<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-KSB/A - Amendment No. 1
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
Commission File Number 0-14942
PRO-DEX, INC.
------------------------------
(name of small business issuer in its charter)
Colorado 84-1261240
-------- -----------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
1401 Walnut St., Ste., 540, Boulder, Colorado 80302
- ---------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (303) 443-6136
--------------
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
---------------------
Title of each class on which registered
- ------------------- -------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of class)
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
------
(Cover page continued on next page)
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is 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. $20,833,236.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average of the bid and asked as of September 20,
1996 was $324,723,397.
The number of shares of the Registrant's no par value common stock
outstanding as of September 20, 1996 was 9,050,783.
DOCUMENTS INCORPORATED BY REFERENCE: Certain Exhibits, as set forth in the
Exhibit Index. Exhibit index begins on sequentially numbered page 40.
PAGE 1 of 44 Pages.
<PAGE>
PART I
ITEM 1. BUSINESS
--------
GENERAL
- -------
As of June 30, 1996, Pro-Dex, Inc. (the "Company" or "Registrant") was the
parent company of six operating subsidiaries, Biotrol International, Inc.
("Biotrol"), Challenge Products, Inc. ("Challenge"), Pro-Dex Management, Inc.
("PDM"), Micro Motors, Inc. ("Micro"), Oregon Micro Systems, Inc. ("OMS") and
Pnu-Light Acquisition Corporation ("Pnu-Light"). Biotrol manufactures and
distributes infection control products for the dental industry. Challenge
manufactures fluoride and related products for preventive dentistry. PDM is a
dental management company, operating five dental centers located in Sears
Roebuck, Inc. stores in northern California. Micro, a manufacturer of
miniature pneumatic motors, was merged with and into a wholly owned subsidiary
of the Company on July 26, 1995. Micro also manufactures and markets a complete
line of hand-pieces for the dental industry. On July 26, 1995, the Company also
acquired all the outstanding stock of OMS. OMS designs and manufactures multi-
axis circuit boards used to control the motion of servo and stepper motors,
predominantly for the computer chip manufacturing industry. On May 11, 1996,
Pnu-Light acquired substantially all the assets of Pnu-Light Tool Works, Inc.,
a Missouri corporation ("Pnu-Light Tools"). Pnu-Light Tools had developed a
patented pneumatic light system for hand tools to be used in dental, medical and
industrial applications.
On May 25, 1994, the shareholders of the Company's predecessor approved a
Plan of Reorganization and Agreement of Merger pursuant to which the Company
changed its state of incorporation to Colorado.
ACQUISITIONS DURING YEAR ENDED JUNE 30, 1996
- --------------------------------------------
On July 26, 1995 the Company acquired all the issued and outstanding stock
of Oregon Micro Systems, Inc., an Oregon corporation ("OMS") from Mr. L. Wayne
Hunter, the sole shareholder of OMS. In addition to the OMS stock, the Company
also acquired from Mr. Hunter related assets identified as two letters patent
for the design of OMS' multi-axis motion control circuit boards. OMS provides
the design and manufacture of multi axis circuit boards to control the motion of
motors used predominantly in medical testing equipment and computer chip
manufacturing machinery. The total purchase price paid for the OMS stock and
related assets was approximately $6,700,000, including a post closing
adjustment, all of which for accounting purposes has been recorded under the
purchase method.
Mr. Hunter and the Company also entered into a consulting and non-
competition agreement pursuant to which, in the aggregate, the Company will pay
Mr. Hunter $1,000,000 over five (5) years. Approximately $3,000,000 of the
purchase price is allocated by the parties to the patents. The balance of
$3,700,000 is allocated to the stock of OMS. The underlying assets and net book
-2-
<PAGE>
value of OMS, not including any intellectual property, was approximately
$3,817,000. See "Item 12- Certain Relationships and Related Party
---
Transactions."
The Company obtained a five (5) year term loan from Finova Capital
Corporation ("Finova") and borrowed $500,000 from Air Techniques, Inc., a
Delaware corporation ("Air Techniques") to finance portions of the acquisition
price and related acquisition costs. The remaining principal of the acquisition
loans from Finova and Air Techniques has since been repaid with proceeds from a
loan from Harris Trust and Savings Bank ("Harris Bank"), which the Company
obtained on July 26, 1996. Prior to repayment of such Finova loan, the Company
was required to pay interest at prime plus 3 1/2 percent plus an additional
annual 5% profit participation fee calculated on the outstanding loan balance at
the beginning of each year. Pursuant to the loan agreement with Air Techniques,
such lender was issued warrants to acquire an aggregate of 26,000 shares of the
Company, exercisable at the loan date market price, with such warrants and
underlying shares restricted and legended in accordance with the registration
requirements of the federal securities law. Also pursuant to the loan agreement
and a guaranty of the Air Techniques loan entered into by Professional Sales
Associates, Inc. ("PSA"), that firm was issued warrants to acquire 13,000
restricted shares of the Company's common stock, exercisable at the loan date
market price. Three of the Company's directors, including its Chairman, are
directors of PSA. See "Item 6 - Management Discussion and Analysis - Liquidity
---
and Capital Resources" and "Item 12 - "Certain Relationships and Related Party
Transactions."
Also on July 26, 1995, Micro Motors, Inc. ("Micro Motors") was merged with
and into Micro, which thereafter changed its name to Micro Motors, Inc.,
pursuant to a Merger Agreement among Micro, Micro Motors, the five Micro Motors
shareholders (the "Micro Shareholders") and the Company. In connection with the
statutory merger of Micro Motors with and into Micro, the Micro Shareholders
were issued 3,350,000 shares of the Company's common stock in exchange for all
of their shares of Micro Motors. The price of the Company's stock at the time
of the exchange was $2.75 per share, making the initial acquisition cost of
Micro $9,212,500. For accounting purposes the transaction has been recorded
under the purchase method. On February 29, 1996, the Company's shareholders
approved conversion of 26,272 options to acquire Micro Motors shares, granted
prior to the merger under the Micro Motors Stock Option Plan, to options to
acquire 591,120 shares of the Company's common stock under the Company's 1994
Stock Option Plan. Micro develops and manufactures patented miniature pneumatic
motors and dental hand-pieces. Prior to the merger transaction, the former
Chairman of Micro Motors, Mr. Ronald G. Coss, entered into an agreement to
terminate his long term employment contract with Micro Motors, Inc., for the sum
of $677,400 payable over five years, at 11% interest per annum. Also, pursuant
to the merger, Mr. Coss executed a non-competition agreement with the Company
for consideration in the amount of $1 million over five years, with payment
commencing in the sixth year after closing. Mr. Coss now serves as Vice
Chairman of the Company. See "Item 12 - Certain Relationships and Related Party
---
Transactions."
On May 11, 1996, the Company and its newly formed wholly owned subsidiary,
Pnu-Light, acquired substantially all the assets of Pnu-Light Tools, including a
letter patent relating to pneumatic light mechanisms to be used in conjunction
with hand-tools (the "Patent"), from Pnu-
-3-
<PAGE>
Light Tools and Mr. Marty J. Anderson, an individual resident of Missouri
("Anderson"), pursuant to an Asset Purchase Agreement dated May 11, 1996 among
the Company, Pnu-Light, Pnu-Light Tools and Mr. Anderson (the "Asset Purchase
Agreement"). The assets of Pnu-Light Tools were acquired by the Company and Pnu-
Light subject to specified outstanding liabilities of Pnu-Light Tools. The
initial consideration for acquisition of assets of Pnu-Light Tools, including
the Patent, was issuance of 368,483 restricted shares of the Company's common
stock, valued at $5.63 per share, the market price on the transaction date.
Additional consideration for acquisition of assets of Pnu-Light Tools is payable
by issuance of additional stock, based upon an interim calculation as of
December 31, 1997, and a final calculation as of June 30, 1999. The total
purchase price is to equal five (5) times the net after tax earnings of the Pnu-
Light Subsidiary for the year ending June 30, 1999, with a minimum total
consideration of $4,000,000 giving credit against such minimum for (a) the
greater of (i) the fair market value of the Company's stock previously issued as
consideration, as of the date issued or (ii) the fair market value of the
Company's stock previously issued as consideration, as of June 30, 1999, (b)
Patent related costs subsequent to closing, (c) excess accounts payable, and (d)
research and development costs incurred within 120 days of closing. In addition,
the Company , at the Company's sole option, may unwind the transaction at any
time prior to payment of final consideration as of June 30, 1999, provided that
the value of total consideration payable at 5 times net after tax earnings shall
not then exceed $4,000,000. The Company has recorded the net assets acquired at
the present value of the estimated, adjusted minimum purchase price of
$3,070,000, using the purchase method of accounting and reflecting therein
additional consideration payable pursuant to the Asset Purchase Agreement. The
excess of the total acquisition cost of Pnu-Light Tools assets over the fair
value of the net assets acquired of approximately 1,100,000 is being amortized
over a 15 year period by the straight line method.
Mr. Anderson currently serves as the Director of Development of Pnu-Light
under a three year employment agreement, at a annual salary of $60,000. See
---
"Item 12 - Certain Relationships and Related Party Transactions."
Management believes the acquisition of these three new subsidiaries will
provide significant synergistic possibilities to the Company's business.
PRODUCTS OFFERED BY BIOTROL
- ---------------------------
Biotrol is a dental products distribution company specializing in infection
control products and preventive dental products. Biotrol believes that the
products offered by it can be used effectively as an operatory infection control
system to minimize cross-contamination by potentially infectious organisms in
the dental operatory. Biotrol's infection control system includes five
categories of products: surface cleaners and disinfectants; immersion cleaners
and disinfectants; a dental vacuum line cleaner/disinfectant; barriers; and a
line of preventative dental products manufactured for Biotrol by Challenge under
the "Perfect Choice" label. These products include fluoride gels and rinses in
addition to prophylaxis pastes and related preventive dentistry products.
