Agreements with WFBCI (incorporated herein by reference to Company's Form 10-KSB filed October 1, 2002). |
10.32 x |
Promissory Note receivable from Ronald G. Coss |
21.00 |
The Company has the following subsidiaries incorporated in the following states: PDMI subsidiary B, a Delaware corporation; Micro Motors, Inc., a Colorado corporation; Oregon Micro Systems, Inc., an Oregon corporation. |
23.1 x |
Consent Letter of McGladrey & Pullen LLP |
31.1 x |
Certification of the Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 x |
Certification of the Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 x |
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
*
Denotes management contract or compensatory arrangement required to be filed as
an exhibit to the Form 10-KSB.
x Filed Herewith
40
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRO-DEX INC. |
|
By: / s / Patrick Johnson |
|
----------------------------- |
|
Patrick Johnson |
|
Chief Executive Officer |
|
and President |
In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/ s / Patrick Johnson |
September 23, 2003 |
|
--------------------------------- |
------------------------------------ |
|
Patrick Johnson |
Date |
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
/ s / Jeffrey J. Ritchey |
September 23, 2003 |
|
--------------------------------- |
------------------------------------- |
|
Jeffrey J. Ritchey |
Date |
|
Treasurer and Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
/ s / George J. Isaac |
September 23, 2003 |
|
---------------------------------- |
---------------------------------------- |
|
George J. Isaac |
Date |
|
Secretary and a Director |
|
|
/ s / Ronald G. Coss |
|
|
--------------------------------- |
September 23, 2003 |
|
Ronald G. Coss |
---------------------------------------- |
|
Director |
Date |
|
/
s / Mark P. Murphy |
September 23, 2003 |
|
Director |
---------------------------------------- |
|
/ s / Michael Mesenbrink |
September 23, 2003 |
|
--------------------------------- |
|
|
Michael Mesenbrink |
---------------------------------------- |
|
Director |
Date |
|
/
s / Valerio Giannini |
September 23, 2003 |
|
Director |
Date |
|
41
EXHIBIT 10.17
PRO-DEX, INC.
1994 AMENDED STOCK OPTION PLAN
This Stock Option Plan (the "Plan") is adopted in consideration for services rendered and to be rendered to Pro-Dex, Inc. and related companies.
1. Definitions. The terms used in this Plan shall, unless otherwise indicated or required by the particular context, have the following meanings:
Board: The Board of Directors of Pro-Dex, Inc.
Code: The Internal Revenue Code of 1986, as amended.
Common Stock: The no par value common stock of Pro-Dex, Inc.
Company: Pro-Dex, Inc., a corporation incorporated under the laws of California, and any successors in interest by merger, operation of law, assignment or purchase of all or substantially all of the property, assets or business of the Company.
Date of Grant: The date on which an Option (see below) is granted under the Plan.
Disinterested Person: A director who has not been granted or awarded equity securities pursuant to any plan of the Company or of any Related Company of the Company during one year prior to that director's service as an administrator of the Plan, except as otherwise provided in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to (a) participation in formula plans or ongoing securities acquisitions plans, and (b) an election to receive securities for an annual retainer fee.
Employee: An Employee is an employee of the Company or any Related Company.
Fair Market Value: The Fair Market Value of the Option Shares. Such Fair Market Value as of any date shall be determined by the Option Committee as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date an Option is granted and shall mean (a) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange by which the Common Stock is traded, if the stock is then traded on a national securities exchange; or, (b) the last reported sale price (on that date) of the Common Stock on NASDAQ, if the stock is not then traded on a national securities exchange; or (c) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the stock is not reported on NASDAQ. However, if the Common Stock is not publicly-traded at the time an Option is granted under the Plan, Fair Market Value shall be deemed to be the fair value of the stock as determined in good faith by the Board or the Option Committee, and a written record of the method of determining such value shall be maintained.
Incentive Stock Options ("ISOs"): "Incentive Stock Options" as that term is defined in Section 422A of the Code.
Key Employee: A person designated by the Option Committee who either is employed by the Company or a Related Company (see below) and upon whose judgment, initiative and efforts the Company or a Related Company is largely dependent for the successful conduct of its business; provided, however, that Key Employees shall not include those members of the Board who are not employees of the Company or a Related Company.
-1-
Non-Incentive Stock Options ("Non-ISOs"): Options which are not intended to qualify as "Incentive Stock Options" under Section 422A of the Code.
Option: The rights granted to an Employee to purchase Common Stock pursuant to the terms and conditions of an Option Agreement (see below).
Option Agreement: The written agreement (and any amendment or supplement thereto) between the Company and an Employee designating the terms and conditions of an Option.
Option Committee: With respect to grants of Options to Employees who are not also Officers and/or Directors of the Company, the Plan shall be administered by an Option Committee ("Option Committee") composed of the Board or at least two members of the Board. With respect to grants of Options to Employees who are also Officers or Directors, the Plan shall be administered by a committee, selected by the Board, consisting of two or more persons, each of whom is a Disinterested Person. Such committee may also be deemed an Option Committee.
