COMMITMENTS AND CONTINGENCIES

12 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Leases

We lease our office, production and warehouse facilities in Irvine, California and Beaverton, Oregon under agreements that expire in April 2018 and April 2014, respectively. Both leases require us to pay insurance, taxes, and other expenses related to the leased space. Rent expense in 2013 and 2012 was $592,000 and $574,000, respectively. On July 15, 2013, we entered into an amendment with respect to our Irvine, California lease which provides for a $4,227 reduction in the monthly base rent (as compared to the monthly base rent that would have been payable under the original lease terms) beginning on July 1, 2013 and continuing for the remainder of the term of the lease. Minimum lease payments for future fiscal years ending June 30 are: 

2014	$	477,000
2015		423,000
2016		440,000
2017		457,000
2018		359,000
	$	2,156,000

Compensation Arrangements

Retirement Savings 401(k) Plan

The Pro-Dex, Inc. Retirement Savings 401(k) Plan (the “401(k) Plan”) is a defined contribution plan we administer that covers substantially all our employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. Employees are eligible to participate in the 401(k) Plan when they have attained 19 years of age and then can enter into the 401(k) Plan on the first day of each calendar quarter. Participants are eligible to receive non-discretionary Pro-Dex matching contributions of 25% of their contributions up to 5% of eligible compensation, once they have completed six months of service. For the years ended June 30, 2013 and 2012, we recognized compensation expense amounting to $41,000 and $44,000, respectively, in connection with the 401(k) Plan.

Annual Incentive Plan (“AIP”)

The AIP provides annual incentive opportunities for our key employees based upon the attainment of certain performance goals. Compensation expense under the terms of the AIP amounted to $29,000 in fiscal year 2012, which amount was included in accrued liabilities in the accompanying consolidated balance sheets.  No compensation expense was accrued under the terms of the AIP in fiscal year 2013.

Long-Term Incentive Plan (“LTIP”)

The LTIP provides incentive opportunities to our executives and other key employees, and are conditioned on attainment of certain performance goals for one or more fiscal years. Awards under the LTIP are accrued when payment of such awards becomes probable. For the years ended June 30, 2013 and 2012, compensation expense under the terms of the LTIP amounted to a benefit of $52,000 and an expense of $43,000, respectively, which amounts are included in accrued liabilities in the accompanying consolidated balance sheets.

Change in Composition of our Board of Directors

In June 2012, AO Partners Group, whose members then owned approximately 22% of our outstanding common stock, nominated a slate of three director nominees (the “AO Nominees”) to run in opposition to the slate of five director nominees placed into nomination by our then-incumbent Board of Directors (the “Pro-Dex Nominees”). At our January 17, 2013 Annual Meeting of Shareholders (the “Annual Meeting Date”), our shareholders elected the three AO Nominees and two Pro-Dex Nominees, only one of whom was an incumbent member of our Board of Directors, to fill the five seats on our new Board of Directors. As a result, the new Board of Directors was composed of four new members and one continuing member as of the 2013 Annual Meeting Date.

The degree of change in composition of our Board as described above constituted a “change of control” as that term is defined in existing change of control agreements we previously entered into with members of senior management (“Change of Control Agreements”) and as defined in our Stock Option Plans. The impact on the accompanying financial statements of the change of control as defined in these instruments and the remaining potential effects of the change of control are as follows:

Change of Control Agreements

The Change of Control Agreements provide that, if the individual’s employment with us involuntarily terminates (as such term is defined in the Change of Control Agreements) within 12 months after a change of control, the individual will receive, subject to signing a release of claims, (i) a lump sum amount equal to 30 weeks base compensation of the individual at the time of such termination and (ii) 100% Company-paid insurance coverage as provided to the individual immediately prior to his termination of employment for a period equal to the earlier of (i) 12 months following termination or (ii) until the individual becomes covered under another employer’s insurance plan. In addition, the individual shall be entitled to receive bonus or compensation award payments, if any, in accordance with the terms of our incentive compensation plans in which the individual was an eligible participant at the time of the termination.

As discussed further below, on February 25, 2013, Michael J. Berthelot, the Company’s Chief Executive Officer and President, was separated from the Company. In connection with the separation, Mr. Berthelot was paid, among other items, $165,423 as contemplated by his Change of Control Agreement.  In addition, on June 19, 2013, we effected a reduction in force that included one additional member of senior management, resulting in a $97,000 benefit as contemplated by this individual’s Change of Control Agreement which was included in accrued expenses as of June 30, 2013 and paid in July 2013.

After giving effect to our payment to Mr. Berthelot and the additional member of senior management under their respective Change of Control Agreements as described above, we have remaining Change of Control Agreements with Mr. Hurwitz and our Chief Operating Officer, Richard Van Kirk, who could be entitled to benefits under such Agreements in the event of termination under the conditions described above and whose annual base compensation aggregates $405,000.  Such Change of Control Agreements expire in July 2014.