-4-
<PAGE>
Biotrol has entered into a marketing agreement with Challenge, whereby it
markets Challenge's branded products. In the opinion of management, this
intercorporate marketing agreement does not undercut Biotrol's ability to enter
into other non-exclusive marketing agreements. Over fifty-eight percent (58%)
of Biotrol sales are attributable to four customers with whom Biotrol has
maintained longstanding relationships. Biotrol has no plans to discontinue
these relationships, nor does it believe these customers have any plans to
discontinue their relationship with Biotrol. Any material adverse change in the
relationship with these four customers may be financially detrimental to
Biotrol.
Biotrol considers its relationships with its various suppliers and
manufacturers to be excellent. It does not intend to terminate any relationship
at this time, nor does its management believe any relationship will be
terminated by a supplier or manufacturer. Biotrol holds no franchises and has
no exclusive arrangements with any of its suppliers or manufacturers.
At the present time, Biotrol is usually able to fill orders within forty
eight hours. During the year ended June 30, 1996, Biotrol continued to maintain
its record for improved customer service and turn-around time. At June 30,
1996, Biotrol had no order backlog, and had virtually no backlog at June 30,
1995. Biotrol does not typically experience seasonal fluctuations in its
orders.
PRODUCTS OFFERED BY CHALLENGE
- -----------------------------
Challenge is a manufacturer of products used by dentists for the prevention
of dental disease. The majority of its business is the formulation and
manufacture of gels, pastes and rinses for in-office and home treatments for the
prevention of dental diseases. Its products are sold under the Challenge labels
of "Perfect Choice,"(TM) "Dual-X,"(TM) "Dentalite,"(TM) and "Prophy Gems," (TM)
which are marketed under the "Perfect Choice"(TM) label. Challenge products are
marketed by Biotrol through the current Biotrol sales force and distributors.
In addition, Micro markets a dental hand-piece lubricant produced by Challenge
under Challenge's "Micro Mist"(TM) label.
Fifty-eight percent (58%) of Challenge products are formulated, packaged
and sold under private label agreements with other dental manufacturers and
distributors. Two such manufacturers/ distributors represent a significant
percentage of Challenge's private label sales, however, these relationships are
longstanding and Challenge has no plans to discontinue these relationships, nor
does it believe that these customers have any plans to discontinue their
relationships with Challenge. Any material adverse change in the relationships
with either of the two customers representing significant percentages of
Challenge's private label sales may be financially detrimental to Challenge.
Sixty-five percent (65%) of Challenge's revenues are derived from sales to
its two largest customers. The largest portion of such revenues, constituting
forty percent (40%) of total sales are to Biotrol, under Challenge's marketing
agreement with Biotrol. Management considers that the intercompany nature of
the relationship with Biotrol affords somewhat greater security of continuity of
relationship than could ordinarily be expected. Nevertheless, if any material
adverse
-5-
<PAGE>
change were to occur in Challenge's volume of business with either of its two
largest customers, such change may be financially detrimental to Challenge.
Challenge usually fills orders for its branded "Perfect Choice"(TM) and
"Prophy Gem"(TM) products within forty-eight hours and carries little backlog,
enabling it to provide a level of customer service which enhances marketing of
the products. Unlike the branded products, private label customers usually
anticipate a 30 to 60 day lead time for the delivery of products to them. As of
June 30, 1996, Challenge had a backlog of $88,000, the largest proportion of
which related to timing of orders for private label products not due for
immediate shipment. At June 30, 1995, Challenge had a backlog of $160,000.
Challenge does not typically experience seasonal fluctuations in its orders, and
expects to fill all its orders during the current fiscal year.
PDM - DENTAL CENTER OPERATIONS
- ------------------------------
Dental services in each PDM center are provided by independent dentists who
contract with PDM to operate in the facilities, using PDM management services.
PDM management services include the establishment of business procedures and the
development and implementation of promotional activities. PDM equips and staffs
its dental offices to facilitate the practice of general and orthodontic
dentistry for children and adults. PDM receives a management fee for providing
facilities, personnel and services to the dentists. Dentists develop and direct
all patient treatment plans and exercise control over all dental services
performed in the office. In accordance with the California professional
requirements, all dentists in PDM centers are licensed to practice dentistry in
California.
Each dentist in the dental centers establishes the fee for services
rendered in his office in consultation with PDM. Upon development of the
treatment plan by the dentist, PDM and the patient enter into a contract for
payment. PDM bears responsibility for collection of the contract amount. PDM
bears the risk of non-collection of fees. PDM, after an intensive review of its
accounts receivable, reduced earnings by providing for a charge for doubtful PDM
accounts of $352,000 for the year ended June 30, 1995. During the year ended
June 30, 1996, PDM's further review of its accounts receivable performance
required it to reduce earnings by providing for a charge for doubtful PDM
accounts of $204,000 for such year. PDM now requires payment at the time
services are rendered for all new non-orthodontic dental cases, where payment
responsibility is not expected to be discharged by a third party payor.
Denti-Cal and Third Party Payors. PDM is an authorized provider for, and
--------------------------------
significant revenues are derived from, California State Welfare Program (Denti-
Cal). Denti-Cal is a program administered by the California Department of
Health Services which provides subsidized dental care to low income California
residents. Provider dentists are required to comply with applicable state and
federal regulations, are inspected by the State of California Department of
Health Services, and must agree to accept the assignment of Denti-Cal payments.
PDM has been involved with Denti-Cal since 1980. Any material adverse
alteration of the relationship between PDM and Denti-Cal would be financially
detrimental to the Company.
-6-
<PAGE>
PDM - Relationship with Sears. PDM has leased offices from Sears Roebuck
-----------------------------
and Co. ("Sears") stores since 1978, affording increased visibility to a large
number of Sears customers. PDM management has successfully negotiated lease
renewals in the past and believes there is no reason why the leases would not be
renewed. Nevertheless, the Company is unable to predict the future of its
relationship with Sears, noting that most of the Company's site leases from
Sears are up for termination or renewal prior to June 30, 1997. See "Business -
---
Properties."
PDM - Liability Exposure for Dental Services. Provision of dental services
--------------------------------------------
necessarily exposes PDM to risk of litigation arising from treatment received in
its dental care offices. The Company and Sears require that services rendered
by dentists in PDM offices are within the covered risks of professional
liability insurance naming PDM and Sears as co-insured. Such insurance must
provide coverage of at least $1,000,000 per individual claim and $1,000,000 per
year for all claims. To the extent insurance may in any case prove insufficient
or the insurance company is relieved of its obligations to cover the loss, PDM
and the Company may bear substantial costs associated with such litigation,
including the amount of any settlement and/or judgment. Although PDM management
believes that its required minimum policy limits are satisfactory, there can be
no assurance that the insurance proceeds, if any, will cover the full extent of
loss, resulting from patient claims, if any. Neither the Company nor its PDM
subsidiary directly maintain such professional liability insurance.
Company Plans Regarding PDM. The Company's Board of Directors recently
---------------------------
began considering various alternatives regarding PDM's future, including
restructuring of the business, continued operations under present parameters,
expansion of operations, and sale of the business. Most of the PDM site leases
with Sears are up for renewal or termination prior to June 30, 1997. After
consideration of the Company's future and PDM's compatibility with other
subsidiaries, the Board of Directors decided to exit this line of business.
Accordingly, the Company's financial statements present the subsidiary as a
"discontinued operation." Recently, the Board of Directors received a written
proposal from a possible purchaser regarding acquisition of the PDM business,
which the Board of Directors was unable to accept without significant
modifications. Negotiations remain open, but the Company's Board of Directors
is unable to predict whether such negotiations will result in any agreement to
dispose the PDM business. Due to the sensitive nature of ongoing negotiations
for which no letter of intent has been adopted, the Company is unable to
disclose the possible price or other material terms for the proposed
transaction, however, the Company believes that it will be able to liquidate its
holdings in PDM at no loss to the Company. Any proposal acceptable to the
Company must provide for an appropriate transition of personnel and independent
contractor professionals. The Board of Directors stresses that the ongoing
negotiations are very preliminary and may result in no agreement. Further,
while the Board of
-7-
<PAGE>
Directors would only agree to a transaction it believed to be in the Company's
best interest. See "Management Discussion and Analysis -Results of Operations-
---
Forward Looking Statements."
PRODUCTS OFFERED BY MICRO MOTORS.
- --------------------------------
Micro manufactures miniature pneumatic motors used in dental, medical and
industrial devices. In addition, Micro manufactures and distributes a complete
line of dental hand-pieces for the dentist and hygienist. Micro's industrial
products are sold directly to original equipment manufacturers. The branded
hand-piece line is sold to dental distributors, who in turn market directly to
the dentist. Micro products are sold under the trademarks "Dynatorq,"(TM)
"Dynapro,"(TM) "Dynalite,"(TM) "Dynasurg,"(TM) and "Micro Handpiece."(TM)
Forty-eight percent (48%) of Micro sales in the year ended June 30, 1996
were accounted for by sales of its dental hand-pieces. Such private label and
branded hand-pieces are sold to original equipment manufacturers and under an
exclusive marketing agreement by Professional Sales Associates, Inc. ("PSA"), a
firm for which three of the Company's directors are directors. See "Item 12 -
---
Certain Relationships and Related Party Transactions." In February 1996, the
Company introduced two products, (1) a new high-speed non-fiber optic handpiece
and (2) a new high-speed fiber optic handpiece. The Company is confident that
this extension of Micro's full line of dental hand-pieces positions Micro to
serve the full breadth of needs in its primary market.
Approximately eighteen percent (18%) of Micro sales in the year ended June
30, 1996 consisted of sales of miniature pneumatic motors for industrial use.
Such motors are marketed directly to manufacturers, using Micro's internal sales
force.
At the present time, Micro is usually able to fill orders within sixty
(60) days. At June 30, 1996, Micro had a backlog of orders of approximately
$97,920, which it believed to be firm. At June 30, 1996 Micro had open orders
of approximately $1.9 million, including such backlog, as compared to open
orders of approximately $1.4 million at June 30, 1995. Micro expects to fill
all of its backlog of orders during the current fiscal year. Micro does not
typically experience seasonal fluctuations in its orders.