Option Shares: The shares of Common Stock underlying an Option granted to an Employee.
Optionee: An Employee who has been granted an Option.
Related Company: Any corporation that is a "parent corporation" or a "subsidiary corporation" with respect to the Company, as those terms are defined in Section 425 of the Code. The determination of whether a corporation is a Related Company shall be made without regard to whether the corporation or the relationship between the corporation and the Company now exists or comes into existence hereinafter.
2. Purpose and Scope.
(a) The purpose of this Plan is to advance the interests of the Company and its shareholders by affording Employees an opportunity for investment in the Company and the incentive advantages inherent in stock ownership in this Company.
(b) This Plan authorizes the Option Committee to grant Options to purchase shares of Common Stock to Employees selected by the Option Committee while considering criteria such as employment position or other relationship with the Company, duties and responsibilities, ability, productivity, length of service or association, morale, interest in the Company, recommendations by supervisors, and other matters.
3. Administration of the Plan. The Plan shall be administered by the Option Committee. The Option Committee shall have the authority granted to it under this section and under each other section of the Plan.
In accordance with and subject to the provisions of the Plan, the Option Committee shall select the Optionees, shall determine (a) the number of shares of Common Stock to be subject to each Option, (b) the time at which each Option is to be granted, (c) whether an Option shall be granted in exchange for the cancellation and termination of a previously granted option or options under the Plan or otherwise, (d) the purchase price for the Option Shares, (e) the option period, and (f) the manner in which the Option becomes exercisable. In addition, the Option Committee shall fix such other terms of each Option as the Option Committee may deem necessary or desirable. The Option Committee shall determine the form of Option Agreement to evidence each Option.
-2-
The Option Committee from time to time may adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and in the best interests of the Company. The Option Committee shall keep minutes of its meetings and those minutes shall be distributed to every member of the Board.
The Board may from time to time make such changes in and additions to the Plan as it may deem proper and in the best interest of the Company; provided, however, that no such change or addition shall impair any Option previously granted under the Plan, and that the approval by the affirmative vote of the holders of a majority of the Company's securities entitled to vote and represented at a meeting duly held in accordance with the applicable laws of the State of California, shall be required for any amendment which would:
(a) modify the eligibility requirements for receiving Options under the Plan;
(b) increase the benefits accruing to Employees under the Plan; or
(c) increase the number of shares of Common Stock that may be issued under the Plan.
All actions taken and all interpretations and determinations made by the Option Committee in good faith (including determinations of Fair Market Value) shall be final and binding upon all Employees, the Company and all other interested persons. No member of the Option Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, and all members of the Option Committee shall, in addition to rights they may have as Directors of the Company be fully protected by the Company with respect to any such action, determination or interpretation.
4. Number of Shares. The Board is authorized to appropriate, issue and sell for the purposes of the Plan, and the Option Committee is authorized to grant Options with respect to, a total number, not in excess of 1,500,000 shares of Common Stock, either treasury or authorized but unissued, or the number and kind of shares of stock or other securities which in accordance with Section 9 shall be substituted for the 1,500,000 shares or into which such 1,500,000 shares shall be adjusted. All or any unsold shares subject to an Option that for any reason expires or otherwise terminates, may again be made subject to Options under the Plan.
5. Eligibility. Options which are intended to qualify as ISOs will be granted only to Key Employees. Key Employees and other Employees may hold more than one Option under the Plan and may hold Options under the Plan and options granted pursuant to other plans or otherwise.
6. Option Price. The Option Committee shall determine the purchase price for the Options Shares, provided that the purchase price to be paid by Optionees for the Option Shares which are intended to qualify as ISOs shall not be less than 100 percent of the Fair Market Value of the Option Shares at the time the ISO is granted. The purchase price to be paid by Optionees for Option Shares which are not intended to qualify as ISOs may be less than the Fair Market Value of the Option Shares at the time the Non-ISO is granted. The purchase price for the Option Shares shall be a fixed, and cannot be a fluctuating, price.
-3-
7. Duration and Exercise of Options.
(a) Each Option granted under the Plan shall be exercisable on such date or dates and during such period and for such number of shares as shall be determined pursuant to the provisions of the instrument evidencing such Option. The Option Committee shall have the right to accelerate the date of exercise of any Option, provided that the Option Committee shall not accelerate the exercise of any ISO granted if such acceleration would violate the annual vesting limitation contained in Section 422(d) (1) of the Code.
(b) Except as otherwise permitted under Section 11, during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee; provided, that in the event of the legal disability of an Optionee, the guardian or personal representative of the Optionee may exercise the Option. However, if the Option is an ISO it may be exercised by the guardian or personal representative of the Optionee only if such guardian or personal representative obtains a ruling from the Internal Revenue Service or an opinion of counsel to the effect that neither the grant nor the exercise of such power is violative of Section 422A(b) (5) of the Code. Any opinion of counsel must be both from counsel arid in a form acceptable to the Option Committee.