Additionally, in the event of a change of control, our Board had the discretion to accelerate the vesting of any outstanding options or shares of restricted stock held by employees. At its meeting on February 4, 2013, the Board took no action to effect such acceleration. In addition, as of the Annual Meeting Date, all outstanding options held by members of our then-incumbent Board were already fully vested under such options’ terms.  Accordingly, the change of control described above had no effect with respect to our stock option plans (as further described in Note 9).

Board Compensation

From July 1, 2010 until May 2, 2013, the compensation plan for non-employee directors (the “2010 Plan”) of the Board provided for the following:

● An annual retainer of $24,000 for each director;

● An additional annual retainer of $7,000 for the Board Chairman or Lead Director, and $5,000 for each Board Committee Chair;

● Fees ranging from $500 to $1,000 for participation in Board or Committee meetings in excess of six per year; and

● An option grant under the Directors Plan (as defined in Note 8) for the purchase of (i) 15,000 shares of common stock upon the director’s initial election or appointment to the Board, and (ii) 10,000 shares of common stock upon the director’s re-election to the Board.

On February 4, 2013, the AO Nominees each opted to waive (a) receipt of stock options they were otherwise entitled to receive upon their election to the Board at the 2013 Annual Meeting, and (b) any cash retainers or meeting fees in excess of $200 per meeting and $2,000 per year.

At its meeting on May 2, 2013, our Board replaced the 2010 Plan with the 2013 Directors’ Compensation Plan (the “2013 Plan”) that provides for the following:

● Fees of $200 for participation in Board or Committee meetings, to a maximum of $2,000 per fiscal year;

● An annual retainer of $23,000 for the Audit Committee Chair (which may be modified in compensating any future Audit Committee Chair)

The 2013 Plan has no provision for (a) retainers other than that described above, or (b) grants of options, restricted stock or other equity or equity-based compensation or incentives.

2013 Change in Chief Executive Officer

In connection with Mr. Berthelot’s separation of employment, as described above, the Company and Mr. Berthelot entered into a Separation Agreement and General Release of All Claims (“Separation Agreement”) concerning the conclusion of Mr. Berthelot’s employment services with the Company. Under the terms of the Separation Agreement, Mr. Berthelot was paid all unpaid base salary and unreimbursed business expenses for the period through February 25, 2013, plus his prorated portion under the Company’s Long Term Incentive Plan in the amount of $1,971, in addition to the $165,423 under the terms of the Change of Control Agreement described above and as additional consideration for the release of claims under the terms of the Separation Agreement.  In addition, as a result of Mr. Berthelot’s separation, the option to purchase 200,000 shares of the Company’s common stock, issued to Mr. Berthelot in May 2012 pursuant to his appointment as the Company’s Chief Executive Officer, expired as unvested and unexercised.

Concurrent with Mr. Berthelot’s separation of employment, Harold A. Hurwitz began service as the Company’s Chief Executive Officer and President. Mr. Hurwitz had been the Company’s Chief Financial Officer and continues to serve in such capacity concurrent with his service as the Company’s Chief Executive Officer and President.  In connection with Mr. Hurwitz’s appointment, Mr. Hurwitz’s base compensation was increased to an annualized rate of $225,000.  All other terms of Mr. Hurwitz’s employment remained unchanged.

2012 Change in Chief Executive Officer

Effective April 20, 2012 (the “Separation Date”), Mark P. Murphy, Chief Executive Officer, President and a member of the Board of Directors of Pro-Dex and its subsidiaries, resigned from all of such positions. On that date, the Company and Mr. Murphy entered into a Separation Agreement and General Release of All Claims (“Separation Agreement”).

Under the terms of the Separation Agreement, we, among other actions, (i) paid Mr. Murphy severance compensation of $300,000, in accordance with the terms of our employment letter agreement with Mr. Murphy dated July 14, 2010, and (ii) paid the monthly premiums for continued health insurance coverage under COBRA for a period from the Separation Date through March 31, 2013, an aggregate amount of approximately $16,000.

Also on April 20, 2012, we executed an employment letter agreement with Michael J. Berthelot under which he commenced employment as Chief Executive Officer and President of Pro-Dex and its subsidiaries. Mr. Berthelot had been a member of our Board of Directors since 2009, and continued in that capacity until the 2013 Annual Meeting Date, as described above.

Legal Matters

In February 2011, we became aware of a report entitled “Site Discovery Report, Southeast Santa Ana Project DTSC – Cypress Region,” dated February 2010 (the “Report”), that was prepared by the Cypress, California regional office of the Cal/EPA Department of Toxic Substances Control (“DTSC”) for Region 9 of the U.S. Environmental Protection Agency under an agreement between the two agencies. The purpose of the Report was to identify sites within an area of southeast Santa Ana, California that may be sources of groundwater contamination previously detected in that area. The Report identified 25 sites, including our former Santa Ana site, for further screening by DTSC staff over the next two years. DTSC has informed us that no further evaluation of our former site took place during fiscal years 2011 through 2013. It is uncertain whether future developments, if any, from DTSC’s screening process would have any application to our former site and, if so, what exposure we might face concerning any findings that might be made concerning the site.

In general, we are from time to time a party to various legal proceedings incidental to our business, none of which we consider may be material. There can be no certainty, however, that we may not ultimately incur liability or that such liability will not be material and adverse.