Joint Development with Pnu-Light. During the year ended June 30, 1996,
--------------------------------
Micro undertook efforts to assist Pnu-Light in the development of a production
prototype of its pneumatic light for incorporation into dental hand-pieces and
other hand-tools, and began manufacture of such tools for the commercial market.
Since the Company's acquisition of Pnu-Light assets on May 11, 1996, greater
Micro resources have been devoted to development of the Pnu-Light products,
pursuant to intercompany arrangements which do not result in an immediate return
to Micro. Management considers the Pnu-Light development work to be an
investment of resources which may result in useful products with a reasonable
return for both Pnu-Light and Micro in the future. See "Management Discussion
---
and Analysis - Results of Operations - Forward Looking Statements."
-8-
<PAGE>
PRODUCTS OFFERED BY OMS
- -----------------------
OMS designs and manufactures multi-axis circuit boards to control the
motion of motors used predominantly in medical testing equipment and computer
chip manufacturing machinery. During the year ended June 30, 1996, OMS achieved
sales of $5,312,648, as compared to pro-forma sales of $3,650,000 for the year
ended June 30, 1995. The comparison sales figures for OMS in the prior period
do not include amounts relating to a pre-acquisition license between OMS, Hunter
and Abbott Laboratories, for which no revenue will flow to the Company.
Management attributes the increase in fiscal year 1996 sales for OMS primarily
to a substantial marketing effort undertaken by new management after acquisition
of OMS, as well as robust sales in the first half of the fiscal year as a result
of positive cyclical factors in the computer chip manufacturing industry which
utilizes OMS' products.
OMS markets its multi-axis circuit boards through nine outside sales
representatives, seven of whom are under exclusive relationships. For the
present, OMS's products are profitably marketed at prices which compare
favorably with any alternative products. As in any high-technology area, it is
important for OMS to continue development efforts to achieve continued market
acceptance. In this connection, OMS has benefited from consulting services
provided in the year ended June 30, 1996 by Mr. Hunter, the former sole
shareholder of OMS. Mr. Hunter's consulting agreement provides that the hours
required to be committed to consulting services for the benefit of OMS reduce in
the year ending June 30, 1997. See "Item 12 - Certain Relationships and Related
---
Party Transactions." Mr. Hunter continues to assist OMS and the Company is
confident that the product development group in place at OMS will continue to
enable OMS to compete effectively.
OMS' two largest customers account for twenty- nine percent (29%) of its
sales, with the largest of such customers accounting for twenty-one percent
(21%) of sales. These relationships are well-established , OMS has no plans to
discontinue the relationships, and has no reason to believe that these customers
have any plans to discontinue their relationships with OMS. Nevertheless, any
material adverse change in the relationships with any customer representing
significant percentages of OMS sales may be financially detrimental to OMS.
At the present time, OMS is usually able to fill its orders within twenty-
four hours. At June 30, 1996, OMS' backlog was $633,823, as compared to
$817,200 as of June 30, 1995. OMS does not typically experience seasonal
fluctuations in its orders, although there are fluctuations in demand resulting
from cyclical activity in the industries it serves.
PNU-LIGHT PRODUCTS
- ------------------
Pnu-Light products include a patented pneumatic light suitable for
incorporation in hand tools. During the year ended June 30, 1996, the products
had very limited sales. Pnu-Light, under development arrangements with Micro,
continues to devote substantial effort to further development of its principal
product. Pnu-Light products are marketed by Micro's internal sales force, under
an intercompany marketing arrangement.
-9-
<PAGE>
EMPLOYEES
- ---------
At June 30, 1996, the Company had approximately 191 full and part-time
employees (excluding independent contractors). At that time, 3 full-time
employees were assigned to corporate headquarters and devoted substantially all
of their time to the operations of the Company. In addition, 2 Company
employees were located at the Company's facility in Santa Ana, California
devoted substantially all their time to the Company operations as the parent
corporation. Approximately 21 persons were employed by Challenge, including 4
persons assigned to Pnu-Light research operations located in Ozark, Missouri.
Approximately 26 persons were employed by Biotrol, not including 2 of the full-
time employees assigned to corporate headquarters. Approximately 28 employees
provided dental-related or clerical services in PDM dental centers, not
including dentists who are independent contractors not in the employ of PDM or
the Company. Micro employed 96 individuals as of June 30, 1996, excluding
personnel located in the Micro facility who were employed as Company personnel.
OMS employed 15 individuals. Pnu-Light had no employees as of June 30, 1996,
but its operations include 4 individuals employed by Challenge, whose offices
are located in the Pnu-Light facility at Ozark, Missouri.
Employees of the Company have not entered into any collective bargaining
agreements with the Company. The Company considers its relations with its
employees to be good.
EMPLOYEE RETIREMENT PLAN
- ------------------------
Effective January 1, 1996, the previously "frozen" employee retirement plan
which had been in place at Micro prior to acquisition by the Company (the "OMS
Plan") were converted to the Pro-Dex, Inc. 401(k) Employee Retirement Plan (the
"401(k) Plan" or the "Plan"). The 401(k) Plan was adopted by the Company for
the benefit of employees of the Company and all six operating subsidiaries. All
amounts in the former plan allocated or accounted for as being for the benefit
of any employee have been preserved in such employee's account under the 401(k)
Plan. The OMS plan was frozen at the time of the acquisition and subsequently
merged into the Plan. For purposes of compliance with the Employee Retirement
Income Security Act of 1974 ("ERISA"), the Company is the Plan Administrator for
the 401(k) Plan, and uses Massachusetts Mutual Insurance to assist it in
administering the Plan. All employee contributions to the Plan vest upon
contribution. Company contributions to the Plan vest in accordance with a six
year schedule from the date a participant is first employed by the Company or
any of its subsidiaries. During the year ended June 30, 1996, the Company's
contribution with respect to the 401(k) Plan was set at $36,232, a portion of
which will have been actually paid in following year end, in accordance with
ERISA standards. The terms of the Company's 401(k) Plan require the Company to
make a Plan contribution, on a matching basis, of 25% of employee contributions,
on an annual basis. The Company currently anticipates that approximately
$90,000 may be contributed to the Plan for the year ending June 30, 1997.
In 1993, Micro Motors established an Employee Stock Ownership Plan (ESOP)
whose shares in Micro Motors, upon merger of Micro Motors with and into Micro
were exchanged for
-10-
<PAGE>
restricted shares of the Company's common stock. No contributions were made to
the ESOP in the year ended June 30, 1996. On July 26, 1996, the ESOP became
eligible to exercise certain demand and concurrent registration rights with
respect to the ESOP's shares in the Company. Demand registration rights will
expire if not exercised prior to July 26, 1997 and concurrent registration
rights expire July 26, 2000. The value of the Company stock owned by the ESOP on
June 30, 1996 was approximately $4,399,200, based upon the average of the bid
and asked price of the Company's common stock.
GOVERNMENT REGULATIONS
- ----------------------
The manufacture and distribution of dental products, such as the Micro
dental hand-piece, the infection control products marketed by Biotrol, the
dental prophylaxis products manufactured by Challenge and the provision of
dental services by PDM, all must be considered to be heavily regulated
businesses. A number of state and federal regulatory bodies, including state
dental boards, the Environmental Protection Agency ("EPA"), and the Food and
Drug Administration ("FDA") have substantial authority to regulate the Company's
businesses. The statutes, regulations, administrative orders, and advisories
which affect the Company's businesses are extremely complex and subject to
diverse, often conflicting, interpretations. While the Company's management and
management of each of the Company's operating subsidiaries make 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 of 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
in achieving such a determination and intervening loss of business could
adversely affect or even terminate a portion of the Company's business.
Further, a change in 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
has deservedly enjoyed a good reputation for compliance with applicable
regulations.
Several of Biotrol's products fall under the Environmental Protection
Agency's (EPA) jurisdiction and are registered with the EPA. The Food and Drug
Administration (FDA) has jurisdiction over Biotrol products that are considered
medical devices or drugs. Both EPA and FDA have broad enforcement power to
recall and prohibit the sale of noncomplying products. As is common in the
industry, certain of Biotrol's products and processes have been periodically the
subject of routine reviews and investigations by the EPA and FDA. Although
certain products have been subject to action by the EPA in the past, those
actions were resolved to the satisfaction of Biotrol's management, and without
recall or other interference with the operations of Biotrol. While the
Company's management is confident that Biotrol products and processes fully
comply with all applicable law and regulations, the Company is unable to predict
the future outcome of any such investigation or review, pending its completion.
Management believes that Biotrol follows Current Good Manufacturing Practices
(CGMP).
-11-
<PAGE>
The Food and Drug Administration (FDA) has jurisdiction over Challenge
products that are considered medical devices or drugs. As noted above, the FDA
has broad enforcement power to recall and prohibit the sale of noncomplying
products. No claim has been made to date by FDA against Challenge or any of its
products or processes. Nevertheless, as is common in the industry, certain of
Challenge products and processes have been the subject of routine reviews and
investigations. While the Company's management is confident that Challenge
products and processes fully comply with applicable law and regulations, the
Company is unable to predict the outcome of any such investigation or review,
pending its completion. Management believes that Challenge follows Current Good
Manufacturing Practices (CGMP).
The practice of dentistry is regulated by statutes, rules and regulations
in each state, and is typically regulated by a state dental board. Generally,
no one other than a licensed dentist admitted to practice in a state may provide
professional dental services. The business of providing and managing dental
offices in the manner engaged in by PDM is still somewhat innovative. PDM
management is unable to assess the risk that a regulatory authority may assert
that the conduct of PDM's business constitutes the unlawful practice of
dentistry or that it results in unlawful fee splitting. PDM seeks to assure
compliance by facilitating, but not engaging in, the practice of dentistry.
Only dentists licensed to practice dentistry in the State of California direct
patient treatment. Although PDM believes that its operations are in compliance
with applicable law, there is no assurance that an adverse determination by
regulatory or judicial authorities might not occur. Such adverse determination,
if any, could substantially impede or even prevent the continuation of PDM's
business.