(c) The Option Committee may determine whether any Option shall be exercisable as provided in Paragraph (a) of this Section 7 or whether the Options shall be exercisable in installments only; if the Option Committee determines the latter, it shall determine the number of installments and the percentage of the Option exercisable at each installment date. All such installments shall be cumulative.
(d) If the Optionee ceases to be employed by either the Company or a Related Company because of the death or permanent and total disability (as defined in Section 22(e) (3) of the Code) of the Optionee, any Option held by the Optionee at the time his employment ceases may be exercised within 90 days after the date his employment ceased, but only to the extent that the Option was exercisable according to its terms on the date the Optionee's employment ceased. After such 90-day period, any unexercised portion of an Option shall expire.
(e) Notwithstanding the provisions of Paragraph (d) of this Section 7, if an Optionee's employment by the Company or a Related Company ceases for any reason other than the Optionee's death or permanent and total disability, any unexercised portion of any Option held by the Optionee at the time his employment ceases may be exercised within 30 days after the date his employment ceased, but only to the extent that the Option was exercisable according to its terms on the date the Optionee's employment ceased. After such date, any unexercised portion of an Option shall expire.
(f) Each Option shall be exercised in whole or part by delivering to the office of the Treasurer of the Company written notice of the number of shares with respect to which the Option is to be exercised and by paying in full the purchase price for the Option Shares purchased as set forth in Section 8; provided, that an Option may not be exercised in part unless the purchase price for the Option Shares purchased is at least $2,000.
(g) To the extent required to qualify for the exemption provided by Rule 16b-3 under the Exchange Act, and any successor provision, at least six months must elapse from the date of acquisition of an Option by any person who is subject to the reporting requirements of Section 16(a) of the Exchange Act to the date of exercise of such Option or disposition of the Option Shares.
-4-
8. Payment for Option Shares. If the purchase price of the Option Shares purchased by any Optionee at one time exceeds $2,000, the Option Committee may permit all or part of the purchase price for the Option Shares to be paid by the Optionee by (a) delivering to the Company shares of the Company's common Stock previously owned by the Optionee with a Fair Market Value as of the date of payment equal to the portion of the purchase price for the Option Shares that the Optionee does not pay in cash, (b) having shares withheld from the amount of shares to be received by the Optionee, (c) delivering an irrevocable subscription agreement obligating the Optionee to take and pay for the shares to be purchased within one year of the date of such exercise, or (d) complying with any other payment mechanisms as the Option Committee may approve from time to time. As a condition to the exercise of any Option granted under this Plan, the Optionee shall make such arrangements as the Option Committee may require for the satisfaction of any federal, state or withholding tax obligations which may arise in connection with such exercise. The issuance, transfer or delivery of certificates of shares of Common Stock pursuant to the exercise or Options may be delayed, at the discretion of the Option Committee, until the Option Committee is satisfied that the applicable requirements of federal and state securities laws and the withholding provisions of the Code have been met. Until such person has been issued a certificate or certificates for the Option Shares so purchased, he or she shall possess no rights of a recordholder with respect to any of such shares.
9. Change in Stock, Adjustments, Inc.
(a) In the event that each of the outstanding shares of Common Stock (other than shares held by dissenting shareholders which are not changed or exchanged) should be changed into, or exchanged for, a different number or kind of shares of stock or other securities of the Company, or, if further changes or exchanges of any stock or other securities into which the Common Stock shall have been changed, or for which it shall have been exchanged, shall be made (whether by reason of merger, consolidation reorganization, recapitalization, stock dividends, reclassification, split-up, combination or shares or otherwise(, then there shall be substituted for each share of Common Stock that is subject to the Plan but not subject to an outstanding Option thereunder, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock (other than shares held by dissenting shareholders which are not changed or exchanged) shall be so changed or for which each outstanding share of Common Stock (other than shares held by dissenting shareholders) shall be exchanged. Any securities so substituted shall be subject to similar successive adjustments.
In the event of any such changes or exchanges, the Option Committee shall determine whether, in order to prevent dilution or enlargement of rights, an adjustment should be made in the number, or kind, or Option price of the shares or other securities then subject to an Option or Options granted pursuant to the Plan and the Option Committee shall make any such adjustment, and such adjustments shall be made and shall be effective and binding for all purposes of the Plan.
(b) The Company completed a Plan of Reorganization and Merger ("Reorganization") whereby P-D Acquiring Corp., a California corporation, merged with and into the Company in exchange for shares of Pro-Dex Holdings, Inc., a Colorado corporation. Post Reorganization, the Plan is the Plan of Pro-Dex, Inc.
10. Relationship to Employment. Nothing contained in the Plan, or in any Option granted pursuant to the Plan, shall confer upon any Optionee any right with respect to continuance of employment by the Company, or interfere in any way with the right of the Company to terminate the Optionee's employment at any time.