Micro's dental hand-pieces are regulated by the FDA as medical devices.
There continues to be internal review within the FDA regarding the scope of the
agency's authority to regulate dental equipment such as Micro's hand-pieces.
Regardless of the scope of FDA regulations governing Micro's products, Micro
believes it complies fully with all applicable law and regulations. Micro's
processes involve certain materials subject to regulation by the EPA, and Micro
management believes that it has taken all required measures to comply with
regulations regarding handling and disposition of such materials. Management
believes that Micro follows Current Good Manufacturing Practices (CGMP).
Management believes that the processes, materials and products of OMS'
business in the manufacture and distribution of multi-axis circuit boards is
conducted in a manner consistent with EPA regulations governing disposition of
industrial waste materials. Although the semi-conductor and computer chip
industries are significantly impacted by the 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 risk of non-compliance. Most significantly, OMS acquires pre-
manufactured computer chips as platforms upon which to place OMS technology.
While the Company's management is confident that OMS products and processes
fully comply with applicable law 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 is products or processes. Management believes that
OMS follows Current Good Manufacturing Processes (CGMP).
-12-
<PAGE>
PATENTS, TRADEMARKS AND LICENSING AGREEMENTS
- --------------------------------------------
The Company currently holds letters patent relating to the multi-axis
motion control circuit boards manufactured by OMS. In addition, Micro holds
letters patent relating to its miniature pneumatic motors products. Further,
the Company also holds letters patent relating to the pneumatic light for
incorporation into hand-tools acquired in the Pnu-Light asset acquisition,
subject to the seller's rights in the event the Company elects to unwind the
transaction. The Company has conducted limited review of the letters patent
acquired in connection with the OMS, Micro and Pnu-Light acquisitions, and
believes that the use of such letters patent is neither infringed upon by any
third party nor infringes on any prior art of any third party. Notwithstanding
the limited review of letters patent relating to the Micro, OMS and Pnu-Light
businesses, the Company is unable to assess the validity, scope or defensibility
of the foregoing letters patent. Any challenge to or claim of infringement
relating to the Company's letters patent could adversely affect the Company's
Micro, OMS and Pnu-Light operations.
Prior to the Company's acquisition of OMS, OMS and its founder entered into
a world-wide, fully paid limited use license of certain letters patent with
Abbott Laboratories. The founder of OMS has agreed to indemnify the Company for
any further duties to be performed in connection with the license to Abbott
Laboratories, which are the obligation of such individual as sole recipient of
related royalties.
The Company's Micro subsidiary has certain trademarks relating to its
miniature pneumatic motors products, including "Dynatorq,"(TM) "Dynapro"(TM)
"Dynalite,"(TM) "Dynasurg,"(TM) and "Micro Handpiece"(TM). Challenge Products
Inc.'s products are sold under the trade name "Dentalite"(TM) in both the United
States and Canada. In addition, Challenge offers its new line of preventative
dental products under its "Perfect Choice"(TM) tradename. Challenge also
markets its new "Prophy Gems"(TM) dental prophylaxis product under its "Perfect
Choice"(TM) trademark, in both the United States and Canada. Micro also
markets a dental handpiece lubricant produced by Challenge under Challenge's
"Micro Mist"(TM) trade name. The Pnu-Light pneumatic light is marketed under
the trade name, "Pnu-Light."(TM)
Except as noted, the Company has not entered into any licensing or
franchising agreements and has no present plans to do so.
ITEM 2. PROPERTIES
----------
The Company's offices are located at 1401 Walnut Street, Suite 540,
Boulder, Colorado 80302. The Company leases its headquarters offices for $1,883
per month, on a month to month basis, under a sub-lease from Professional Sales
Associates, Inc., a dental equipment marketing firm for which three of the
Company's directors are also directors and two of such directors are also
shareholders. The per square foot cost of the Company's spaces under its sub-
lease equals the per square foot cost of the master lease, and the Company's
sub-lease is subject to the terms of the master lease. The master lease under
which the Company is sub-lessee expires January 31, 2000.
-13-
<PAGE>
The Company's sub-tenancy has been ratified by a disinterested majority of the
Board of Directors, which does not feel that the Company's operations would be
unduly inconvenienced were the Company required to relocate its three
headquarters employees. Although the Board of Directors believes that the
monthly rental for its Boulder office facility is comparable to rents charged
for comparable properties in the market area, the terms of such lease may not be
the same as might have been negotiated with a third party in an arms' length
transaction.
Biotrol's office, assemblage and warehouse facility is located at 650 South
Taylor, Louisville, Colorado 80027. Biotrol leases 15,005 square feet from an
organization which is not affiliated with Biotrol. Biotrol's lease expires
March 31, 1999. Biotrol currently pays monthly rental of $6,877, which will
escalate to $8,365 per month during the final year of the lease term. Biotrol
is also responsible for its proportionate share of common expenses.
Challenge owns an office and manufacturing facility located at 1100 Bluff
Drive, Osage Beach, Missouri 65065. The office and manufacturing facility is
approximately 14,000 square feet on 1.2 acres of land. In addition, Challenge
has 8.8 acres of undeveloped land adjacent to the manufacturing facility.
Micro's office and manufacturing facility is located at 151 E. Columbine,
Santa Ana, California 92707. Micro leases the facility under a previously
existing lease from Mr. Ronald G. Coss, currently a director of the Company, at
a monthly rental of $27,383. The Company's management believes that the monthly
rental is comparable to rents charged for comparable properties in the market
area, but the terms of the lease may not be the same as might have been
negotiated with a third party in an arms' length transaction. The property upon
which the Micro plant is located contains ground water monitoring devices in
order to comply with applicable California and EPA regulations relating to
activities of a prior owner of the property. Such monitoring activity has not
to date indicated a requirement for remedial action. Micro and the Company
require full compliance by the lessor with applicable California and EPA
standards. See "Item 12 - Certain Relationships and Related Party
---
Transactions."
OMS' offices and manufacturing facilities are located at 1800 N.W. 169th
Place, Suite C100, Beaverton, Oregon 07005. OMS leases the facility from an
unrelated third party, at a monthly lease rate of $5,818, with the lease to
terminate on May 31, 1999.
Pnu-Light's facility for its development operation is located at 3031-1
N.10th Street, Ozark, Missouri 67521. Pnu-Light leases such facility from an
unrelated third party, on a month to month lease, at a monthly lease rate of
$400. Management believes that Pnu-Light operations would not be unduly
inconvenienced were Pnu-Light required to relocate its development operation.
In addition, Pnu-Light is a subtenant of Micro for certain production facilities
located at 151 E. Columbine, Santa Ana, California 92707. Pnu-Light's monthly
rental for its California production facilities is $2,763. Pnu-Light's cost per
square foot is equal to Micro's cost per square foot under the master lease for
the entire Micro facility. Currently, Micro is accruing rent not paid by Pnu-
Light in respect of this sub-lease as an intercorporate obligation.
-14-
<PAGE>
PDM's administrative office is located at 9197 Greenback Lane, Suite G,
Orangevale, California 95662. The five dental centers of Pro-Dex are all
located in Sears stores and leased from Sears. There is no affiliation between
the management of PDM or the Company and the management of Sears. Sears
provides PDM with unfinished space, which PDM finishes and furnishes as a dental
office. Sears takes title to all leasehold improvements at the conclusion of
the lease. PDM leases equipment from an affiliate. See Item 13.
PDM leases for dental care offices in Sears premises are as follows:
Date
Opened Office, Location, Size and Term
- ------ -------------------------------
1979 Arden Fair Shopping Center, 1601 Arden Way, Sacramento, CA. 1,762
-----------------------------------------------------------
square feet. Lease currently requires monthly payments of $5,090 per
month, gradually increasing to $5,612 in the final lease year. Lease
term commenced March 1989 and ends March 31, 1999.
1979 Florin Mall, 5901 Florin Road, Sacramento, CA. 1,034 square feet.
---------------------------------------------
Lease currently requires monthly payments of $3,236 per month. Lease
term commenced March 2, 1988 and ends June 30, 1997.
1984 Sun Valley Shopping Center, 1001 Willow Pass Road, Concord, CA. 1,709
--------------------------------------------------------------
square feet. Lease currently requires monthly payments of $3,675 per
month. Lease term commenced December 1, 1984 and ends April 30, 1997.
1979 Sunrise Mall, 5900 Sunrise Mall, Citrus Heights, CA. 4,900 square
---------------------------------------------------
feet. Lease currently requires monthly payments of $6,817 per month.
Lease term commenced March 2, 1988 and ends June 30, 1997.
1987 Santa Rosa Mall, 100 Santa Rosa Plaza, Santa Rosa, CA. 1,634 square
-----------------------------------------------------
feet. Lease requires monthly payments of $3,434 per month. Lease
term commenced November 24, 1986 and ends February 8, 1997.
ITEM 3. LEGAL PROCEEDINGS
-----------------
No material legal proceedings are presently pending by or against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
During the year ended June 30, 1996, five proposals were submitted to the
vote of security holders at the Company's annual meeting, held in Boulder,
Colorado on February 27, 1996. The Company's Transfer Agent served as Inspector
of Elections and reported that the holders of 7,688,044 shares, comprising 89.5%
of the Company's Common Stock voted either by proxy or in person at the meeting.
The shareholders of the Corporation approved the following matters, each of
which was described in further detail in the proxy materials filed with the
Securities and Exchange Commission and transmitted prior to the meeting to the
shareholders of record as of the record date:
-15-
<PAGE>
Proposal 1. To convert options to acquire shares in the Company's Micro
----------
subsidiary to options to acquire shares of the Company's common stock under the
1994 Stock Option Plan, pursuant to the Merger Agreement whereby Micro Motors.
Inc. was on July 26, 1996 merged with and into Micro, with 5,872,782 votes in
favor, 52,550 opposed, and 14,200 abstaining. See "Item 10 - Executive
---
Compensation."
Proposal 2. To increase the number of shares authorized in the
----------
Company's 1994 Stock Option Plan, by adding authority to grant options to
acquire 1 million shares of Common Stock to such Plan, thereupon totaling 1.5
million shares allocable to future grants and exercise of previously granted
options under such Plan, with 5,859,678 votes in favor, 93,813 opposed, and
10,570 abstaining. See "Item 10 - Executive Compensation."
---
Proposal 3. To increase the number of shares authorized in the Company's
----------
Directors' Stock Option Plan, by adding authority to grant options to acquire
300,000 shares to such Plan, thereupon totaling 500,000 shares allocable to
future grants and exercise of previously granted options under such Plan, with
6,014,895 votes in favor, 100,458 against, and 13,500 abstaining. See "Item 10
---
- - Executive Compensation - Compensation to Directors."
Proposal 4. To elect To elect Kent E. Searl (with 7,677,423 votes),
----------
Ronald G. Coss (with 7,558,428 votes), Charles E. Strait (with 7,559,018 votes)
and George J. Isaac (with 7,555,872 votes), as members of the Company's Board of
Directors. See "Item 9 - Management," for biographical information.
---
Proposal 5. To ratify selection of McGladrey & Pullen, LLP as the
----------
independent certifying accountants of the Company's financial statements for the
year ending June 30, 1996, with 7,673,928 in favor, 1,098 opposed, and 11,018
abstaining. See "Item 8 - Changes in Accountants."
---
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
The Company's Common Stock is quoted on the NASDAQ, Inc. SmallCap
Market(TM) under the symbol "PDEX". The range of high and low bid quotations
for each quarterly period during the last two fiscal years of the Company as
furnished by NASDAQ is as follows:
Fiscal Year High Bid Low Bid
----------- -------- -------
1995
First Quarter $2 13/16 $1 7/8
Second Quarter 2 9/16 2
Third Quarter 3 2
Fourth Quarter 2 7/8 2 11/32
-16-
<PAGE>
1996
First Quarter $3 1/16 $2 1/4
Second Quarter 3 5/8 2 1/8
Third Quarter 4 9/16 3 1/16
Fourth Quarter 6 3 3/4
On September 20, 1996, the last sale price of the Common Stock as reported
by NASDAQ was $3.81 per share. The last sale price reported on NASDAQ on June
30, 1996 was $4.17 per share.
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
At June 30, 1996, the approximate number of holders of record of the
Company's Common Stock was 416. This number does not include beneficial owners
who hold their shares in a depository trust in "street" name.
The Company has not paid any cash dividends on its Common Stock and has no
current plan to pay cash dividends on its Common Stock. Payment of dividends in
the future is dependent upon the financial condition, capital requirements and
earnings of the Company and such other factors as the Board of Directors may
deem relevant. It is not anticipated that dividends will be paid in the near
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
SELECTED FINANCIAL DATA
- -----------------------
The selected financial information presented below is qualified in its
entirety by, and should be read in conjunction with the Company's financial
statements and notes thereto.
-17-
<PAGE>
(All amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995 1995
(Pro-Forma)
<S> <C> <C> <C>
Statement of Operations
Data(1)(2)(3)
Net Sales $20,833 $17,500 $9,037
Cost of Sales 8,420 7,555 2,649
------- ------- ------
Gross Profit 12,413 9,945 3,754
Operating Expenses 9,889 8,803 3,279
Net Operating Income 2,524 1,142 475
Net income (expense) (980) (507) (3)
Income Taxes 338 161 90
------- ------- ------
Income from Continuing
Operations 1,206 474 382
Loss from Discontinued
Operation (31) (107) (107)
------- ------- ------
Net Income $ 1,175 $ 367 $ 275
Net income
per share 0.13 0.05
JUNE 30
1996 1995
Balance Sheet Data (1)
Total assets 28,327 $5,723
Long-term debt (net of
current portion) 5,371 416
- ------------------
</TABLE>
-18-
<PAGE>
(1) Includes transactions and balances of Micro Motors, Inc. (acquired July 26,
1995) and Oregon Micro Systems, Inc. (acquired July 26, 1996), for the
applicable periods subsequent to such acquisitions. See "Item 7 -
Consolidated Financial Statements, at Notes 1 and 10.
(2) Includes adjustments to revenues and income to remove results of
discontinued operations of PDM, for all years.
(3) Pro-forma results of operations for 1995 include the effect of the
acquisitions of Micro and OMS as if the acquisitions had occurred on July 1,
1994. The acquisition of Pnu-Light is excluded because it is not material.
RESULTS OF OPERATIONS
- ---------------------
Forward Looking Statements All forward looking statements in the following
--------------------------
discussion of management's analysis of results of operation, liquidity and
capital requirements, and the possible effect of inflation, as well as elsewhere
in the Company's Form 10-KSB for the year ended June 30, 1996, are projections
based upon a number of assumptions regarding factors such as (1) market
acceptance of the products and services of each of the subsidiary, including
brand and name recognition for quality and value in each of the Company's
subsidiaries' markets, (2) existence, scope, defensibility and non-infringement
of patents, trade-secrets and other trade rights, (3) each subsidiary's relative
success in achieving and maintaining technical parity or superiority with
competitors, (4) interest rates for domestic and Eurofunds, (5) the relative
success of each subsidiary in attracting and retaining technical and sales
personnel with the requisite skills to develop, manufacture and market the
Company's products, (6) the non-occurrence of general economic downturns or
downturns in any of the Company's market regions or industries (such as dental
products and tools or computer chip manufacture), (7) the relative
competitiveness of products manufactured by the Company's facilities, including
any contractors, in the global economy, (8) the non-occurrence of natural
disasters, (9) a stabile regulatory environment in areas of significance to each
of the Company's subsidiaries, (10) the Company's success in managing its
regulatory relations and avoiding any adverse determinations, (11) the
availability of talented senior executives for the parent and each of the
subsidiaries, (12) the Company's success in finding a suitable buyer for PDM at
a suitable price and (13) other factors affecting the sales and profitability of
the Company in each of its markets. Should any of the foregoing assumptions or
other assumptions not listed fail to be realized, the forward looking statements
herein may be inaccurate. In making forward looking statements in this and
other Sections of the Company's report on Form 10-KSB, the Company relies upon
recently promulgated policies of the Securities and Exchange Commission and
statutory provisions, including Section 21E of the Securities Exchange Act of
1934, which provide a safe-harbor for forward looking statements.
Accounting for Discontinued Operation. On June 24, 1996, the Company
-------------------------------------
decided to sell its dental center operations and report the results of PDM as a
discontinuing operation. Accordingly, the Company's financial statements have
been restated to reflect the accounting treatment for discontinued operations of
the dental centers.
-19-
<PAGE>
Results of Operations for Fiscal Year Ended June 30, 1996 Compared to
---------------------------------------------------------------------
Fiscal Year Ended June 30, 1995. Management believes that a comparison of 1996
- -------------------------------
actual results of operations to 1995 pro-forma results of operations will more
accurately describe the activities of the Company for the period. Pro-forma
results of Pnu-Light are not included in 1995 results of operations because they
are not material. A loss of $73,000 from Pnu-Light's operations is included in
the actual 1996 results of operations. Amortization expense of $200,000
resulting from the Pnu-Light acquisition will be included in the 1997 results of
operations.
Net sales increased $3,333,000 or 19%, from $17,500,000 in 1995 to
$20,833,000 in 1996. The increase was due primarily to additional marketing
efforts at OMS and a higher demand in the semiconductor industry, as well as
introduction of a full line of branded dental hand-pieces by Micro.
Gross profit increased $2,468,000, or 24.8%, due primarily to an increase
in sales. Gross profit as a percentage of net sales increased from 56.8% in
1995 to 59.6% in 1996 due to larger sales volume and increased efficiency.
Operating expenses increased $1,086,000 or 12.2% mainly due to an increase
in sales. Operating expenses as a percentage of net sales decreased from 50.6%
in 1995 to 47.5% in 1996.
The Company's effective tax rate on income from continuing operations was
21.9% in 1996 and 19.2% in 1995. The rate was reduced in both years because of
a change in the valuation allowance for deferred tax assets of $432,000 in 1996
and $90,300 in 1995. Management has provided a valuation allowance related to
net operating loss carry forwards which cannot be realized until after a two
year period. Management believes the deferred tax assets are more likely than
not to be realized given the current operating results.
For 1996, income from continuing operations increased $732,000, or 154.4%
from $474,000 in 1995 to $1,206,000 in 1996, primarily due to higher sales and
gross profit margins.
Net revenues from the discontinued dental centers decreased from $2,635,000
in 1995 to $2,421,000 in 1996, a decrease of $214,000 or 8.1%. Loss from
discontinued operations decreased from $107,000 in 1995 to $31,000 in 1996.
Management does not believe that PDM will incur future operating losses through
its disposition and that the Company will be able to sell the net assets of this
operation for at least equal to their recorded value.
The weighted average number of shares increased by 3,643,055 shares mainly
due to the issuance of approximately 3,700,000 shares to acquire new businesses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The operations of the Company are conducted principally through its wholly
owned subsidiaries. The Company's financial position at June 30, 1996 remains
strong with working capital on that date of $5,308,745, compared with $3,445,827
at June 30, 1995. Cash and cash
-20-
<PAGE>
equivalents totaled $407,722 at June 30, 1996, compared to $384,968 at June 30,
1995. The Company provided $1,041,901 in cash from operations for the year ended
June 30, 1996. Net cash used in operations was $116,310 for year ended June 30,
1995.
The Company's principal source of liquidity during year ended June 30, 1996
was cash on hand and a net increase in both short and long term borrowings of
$3,611,379. During year ended June 30, 1995, the Company's liquidity was
provided principally from cash on hand, revenues from operations and short term
borrowings.