-5-
11. Nontransferability of Option. No Option granted under the Plan shall be transferable by the Optionee, either voluntarily or involuntarily, except by will or the laws of descent and distribution, pursuant to a qualified domestic relations order as defined in the Code, or pursuant to the Employee Retirement Income Security Act or rules promulgated thereunder; except that (a) Optionees who are not subject to Section 16(b) of the Exchange Act may upon written notice transfer an Option (i) to an Optionee's spouse, parents, siblings, or lineal descendants, or (ii) to a trust for the benefit of the Optionee or any of the Optionee's spouse, parents, siblings, or lineal descendants, or (iii) to any corporation or partnership controlled by the Optionee; and (b) Optionees who are subject to Section 16(b) of the Exchange Act may transfer Options to immediate family members and family trusts. No Option shall be subject to execution, attachment or similar process. Except as specifically provided herein, any attempt to transfer the Option shall void the Option.
12. Rights as a Shareholder. No person shall have any rights as a shareholder with respect to any shares covered by an Option until that person shall become the holder of record of such shares and, except as provided in Section 9, no adjustments shall be made for dividends or other distributions or other rights as to which there is an earlier record date.
13. Securities Laws Requirements. No Option Shares shall be issued unless and until, in the opinion of the Company, any applicable registration requirements of the Securities Act of 1933, as amended ("Securities Act"), any applicable listing requirements of any securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery, have been fully complied with. Each Option and each Option Share certificate may be imprinted with legends reflecting federal and state securities laws, restrictions and conditions, and the Company may comply therewith and issue "stop transfer" instructions to its transfer agent and registrar in good faith without liability.
14. Disposition of Shares. Each Optionee, as a condition of exercise, shall represent, warrant and agree, in a form of written certificate approved by the Company, as follows: (a) that all Option Shares are being acquired solely for his own account and not on behalf of any other person or entity; (b) that no Option Shares will be sold or otherwise distributed in violation of the Securities Act, or any other applicable federal or state securities laws; (c) that if he is subject to reporting requirements under Section 16(a) of the Exchange Act, he will (i) not violate Section 16(b) of the Exchange Act, (ii) furnish the Company with a copy of each Form 4 and Form 5 filed by him, and (iii) timely file all reports required under the federal securities laws; and (d) that he will report all sales of Option Shares to the Company in writing on a form prescribed by the Company.
15. Effective Date of Plan; Termination Date of Plan. The Plan shall be effective on the date of the approval of the Plan by the affirmative vote of the holders of a majority of the Company's securities entitled to vote and represented at a meeting duly held in accordance with applicable law. The Plan shall terminate on May 25, 2004, except as to Options previously granted and outstanding under the Plan at that time. No Options shall be granted after the date on which the Plan terminates. The Plan may be abandoned or terminated at any earlier time by the Board, except with respect to any Options then outstanding under the Plan.
16. Limitation on Amount of Option. With respect to ISOs, the aggregate Fair Market Value (determined as of the time the ISO is granted) of the stock as to which an ISO may first become exercisable in a particular calendar year may not exceed $100,000.
17. Ten Percent Shareholder Rule. With respect to ISOs, no Option may be granted to a Key Employee who, at the time the Option is granted, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any "parent corporation" or "subsidiary corporation" as those terms are defined in Section 425 of the Code, unless at the time the Option is granted the purchase price for the Option shares is at least 110 percent of the Fair Market Value of the Option Shares at the time the ISO is granted and such Option by its terms is not exercisable after the expiration of five years from the Date of Grant. For purposes of the preceding sentence, stock ownership shall be determined as provided in Section 425 of the Code.
-6-
18. Withholding Taxes. The Company, or any Related Company, may take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company, or any Related Company, is required by any law or regulation or any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Option including, but riot limited to, the withholding of all or any portion of any payment or the withholding of issuance of Option Shares to be issued upon the exercise of any Option.
19. Change in Control, Stock Dividends, Reorganization and Other Extraordinary Actions.
(a) If (i) the company shall at any time be involved in a transaction described n Section 424(a) of the Code (or any successor provision) or any "corporate transaction" described in the regulations thereunder; (ii) the Company shall declare dividends payable in, or shall subdivide or combine, its Common Stock or (iii) any other event with substantially the same effect shall occur, the Option Committee shall, with respect to each outstanding Option, proportionately adjust the number of Option Shares and/or the exercise price per share so as to preserve the rights of the Optionee substantially proportionate to the rights of the Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of Option Shares subject to outstanding Options, the number of shares available under this Plan shall automatically be increased or decreased, as this case may be, proportionately, without further action on the part of the Option Committee, the Company or the Company's shareholders.
(b) If the Company is liquidated or dissolved, the Option Committee may allow the holders of any outstanding Options to exercise all or any part of the unvested portion of the Options held by them; provided, however, that such Options must be exercised prior to the effective date of such liquidation or dissolution. If the Option Holders do not exercise their Options prior to such effective date, each outstanding Option shall terminate as of the effective date of the liquidation or dissolution.
(c) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or part of its business or assets.
(d) In the event of a Change in Control (as defined below) of the Company, the Option Committee may, in its discretion, accelerate all outstanding Options so that they immediately become fully vested and immediately exercisable for the duration of the Option Term. For purposes of this subsection (d), "Change in Control" shall mean either one of the following: (i) when any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than a shareholder of the Company on the date of this Plan), the Company, a subsidiary or a Company Employee Benefit Plan, (including any trustee of such Plan acting as trustee) becomes, after the date of this Plan, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (ii) the occurrence of a transaction requiring shareholder approval, arid involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.
-7-
(e) If at any time the Company declares an Extraordinary Dividend, as defined below, all Options shall accelerate and thereupon become fully vested and immediately exercisable for the duration of the Option Term. For purposes of this subsection (e), "Extraordinary Dividend" shall mean a cash dividend payable to holders of record of the Common Stock in an amount in excess of 10% of the then Fair Market Value of the Company's Common Stock.
20. Other Provisions.
(a) The use of a masculine gender in the Plan shall also include within its meaning the feminine, and the singular may include the plural, and the plural may include the singular, unless the context clearly indicates to the contrary.
(b) Any expenses of administering the Plan shall be borne by the Company.
(c) This Plan shall be construed to be in addition to any and all other compensation plans or programs. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company shall be construed as creating any limitations on the power of authority of the Board to adopt such other additional incentive or other compensation arrangements as the Board may deem necessary or desirable.
(d) The validity, construction, interpretation, administration and effect of the Plan and its rules and regulations, and the rights of any and all personnel having or claiming to have an interest therein or thereunder shall be governed by and determined exclusively and solely in accordance with the laws of the State of California; provided, however, if the Reorganization described in Section 9(b) hereof shall be consummated, the laws of the State of Colorado shall govern and determine construction, etc. of this Plan.
*********
EXHIBIT 10.18
PRO-DEX, INC.
DIRECTORS' STOCK OPTION PLAN
This Directors' Stock Option Plan (the "Plan") adopted by Pro0Dex, Inc. (the "Company") on May 25, 1994, is amended this 27th day of February 1996.
1. Definitions.
Unless otherwise indicated or required by the particular context, the terms used in this Plan shall have the following meanings:
Board: The Board of Directors of Pro-Dex, Inc.
Code: The Internal Revenue Code of 1986, as amended.
Common Stock: The no par value common stock of Pro-Dex, Inc.
Company: Pro-Dex, Inc., a corporation incorporated under the laws of California, and any successors in interest by merger, operation of law, assignment or purchase of all or substantially all of the property, assets or business of the Company.
Date of Grant: The date on which an Option (see below) is granted under the Plan.
Fair Market Value: If, at any time an Option is granted under the Plan, the Company's Common Stock is publicly traded, Fair Market Value shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date an Option is granted and shall mean (a) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange by which the Common Stock is traded, if the stock is then traded on a national securities exchange; or, (b) the last reported sale price (on that date) of the Common Stock on NASDAQ, if the stock is not then traded on a national securities exchange; or (c) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the stock is not reported on NASDAQ. However, if the Common Stock is not publicly-traded at the time an Option is granted under the Plan, Fair Market Value shall be as determined in good faith by the Board after such consultation with outside legal, accounting and other experts as the Board may deem advisable.
Nonemployee Director: A person who is a member of the Board of Directors and who is not an employee of the Company.
Option: The rights to purchase Common Stock granted pursuant to the terms and conditions of an Option Agreement (defined below
Option Agreement: The written agreement (including any amendments or supplements thereto) between the Company and a Nonemployee Director designating the terms and conditions of an Option.
Option Shares: The shares of Common Stock underlying an Option granted to an Employee.
Optionee: A Nonemployee Director who has been granted an Option.
1
2. Purpose and Scope.
(a) The purpose of this Plan is to advance the interests of the Company and its shareholders by affording Nonemployee Directors, whose participation and guidance contribute to the successful operation of the Company, and affording them an opportunity for investment in the Company and the incentive advantages inherent in stock ownership in this Company.
(b) This Plan authorizes that Options be granted to Nonemployee Directors according to the formula set forth in Section 3 of this Plan.
3. Operation of the Plan.
(a) Grant of Options: Amount and Timing. Options to purchase 20,000 in shares of Common Stock shall be granted under the Plan to each Nonemployee Director at the later to occur of (i) the date this Plan is adopted by the Company's shareholders, or (ii) the date he or she is first elected or appointed a Nonemployee Director of the Company. In addition, effective on the second and third anniversary dates of commencement of service on the Board, options to purchase an additional 15,000 shares shall automatically be granted to the Optionee provided that, at that time, he or she is a Nonemployee Director. All Options shall be exercisable only as set forth in Sections 3(c) and 6 below and shall be subject to the other terms and conditions set forth in this Plan or otherwise established by the Company.
(b) Option Purchase Price. The exercise price for each Option Share shall be the Fair Market Value of the Company's Common Stock on the Date of Grant.
(c) Term. Each Option shall expire ten years after the Date of Grant, except that an Option will expire, if not exercised, 90 days after the Optionee ceases to be a director of the Company.