On July 26, 1995, The Company borrowed $3.5 Million from FINOVA Capital
Corporation ("FINOVA") in connection with its acquisition of OMS, under a five
(5) year fixed asset secured promissory note, and at the same time entered into
a $1.5 Million line of credit with FINOVA, primarily to provide working capital
for the Micro acquisition, replacing a prior line of credit of Micro Motors with
another institution. The interest rate under the fixed asset secured promissory
note was prime plus 3 1/2 percent plus an additional annual 5% profit
participation fee calculated on the outstanding loan balance at the beginning of
each year. In addition, the Company borrowed $500,000 from Air Techniques,
Inc., at an interest rate of prime plus 2%, on an interest only basis for the
first two (2) years. Both of these loans were repaid on July 26, 1996, when the
Company entered into a loan agreement with Harris Trust and Savings Bank
("Harris Bank"). Upon prepayment of the FINOVA debt, the Company incurred a
prepayment penalty of $293,200. At June 30, 1996, the Company's Biotrol
subsidiary also had a $250,000 line of credit with a bank, bearing interest at
prime plus 1 1/2 percent.
On July 26, 1996, the Company entered into a credit agreement with Harris
Bank pursuant to which the Company borrowed $6 million for five years, with an
interest rate of prime. In addition, the Company obtained a line of credit
permitting it to borrow $4 million at the prime rate of interest. The Company
has the option, at any time, to convert its domestic rate loans with Harris Bank
to an adjusted LIBOR Eurocredit rate of Adjusted LIBOR plus 1 1/2 to 2 percent,
on a sliding scale relating to cash flow ratios determined under provisions of
the credit agreement. The term loan requires annual prepayments equal to the
greater of 50% of excess cash flow, as defined, or $800,000, beginning in
October 1997. The credit facility also requires compliance with certain
financial covenants. The obligations to Harris Bank are secured by security
interests in the personal property assets of the Company's subsidiaries and the
Company's intellectual property assets, subject to pre-existing security
interests of Hunter in the OMS patents and the rights of Pnu-Light Tools, in the
event of an unwinding of the Pnu-Light acquisition. As of September 20, 1996,
the Company's outstanding balance on the five year loan was $6 million and on
the line of credit loan was $1 million, and the applicable interest rate for
both loans was 8.25%.
Management believes that The Company's existing credit resources, including
the credit facility with Harris Bank, as well as internally generated funds
should be sufficient to satisfy the Company's requirements for cash flows for
operations and capital expenditures for fiscal 1997. Capital expenditures for
the Company's operations for the year ended June 30, 1997 are presently
anticipated to be less than $1,500,000.
-21-
<PAGE>
YEARS ENDED JUNE 30, 1995 AND 1996
- ----------------------------------
Net cash provided (used) by operating activities in 1996 was $1,041,901
compared to net cash provided from (used in) operating activities in $(116,230)
in 1995. Net cash was reduced by increases in net accounts receivable of
$644,714 and $1,535,396 in 1995 and 1996, respectively.
Net cash used in investing activities was $213,686, and $4,674,226 in 1995
and 1996, respectively. Cash used in investing activities primarily related to
the purchase of equipment in 1994 and 1995. Cash used in investing activities
primarily related to acquisition of new subsidiaries in 1996, as well as
purchase of equipment. In 1994, 1995 and 1996, the primary purchases of
equipment are associated with new product lines being developed by Challenge and
Micro.
Net cash provided by financing activities was $57,791 and $3,655,079 in
1995 and 1996. In 1994, net cash provided by financing activities was primarily
the result of long-term borrowings. In 1995, net cash provided by financing
activities was primarily the result of short-term borrowings. In 1996, net cash
provided by financing activities was primarily the result of long-term
borrowings, primarily used to fund acquisitions.
EFFECT OF FASB 123.
- ------------------
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 suggests,
but does not require, that stock based Compensation transactions with employees
be accounted for based on fair market value of the consideration received or
fair market value of the equity instruments issued, whichever is more reliably
measurable. The Company has elected to adopt FASB Statement No. 123. Adoption
of Statement No. 123 is not expected to have a material impact on the Company's
financial statements. See "Pro-Dex Consolidated Financial Statements, Note 1."
---
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. The Company expects its subsidiaries to face somewhat higher
labor costs as the market for personnel with the skills sought by the Company
becomes tighter in a period of full employment. In addition, suppliers pass
along rising costs to the Company's subsidiaries the form of higher prices.
Further, the Company's credit facility with Harris Bank involves increased costs
if domestic interest rates rise or there are other adverse changes in the
international interest rates, exchange rates and/or Eurocredit availability. 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
-22-
<PAGE>
limited by market conditions, including international competition in many of the
Company's markets.
PDM's ability to increase prices is limited by various third-party payors
and governmental agencies, and there can be no assurance that PDM will be able
to raise prices to cover future cost increases, given the impetus toward cost
limitations for dental and other health services. To the extent permitted by
competition, Biotrol, Challenge, Micro and OMS have passed along increased costs
by increasing prices over time. In addition, each of the Company's subsidiaries
has continued to implement greater cost control measures to curb increases in
operating costs.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
------------------------------------------
Independent Auditor's Report F-1
Balance Sheet F-2
Statement of Income F-4
Statement of Stockholder's Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
-23-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pro-Dex, Inc.
Boulder, Colorado
We have audited the accompanying consolidated balance sheet of Pro-Dex, Inc. and
Subsidiaries (the "Company") as of June 30, 1996, and the related consolidated
statement of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
Management. Our responsibility is to express opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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, 1996, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
August 29, 1996
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pro-Dex, Inc.
Boulder, Colorado
I have audited the accompanying consolidated statement of income, stockholders'
equity and cash flows for Pro-Dex, Inc. and Subsidiaries (the "Company") for the
year ended June 30, 1995. These financial statements are the responsibility of
the Company's Management. My responsibility is to express opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Company for the year ended June 30, 1995, in conformity with generally
accepted accounting principles.
Henry Vanderzee
September 22, 1995
F-1(a)
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash & cash equivalents $ 407,722
Accounts receivable, net 5,069,942
Inventories, at cost 4,699,567
Deferred taxes 398,300
Prepaid expenses 257,898
----------
Total current assets 10,833,429
----------
Property and equipment:
Land 61,776
Buildings 308,505
Equipment 4,638,479
Leasehold improvements 496,367
Total property and equipment 5,505,127
----------
Less accumulated depreciation (2,186,233)
----------
Net property and equipment 3,318,894
----------
Other assets:
Deferred taxes 387,000
Other 133,761
Intangibles 13,654,404
----------
Total other assets 14,175,165
----------
Total Assets $28,327,488
===========
</TABLE>
F-2
See Notes to Financial Statements
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
June 30, 1996
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Current liabilities:
Notes payable $ 1,162,465
Current portion of long-term debt 1,236,570
Accounts payable 1,039,706
Accrued expenses 1,330,450
Income taxes payable 547,007
Deferred revenue 208,485
-----------
Total current liabilities 5,524,683
Long-term debt, net of current portion 5,371,264
-----------
Total liabilities 10,895,947
-----------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, no par value; 10,000,000
shares authorized; 78,129 shares issued and outstanding 282,990
Common stock, no par value; 50,000,000 shares
shares authorized; 9,025,783 shares issued and outstanding 16,697,660
Additional paid in capital 1,004,541
Accumulated deficit (532,350)
----------
17,452,841
Receivable from employee stock ownership plan (ESOP) (21,300)
----------
Total stockholders' equity 17,431,541
----------
Total Liabilities and Stockholders' Equity $28,327,488
===========
</TABLE>
F-3
See Notes to Financial Statements
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ending June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales (net of sales from discontinued operation of
$2,420,828 and $2,634,850)
$ 20,833,326 $ 6,402,619
Cost of Sales 8,419,733 2,648,809
------------ -----------
Gross Profits 12,413,593 3,753,810
------------ -----------
Operating expenses:
Selling 3,988,454 2,046,000
General and administrative 4,602,711 1,119,700
Research and development 559,369 98,341
Amortization 738,528 14,657
----------- -----------
Total operating expenses 9,889,062 3,278,698
----------- -----------
Income from operations 2,524,531 475,112
----------- -----------
Other income (expense):
Interest income 33,367 11,860
Interest expense (1,025,790) (61,081)
Other income, net 12,300 46,160
----------- -----------
Total (980,123) (3,061)
Income before income taxes and loss from
discontinued operation 1,544,408 472,051
Income taxes 338,278 90,419
------------ -----------
Income before loss from discontinued operation 1,206,130 381,632
(Loss) from discontinued operation (net of tax benefit) (31,600) (106,741)
------------ -----------
Net income $ 1,174,530 $ 274,891
============ ===========
Earnings per common and common equivalent share:
Income from continuing operations $ 0.14 $ 0.07
(Loss) from discontinued operation (0.01) (0.02)
------------ -----------
Net income per share $ 0.13 $ 0.05
============ ===========
Weighted average number of common and common
equivalent shares outstanding 8,921,688 5,278,633
------------ -----------
</TABLE>
F-4
See Notes to Financial Statements
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDING JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------ Additional
Number Number Paid-In Accumulated
of Shares Amount of Shares Amount Capital Deficit ESOP Total
---------- ------- ---------- ---------- --------- ------------ ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1994 78,129 $282,990 5,261,300 $5,342,445 $ 10,000 $(1,981,771) $ 3,653,664
Exercise of common
share warrants 20,000 5,000 5,000
Net income 274,891 274,891
-------------------------------------------------------------------------------------------------
Balances, June 30, 1995 78,129 282,990 5,281,300 5,347,445 10,000 (1,706,880) 3,933,555
Issuance of common shares
for purchase of
Micro Motors, Inc. 3,350,000 9,212,500 9,212,500
Exercise of common
share warrants 26,000 65,000 65,000
Issuance of common shares
for purchase of Pnu-Light
Tool Works, Inc. 368,483 2,072,715 994,541 3,067,256
Advance to ESOP $(21,300) (21,300)
Net Income 1,174,530 1,174,530
-------------------------------------------------------------------------------------------------
Balances, June 30, 1996 78,129 $282,990 9,025,783 $16,697,660 $1,004,541 $ (532,350) $(21,300) $17,431,541
=================================================================================================
</TABLE>
See Notes to Financial Statements.