(d) Amendments. This Plan may be changed or modified from time to time provided, however, that, (A) no such change or modification shall impair any Option previously granted under the Plan; (B) the provisions relating to the amount, price and timing of the Options shall not be amended more than once every six months other than to comport with changes in the Code, the Employee Retirement Income Security Act, or rules promulgated thereunder; and (C) the approval by the affirmative vote of the holders of a majority of shares of the Company's securities present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Colorado, shall be required for any amendment which would do any of the following:
(i) modify the eligibility requirements for receiving Options under the Plan;
(ii) except as provided in Section 8 relative to capital changes, the number of shares purchasable pursuant to the granting of any Option hereunder or the exercise price of each Option;
(iii) the maximum term of Options granted;
(iv) the minimum price at which Options may be granted;
(v) the dollar amount pursuant to which Options may be granted at any one time;
(vi) the timing of Option Grants; or
(vii) the term of the Plan.
2
4. Number of Shares.
The Board is authorized to appropriate, issue and sell for the purposes of the Plan, an aggregate maximum of 500,000 shares of Common Stock, including both treasury and newly issued shares, or the number and kind of shares of stock or other securities which in accordance with Section 8 shall be substituted for the 500,000 shares or into which such 500,000 shares shall be adjusted. All or any unsold shares subject to an Option that for any reason expires or otherwise terminates before it has been exercised, again may be made subject to other Options granted under the Plan.
5. Eligibility.
Options shall be granted under the Plan only to Nonemployee Directors provided that any Nonemployee Director may waive his right to participate in the Plan.
6. Exercise of Options.
(a) Each Option granted pursuant to this Plan shall be exercisable in full commencing six months after the Date of Grant.
(b) Except as otherwise provided in Section 9, during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee; provided that, in the event of the legal disability of an Optionee, the guardian or personal representative of the Optionee may exercise the Option.
(c) Each Option shall be exercised in whole or in part by delivering to the office of the Treasurer of the Company written notice of the number of shares with respect to which the Option is to be exercised and by paying in full the purchase price for the Option Shares as set forth in Section 7 herein; provided, that an Option may not be exercised in part unless the purchase price for the Option Shares purchased is at least $2,000.
(d) No Option may be exercised, and no Option Shares may be sold, transferred or otherwise disposed of for a period of at least six months following the Date of Grant of the Option.
7. Payment for Option Shares.
Upon exercise of any Option, the aggregate exercise price shall be paid to the Company in cash or by certified or cashier's check. For any single purchase by an Optionee of Option Shares at a total purchase price in excess of $2,000, the Company, in its sole discretion, upon request by the Optionee, may permit all or part of the purchase price for the Option Shares to be paid by (a) delivery to the Company for cancellation shares of the Common Stock previously owned by the Optionee ("Previously Owned Shares") with a Fair Market Value as of the date of the payment equal to the portion of the purchase price for the Option Shares that the Optionee does not pay in cash; (b) having shares withheld from the amount of shares to be received by the Optionee; (c) delivering an irrevocable subscription agreement obligating the Optionee to take and pay for the shares to be purchased within one year of the date of such exercise; or (d) complying with any other payment mechanism as the Company may approve from time to time. Notwithstanding the above, an Optionee shall be permitted to exercise his Option by delivering Previously Owned Shares only if he has held, and provides appropriate evidence of such, the Previously Owned Shares for more than six months prior to the date of exercise. This period (the "Holding Period") may be extended by the Company acting in its sole discretion as is necessary, in the opinion of the Company, so that, under generally accepted accounting principles, no compensation shall be considered to have been or to be paid to the Optionee as a result of the exercise of the Option in this manner. At the time the Option is exercised, the Optionee shall provide an affidavit, and such other evidence and documents as the Company shall request, to establish the Optionee's Holding Period. As indicated above, an Optionee may deliver shares of Common Stock as part of the purchase price only if the Company, in its sole discretion agrees, on a case by case basis, to permit this form of payment.
3
8. Change in Stock, Adjustments, Etc.
In the event that each of the outstanding shares of Common Stock (other than shares held by dissenting shareholders which are not changed or exchanged) should be changed into, or exchanged for, a different number or kind of shares of stock or other securities of the Company, or if further changes or exchanges of any stock or other securities into which the Common Stock shall have been changed, or for which it shall have been exchanged, shall be made (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividends, reclassification, split-up, combination of shares or otherwise) then there shall be substituted for each share of Common Stock that is subject to the Plan but not subject to an outstanding Option hereunder, the number and kind of shares of stock or other securities into which each outstanding shares of Common Stock (other than shares held by dissenting shareholders which are not changed or exchanged) shall be so changed or for which each outstanding share of Common Stock (other than shares held by dissenting shareholders) shall be so changed or for which each such share shall be exchanged. Any securities so substituted shall be subject to similar successive adjustments.
In the event of any such changes or exchanges, (a) the number, or kind, or exercise price of the Option Shares or other securities that are then subject to an Option or Options granted pursuant to the Plan shall be deemed automatically adjusted in order to prevent dilution or enlargement of rights and (b) such adjustments shall be effective and binding for all purposes or the Plan.