- ---
F-5
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending June 30, 1996 and 1995
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,174,530 $ 274,891
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,338,165 218,629
Provision for doubtful accounts 204,643 352,201
Loss (gain) on sale of property
and equipment (46,116) (36,032)
Change in working capital components
net of effects from purchase of Oregon
Micro Systems, Inc., Micro Motors, Inc.,
and Pnu-Light Tool Works, Inc.:
(Increase) decrease in accounts receivable (1,535,396) (644,714)
(Increase) decrease in inventories (721,386) 63,042
(Increase) decrease in deferred taxes (233,600)
(Increase) decrease in prepaids 381,604 (518,231)
(Increase) decrease in other assets 30,003 (80)
Increase (decrease) in accounts payable and
accrued expense (140,900) 161,689
Increase (decrease) in deferred revenue 53,411 12,295
Increase (decrease) in income taxes payable 536,943
---------- --------
Net cash provided by (used in) operating
activities 1,041,901 (116,310)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses (4,326,309)
Proceeds from sale of property and equipment 7,500 100
Purchase of property and equipment (355,417) (213,706)
---------- --------
Net cash flows (used in) investing activities (4,674,226) (213,606)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving credit agreements 769,279 150,000
Proceeds from long-term borrowing 4,022,887
Principal payments on long term borrowing (1,180,787) (97,209)
Issuance of common stock 65,000 5,000
Advances ESOP (21,300)
---------- --------
Net cash flows provided by financing activities 3,655,079 57,791
---------- --------
INCREASE (DECREASE) IN CASH 22,754 (272,125)
CASH, beginning of period 384,968 657,093
---------- --------
CASH, end of period $ 407,722 $ 384,968
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 1,053,447 $ 91,928
Cash payments for income taxes $ 109,350 $ 90,362
F-6
See Notes to Financial Statements
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
Pro-Dex, Inc. (the Company) is the parent of six operating subsidiaries, Pro-Dex
Management, Inc. (PDM), Biotrol International, Inc. (Biotrol), Challenge
Products, Inc. (Challenge), Micro Motors, Inc. (Micro), Oregon Micro Systems,
Inc. (OMS), and Pnu-Light Tool Works, Inc. (Pnu-Light). PDM operates fully
equipped dental offices in Sears retail stores in northern California at which
general and orthodontic dentistry are offered (Note 11). Biotrol is a
manufacturer and supplier of infection control products for the dental industry.
Challenge manufactures and sells fluoride products for preventive dentistry,
along with a complementary line of products used for the cleaning, whitening,
and protection of teeth. Micro manufactures miniature pneumatic motors used in
dental, medical, and industrial devices worldwide as well as a complete line of
dental handpieces. OMS designs, develops and manufactures multi-axis circuit
boards used to control the motion of servo and stepper motors predominantly used
in the medical testing equipment industry and the computer chip manufacturing
industry. Pnu-Light developed a patented pneumatic light system for hand tools
which draws its power from the air that powers the tool. Operations of the
Pnu-Light subsidiary are currently not material.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable initiated at the
dental centers. PDM grants credit to patients of its dental centers,
substantially all of whom are California residents. Credit evaluations of the
patients are performed and, due to the large number of patients, management does
not believe significant credit risks exist.
REVENUE RECOGNITION
Revenue from patient services of general dentistry is recognized as services are
provided. Revenue from patient services of orthodontics dentistry is recognized
at the rate of 75% upon installation of the appliances and the balance over the
treatment period which is estimated to be twenty months. Revenue on product
sales is recognized upon shipment to the customer.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
F-7
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Inventories consist of the following:
Raw materials $ 990,364
Work in process 268,523
Finished goods 3,440,680
-----------
Total $ 4,699,567
===========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight line method over the estimated useful lives of the assets as follows:
Buildings-- generally 40 years and machinery and equipment-- 3 - 10 years.
INTANGIBLE ASSETS
Intangible assets include patents, organization costs, non-compete contracts and
the cost of net assets acquired in excess of fair value which are amortized on a
straight-line basis over their estimated useful lives ranging from 5 to 20
years. Intangible assets are stated net of accumulated amortization of
$762,914.
The Company evaluates impairment of its long-lived assets and certain intangible
assets whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable in accordance with Financial
Accounting Standards Board (FASB) Statement No. 121. An asset is deemed
impaired if the sum of the expected future cash flows is less than the carrying
amount of the asset.
INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and 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 that 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 in conformity with generally accepted
accounting principles 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.
F-8
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares and
common share equivalents outstanding during the period. Common share
equivalents are excluded if their effect is anti-dilutive. Contingent shares
are excluded if the event which will cause the shares to be issued is not likely
to occur.
NEW ACCOUNTING PRONOUNCEMENT
In 1995 the FASB issued Statement No. 123, "Accounting for Stock-based
Compensation". Statement No. 123, establishes financial accounting and reporting
standards for stock-based employee compensation plans such as a stock purchase
plan. The Statement generally suggests, but does not require, stock-based
compensation transactions with employees be accounted for based on the fair
market value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The Company has
elected to adopt FASB Statement No. 123 for stock-based employee compensation.
Adoption of this pronouncement in fiscal year 1997 is not expected to have a
material impact on the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted Financial Accounting Standards (FASB) Statement No.
107, which requires disclosure about the fair value of the Company's financial
instruments. The method and assumptions used to estimate the fair value of the
following classes of financial instruments were: a) Long-term debt: The
estimated fair value, which approximates the carrying value, is based on
interest rates that are currently available to the company for issuance of debt
with similar terms and remaining maturities. b) Note payable: The carrying
amount approximates fair value since the interest rate changes with the market
interest rate.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable of Pro-Dex include amounts due for dental services rendered
to patients under an extended term payment arrangement. General dentistry
billings may be paid over ten monthly installments, and billings for orthodontic
services is paid over a twenty-four month installment arrangement (Note 11).
Accounts receivable are stated net of an allowance for doubtful accounts of
$216,078.
F-9
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT
The Company through its subsidiaries has established lines of credit with
various lenders as follows:
Revolving credit line of $250,000 at prime plus 1 1/2 %,
maturing July 1, 1996 $ 236,180
Revolving credit line of $250,000 at prime plus 1 1/2 %,
maturing November 1, 1996 (a) 146,000
Revolving credit line of $1,800,000 at prime plus 2 1/4 %,
maturing July 26, 1996 (a) 1,612,214
Notes payable other, at various interest rates due
on demand 126,285
------------
2,120,679
Less amounts transferred to long term debt resulting from
refinancing (a) 958,214
------------
Total notes payable $ 1,162,465
============
Long-term debt consist of the following:
Secured term loan bearing interest at 3 1/2 % over prime,
plus a 5% profit participation fee on outstanding
balance calculated on the annual anniversary date,
maturing July, 2000 (a) $ 3,018,463
Unsecured note bearing interest at 2% over the prime
rate, maturing July, 1997 (a) 500,000
Secured note, bearing interest at 11%, maturing August,
2000, payable at$14,728 per month (b) 573,821
Secured note, bearing interest at 12.25%, maturing
$40,000 quarterly, including interest to October, 2000 $ 504,998
Loan secured by certain equipment bearing interest at
9.1%, maturing $7,096 monthly, including interest to
May 30, 1999 217,942
Mortgage payable secured by land and building, bearing
interest at 2% over prime, maturing $1,967 monthly due
November 12, 1996. This note is normally renewed for
successive one year terms 189,599
Secured notes at various interest rates and various
maturities 644,797
------------
5,649,620
Add amount transferred from short term notes payable
resulting from refinancing (a) 958,214
------------
Total 6,607,834
Less current portion 1,236,570
------------
Long-term debt $ 5,371,264
============
F-10
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
(a) In July, 1996, the Company obtained a $10,000,000 credit facility from
Harris Bank secured by all assets of the Company and guaranteed by each of
the Company's subsidiaries. The Facility consists of a $6,000,000 term
loan with a seven year amortization period and a $4,000,000 revolving line
of credit. Both facilities require monthly interest payments at the prime
rate or at a variable interest rate from 1.5% to 2% above the LIBOR rate.
The term loan requires annual prepayments equal to 50% of excess cash flow,
as defined, beginning in October 1997. The credit facility may be prepaid
without penalty. The credit facility also requires the maintenance of
certain financial covenants. A portion of the proceeds were used to retire
the existing debt for which the Company incurred a prepayment penalty of
$293,200. Notes payable and the current portion of long term debt has been
adjusted to reflect the maturities of the new credit facility.
Aggregate maturities on long-term debt for each of the next five years is
as follows: 1997 $1,236,570; 1998 $1,255,637; 1999 $1,230,082; 2000
$1,171,350; 2001 $891,481 thereafter $822,714.
(b) These amounts are due to the former owner of Micro Motors and the Company's
largest stockholder and are subordinated to the bank debt discussed above.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
PDM leases all of its dental centers under lease agreements expiring at various
dates until March, 1999 (Note 11). Micro Motors leases office and warehouse
facilities from the Company's largest stockholder. The Company and its
subsidiaries also lease other office and warehouse facilities from unrelated
parties under lease agreements expiring from February 1999 through June 2001.
These leases generally require the Companies to pay insurance, taxes, and
other expenses related to the leased space. Total rent expense was $810,763 and
$353,980 including 335,148 and $0, paid to the Company's largest stockholder
for the years ended June 30, 1996 and 1995. Future minimum lease payments for
the years ending June 30, amount to: 1997 $497,453; 1998 $502,154; 1999
$466,073; 2000 $335,148; and 2001 $248,661. Total of $2,049,489, including
$1,589.253 to the Company's largest stockholder.
The company is currently a party to disputes which involve or may involve
litigation. Management believes that the ultimate liability, if any, with
respect to these disputes will not be material to the Company's financial
statements.