9. Nontransferability of Option.
Except as herein provided, no Option granted under the Plan shall be transferable by the Optionee, either voluntarily or involuntarily, except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in the Code or the Employee Retirement Income Security Act or rules promulgated thereunder; and no Option shall be subject to execution, attachment or similar process. Any attempt to transfer an Option except as otherwise herein provided shall void the Option. Notwithstanding anything herein to the contrary, an Option may be transferred to an immediate family member or a family trust if such transfer is then permitted by the rules adopted under Section 16(b) of the Securities Exchange Act of 1934, as amended.
10. Rights as a Shareholder.
No person shall have any rights as a shareholder with respect to any shares covered by an Option until that person becomes the holder of record of such shares and, except as provided in Section 8, no adjustments shall be made for dividends or other distributions or other rights as to which there is an earlier record date.
11. Securities Laws Requirements.
No Option Shares shall be issued unless and until, in the opinion of the Company, any applicable registration requirements of the Securities Act of 1933, as amended ("Securities Act"), any applicable listing requirements of any securities exchange on which stock of the same class is then listed, and any other requirement of law or of any regulatory bodies having jurisdiction over such issuance and delivery, have been fully complied with. Each Option Agreement and each Option Share certificate may be imprinted with legends reflecting federal and state securities laws restrictions and conditions, and the Company may comply therewith and issue "stop transfer" instructions to its transfer agent and registrar in good faith without liability.
4
12. Disposition of Shares.
To the extent reasonably requested by the Company, each Optionee, as a condition of exercise, shall represent, warrant and agree, in a form of written certificate approved by the Company, as follows: (a) that all Option Shares are being acquired solely for his/her own account and not on behalf of any other person or entity; (b) that no Option Shares will be sold or otherwise distributed in violation of the Securities Act or any other applicable federal or state securities laws; (c) that he/she will report all sales of Option Shares to the Company in writing on a form prescribed by the Company; and (d) that if he/she is subject to the reporting requirements under Section 16(a) of the Exchange Act (i) he will not violate Section 16(b) of the Exchange Act, (ii) he will furnish the Company with a copy of each Form 4 and Form 5 filed by him, and (iii) he will timely file all reports required under the federal securities laws.
13. Effective Date of Plan; Termination Date of Plan.
The Plan shall be effective on the date of the Plan has been approved by the Board of Directors and the shareholders of the Company and shall terminate at midnight on a date which is ten years after the effective date, except as to Options previously granted and outstanding under the Plan at that time. No Options shall be granted after the date on which the Plan terminates. The Plan may be abandoned or terminated at any earlier time by the affirmative vote of the holders of a majority of the shares of Common Stock present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of California, except with respect to any Options then outstanding under the Plan.
14. Withholding Taxes.
The Option Agreement shall provide that the Company may take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation or any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Option including, but riot limited to, the withholding of all or any portion of any payment or the withholding of issuance of Option Shares upon the exercise of any Option.
15. Other Provisions.
The following provisions are also in effect under the Plan:
(a) The use of a masculine gender in the Plan shall also include within its meaning the feminine, and the singular may include the plural, and the plural may include the singular, unless the context clearly indicates to the contrary.
(b) Any expenses of administering the plan shall be borne by the Company.
(c) This Plan shall be construed to be in addition to any and all other compensation plans or programs. The adoption of the Plan by the shareholders of the Company shall not be construed as creating any limitations on the power or authority of the Board to adopt such other additional incentive or other compensation arrangements as the Board may deem necessary or desirable.
(d) The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and the rights of any and all persons having or claiming to have an interest therein or thereunder shall be governed by and determined exclusively and solely in accordance with the laws of the State of Colorado.
*********
EXHIBIT 10.32
Promissory Note
$326,482.28 September 12, 2003
FOR VALUE RECEIVED, (receipt of which is herewith acknowledged), Ronald G. Coss, (Debtor), the undersigned jointly and severally promise to pay to the order of Micro Motors, (Creditor) at 151 E Columbine Ave, CA 92707, the sum of Three Hundred Twenty-Six Thousand, Four-Hundred Eighty Two and 28/100 Dollars ($326,482.28), together with interest thereon at the rate of 7% per annum on any unpaid balance. The effective date of this note is June 30, 2003.
Said sum, inclusive of interest, shall be paid in quarterly installments of $30,400.00 each (see attachment A), with a first payment due September 30, 2003, and a like amount on the same day of each quarter ending thereafter until the full amount of this note and accrued interest shall be fully paid. All payments shall be first applied to accrued interest and the balance to principal. The undersigned reserves the right to pre-pay this note in whole or in part with payment of all remaining interest as if the note was held to its full term. This note completely replaces prior note dated January 1, 1999, as amended March 16, 1999.
This note shall be fully payable upon demand of any holder in the event the undersigned shall default in making any payments due under this note within 30 days of its due date. In the event of any default, the undersigned agreed to pay all reasonable attorney fees and costs of collection to the extent permitted by law. This note shall take effect as a sealed instrument and be enforced in accordance with the laws of the payee's state.
The payment of this note shall be fully secured by the debtor's Not to Compete agreement with Micro Motors.
Date ___September 12, 2003_ |
Name & Address of Borrower: |
Ronald G. Coss | |
3 Overlook Drive, |
|
Newport Coast, CA 92657 |
_____/ s / Ronald
G. Coss
_________
Signature of Borrower
Date ___September 12, 2003_
/s/
JEFFREY J. RITCHEY _________
Signature
of Creditor
Micro Motors Inc.
Attachment A
Final Accounting
Schedule of Payments
Enter Values |
||||||||
Loan Amount |
$326,482.28 |
|||||||
Annual Interest Rate |
7.00% |
|||||||
Loan Period in Years |
3 |
|||||||
Start Date of Loan |
7/1/2003 |
|||||||
Monthly Payment |
$30,400.00 |
|||||||
Number of Payments |
12 |
|||||||
Total Interest |
$38,317.69 |
|||||||
Total Principal |
$326,482.31 |
|||||||
Total payments |
$364,800.00 |
|||||||
No. |
Payment Date |
Beginning |
Payment |
Principal |
Interest |
Ending |
Monthly |
|
1 |
9/30/2003 |
$326,482.28 |
$30,400.00 |
($24,686.56) |
$5,713.44 |
$301,795.72 |
$1,904.48 |
|
2 |
12/31/2003 |
$301,795.72 |
$30,400.00 |
($25,118.57) |
$5,281.43 |
$276,677.15 |
$1,760.48 |
|
3 |
3/31/2004 |
$276,677.15 |
$30,400.00 |
($25,558.15) |
$4,841.85 |
$251,119.00 |
$1,613.95 |
|
4 |
6/30/2004 |
$251,119.00 |
$30,400.00 |
($26,005.41) |
$4,394.58 |
$225,113.59 |
$1,464.86 |
|
5 |
9/30/2004 |
$225,113.59 |
$30,400.00 |
($26,460.51) |
$3,939.49 |
$198,653.08 |
$1,313.16 |
|
6 |
12/31/2004 |
$198,653.08 |
$30,400.00 |
($26,923.57) |
$3,476.43 |
$171,729.51 |
$1,158.81 |
|
7 |
3/31/2005 |
$171,729.51 |
$30,400.00 |
($27,394.73) |
$3,005.27 |
$144,334.78 |
$1,001.76 |
|
8 |
6/30/2005 |
$144,334.78 |
$30,400.00 |
($27,874.14) |
$2,525.86 |
$116,460.64 |
$841.95 |
|
9 |
9/30/2005 |
$116,460.64 |
$30,400.00 |
($28,361.94) |
$2,038.06 |
$88,098.71 |
$679.35 |
|
10 |
12/31/2005 |
$88,098.71 |
$30,400.00 |
($28,858.27) |
$1,541.73 |
$59,240.44 |
$513.91 |
|
11 |
3/31/2006 |
$59,240.44 |
$30,400.00 |
($29,363.29) |
$1,036.71 |
$29,877.15 |
$345.57 |
|
12 |
6/30/2006 |
$29,877.15 |
$30,400.00 |
($29,877.15) |
$522.85 |
$0.00 |
$174.28 |
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation
by reference in Registration Statement No. 333-107044 of
Pro-Dex, Inc. & Subsidiaries on Form S-8 of our report, dated August 8,
2003, except as to the last paragraph of Note 3 as to which the date is
September 17, 2003 appearing in this Annual Report on Form 10-KSB of Pro-Dex,
Inc. & Subsidiaries for the year ended June 30, 2003.
/S/ McGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
Irvine, California
September 22, 2003
EXHIBIT 31.1
I, Patrick L. Johnson, certify that:
1. I have reviewed this Form 10-KSB of Pro-Dex, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [Omitted pursuant to SEC Release 34-47986];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such valuation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 23, 2003
/s/ PATRICK L. JOHNSON
Patrick
L. Johnson
Chief
Executive Officer
EXHIBIT 31.2
I, Jeffrey J. Ritchey, certify that:
1. I have reviewed this Form 10-KSB of Pro-Dex, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [Omitted pursuant to SEC Release 34-47986];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such valuation; and
e) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 23, 2003
/s/
JEFFREY J. RITCHEY
Jeffrey
J. Ritchey
Chief
Financial Officer
EXHIBIT 32.1
CERTIFICATIONS
OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certifications of Chief Executive Officer and Chief Financial Officer
In connection with the annual report on Form 10-KSB of Pro-Dex Inc. (the "Company") for the annual period ended June 30, 2003 (the "Report"), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18 U.S.C.section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, , that:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d), of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 23, 2003 |
By: /s/ PATRICK L. JOHNSON
|
Dated: September 23, 2003 |
By: /s/ JEFFREY J.RITCHEY |
Jeffrey J. Ritchey |
|
Chief Financial Officer |
|
|
|
|
A
signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signatures
that appear in typed form within the electronic version of this written
statement required by Section 906, has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.