NOTE 6 - INCOME TAXES
The provision for income taxes for the year ended June 30, 1996 and 1995 is as
follows:
1996 1995
------- ------
Current federal taxes $ 451,878 $ 55,912
Current state taxes 120,000 34,507
Deferred taxes (233,600)
---------- --------
$ 338,278 $ 90,419
========== ========
F-11
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
A reconciliation of expected tax expense to the amount computed by applying the
federal statutory income tax rates to income before income taxes and net loss
from discontinued operations is as follows:
1996 1995
---------- --------
Federal income tax computed at the
statutory rate $ 525,100 $ 160,500
Change in valuation allowance (432,000) (90,300)
State income taxes 120,000 34,507
Non-deductible items, primarily
amortization of goodwill 139,000
Other (13,822) (14,288)
----------- ---------
$ 338,278 $ 90,419
=========== =========
Deferred income tax assets in the accompanying balance sheet at June 30, 1996
consist of the following:
Net operating loss carryforwards $ 354,000
Contract payable 235,000
Accrued expenses 227,000
Accounts receivable 82,000
Intangible assets 48,000
Inventories 37,000
Other 32,300
-----------
Total deferred tax assets 1,015,300
Valuation allowance (230,000)
-----------
Net deferred tax assets $ 785,300
===========
Net deferred tax assets of $398,300 are included in the accompanying balance
sheet as current assets. The remaining deferred tax assets of $387,000 are
included in the accompanying balance sheet as long term assets. Management has
provided a valuation allowance related to net operating loss carryforwards which
cannot be realized until after a two year period. The ultimate realization of
these assets is dependent upon the Company generating sufficient taxable income
in future years. Management believes the remaining deferred tax assets are more
likely than not to be realized given their current operating results.
As of June 30, 1996, the Company had federal net operating loss carryforwards of
approximately $1,040,000 which expires $785,000 in 2003 and $255,000 in 2004.
Utilization of these loss carryforwards is limited under income tax rules to
approximately $280,000 per year.
NOTE 7 - STOCK OPTIONS AND WARRANTS
The Board of Directors and the stockholders of the Company have approved and
adopted three plans, pursuant to which options to purchase 2,150,000 shares of
common stock can be granted to officers, directors, employees and to others
expected to provide significant services to the Company. As of June 30, 1996
options and warrants to purchase 1,279,376 shares of the Company's common stock
are outstanding and exercisable. There are 870,624 shares remaining in the
option plans which are available for grant in future years.
F-12
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
Transactions involving the stock options and warrants are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Shares Price Shares Price
---------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning 372,856 $0.25 - $2.85 171,102 $0.25 - $2.50
Granted (a)(b) 906,520 $2.50 - $2.75 201,754 $2.50 - $2.85
Exercised - $2.50 - -
---------- -------
Outstanding at ending 1,279,376 $0.25 - $2.85 372,856 -
========== =======
Average price outstanding - $2.62 - $2.62
Available for grant at June 30 870,624 - 477,144 -
========== =======
</TABLE>
(a) Includes 591,190 options granted to owners of Micro options, upon conversion
of such options on approval of the Company's shareholders.
(b) Does not include outstanding warrants to acquire 113,000 shares,
exercisable at an average price $1.75.
NOTE 8 - PREFERRED STOCK
Holders of Series A preferred stock have no voting, dividend, or redemption
rights. In the event of liquidation or dissolution, preferred stockholders are
entitled to receive $3.60 per share. Each share of preferred stock is
convertible into one share of common stock at the option of the holder.
NOTE 9 - EMPLOYEES' BENEFIT PLANS
The Company has adopted an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions up to a
specified percentage of their compensation. Under the plan, the Company is
obligated to match up to 25% of the employees' contribution up to a defined
maximum. For the year ended June 30, 1996 the Company contributed $36,232 as a
matching contribution to the 401(k) plan. No contributions were required for
1995.
In 1973, Micro established an Employee Stock Ownership Plan (ESOP), whose shares
of stock in Micro, upon acquisition of Micro by the Company, were converted to
restricted Company shares of common stock. For the years ended June 30, 1996
and 1995, the Company did not make any contributions to the ESOP. In the event
terminated Plan participants desire to sell their shares of the Company's stock,
or for certain employees who elect to diversify their account balances, the
Company may be required to purchase the shares from the participant at their
fair market value or loan sufficient funds to the ESOP to enable it to do so.
This provision will lapse when the restriction on the common stock held by the
ESOP is removed in July, 1997. During the year ended June 30, 1996, the Company
advanced funds to the ESOP totaling $21,300 in order for it to purchase stock
from Plan participants. The value of the stock owned by the Plan at June 30,
1996 based on the average of the bid and asked price of the Company's stock was
approximately $4,399,200.
OMS adopted a Defined Benefit Pension Plan. Upon the merger the Plan was
terminated by the Company and all benefits to participants were frozen effective
July 26, 1995. Information related to this plan is not material to the financial
statements of the Company.
F-13
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
NOTE 10 - BUSINESS ACQUISITIONS
On July 26, 1995, the Company acquired for cash all of the outstanding shares of
Oregon Micro Systems, Inc., a manufacturer of multi-axis motion control circuit
boards. In addition to the OMS stock, the Company acquired two letters patent
for the design of multi-axis motion control circuit boards with an approximate
value of $2,925,000. The total acquisition cost was approximately $6,700,000.
The excess of the total acquisition cost over the fair value of the net assets
acquired was approximately $90,000 and is being amortized over a 15 year period.
The patents are being amortized over seven (7) years by the straight line
method.
Also on July 26, 1995, Micro Motors, Inc., a manufacturer of patented miniature
pneumatic (air) motors, and dental handpieces was acquired in exchange for
3,350,000 shares of the Company's stock. The amount assigned to the shares of
the Company stock was $2.75 per share making the total acquisition price
$9,212,500. The excess of the total acquisition cost of Micro Motors, Inc. over
the fair value of the net assets acquired of approximately $7,300,000 is being
amortized over 20 years by the straight line method.
On May 11, 1996, the Company acquired certain assets and liabilities of Pnu-
Light Tool Works, Inc., a developer of pneumatic light mechanisms for hand
tools, for common stock. The purchase agreement calls for the final purchase
price to be determined based upon a multiple of the Company's net income
generated for the year ended June 30, 1999 and based upon the then current
market price of the Company's common stock. The agreement states that the
minimum value assigned to the net assets purchased is $4,000,000 subject to
certain adjustments. The agreement also provides that if the computed value
based on the prescribed formula does not exceed $4,000,000, the Company has the
option to rescind the transaction. The Company issued 368,483 shares of stock at
acquisition. The Company has recorded the net assets acquired at the present
value of the estimated minimum purchase price of approximately $3,070,000. The
excess of the total acquisition cost of Pnu-Light over the fair value of the net
assets acquired of approximately $1,100,000 is being amortized over a 15 year
period by the straight-line method.
All acquisitions have been accounted for as a purchase and the results of
operations of Oregon Micro Systems, Inc., Micro Motors, Inc., and Pnu-light Tool
Works, Inc., since the date of acquisition are included in the consolidated
financial statements.
Unaudited pro-forma consolidated results for the years ended June 30, 1996 and
1995 as though the acquisitions had occurred on July 1, 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Sales $21,650,000 $17,500,000
Net income 1,026,000 33,000
Earnings per share $ 0.11 $ 0.00
</TABLE>
Additional information regarding cash flows from these acquisitions is as
follows:
<TABLE>
<CAPTION>
Micro Motors OMS Pnu-Light Total
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Working capital acquired net of
cash and cash equivalents $ 413,068 $1,348,074 $ 16,506 $ 1,777,648
Fair value of long-term assets 10,429,486 3,424,724 3,271,719 17,125,929
Long-term debt assumed (1,590,988) (480,327) (226,195) (2,297,510)
Issuance of common stock (9,212,500) - (3,067,258) (12,279,758)
----------- ---------- ---------- ------------
$ 39,066 $4,292,471 $ (5,228) $ 4,326,309
=========== ========== ========== ============
</TABLE>
F-14
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
NOTE 11 - SEGMENT INFORMATION AND DISCONTINUED OPERATIONS
A summary of information about the Company's continuing operations by segment
follows:
Fiscal years ended June 30,
1996 1995
------------ -------------
Revenues
Infection control products $ 4,721,561 $ 4,888,054
Preventative dentistry products 1,661,736 1,514,565
Medical/dental equipment 7,491,047 --
Industrial 1,646,334 --
Circuit boards 5,312,648 --
------------ -------------
$20,833,326 $ 6,402,619
============ ============
Income (loss) from operations
Infection control products $ 304,554 $ 426,852
Preventative dentistry products 180 48,260
Medical/dental equipment 225,050 --
Industrial (19,855) --
Circuit boards 2,014,602 --
------------ -------------
$ 2,524,531 $ 475,112
============ =============
Assets
Infection control products $ 1,907,581 $ 1,656,676
Preventative dentistry products 1,156,563 1,165,244
Medical/dental equipment 11,492,974 --
Industrial 6,029,790 --
Circuit boards 5,077,633 --
------------ ------------
$25,664,541 $ 2,821,920
============ ============
Depreciation and amortization
Infection control products $ 53,161 $ 55,082
Preventative dentistry products 105,539 96,847
Medical/dental equipment 573,842 --
Industrial 153,392 --
Circuit boards 377,903 --
------------ ------------
$ 1,263,837 $ 151,929
============ ============
Capital Expenditures
Infection control products $ 51,832 $ 96,860
Preventative dentistry products 35,087 113,307
Medical/dental equipment 110,397 --
Industrial 23,965 --
Circuit boards 54,937 --
------------ ------------
$ 276,218 $ 210,167
============ ============
The Company incurred advertising expenses of $581,358 in 1996 and $145,050 in
1995.
F-15
<PAGE>
PRO-DEX, INC. AND SUBSIDIARIES
On June 24, 1996, the Company decided to report the operations of PDM on a
discontinued basis and expects to sell that line of business. The Company
believes that PDM will not incur future operating losses through its disposition
and that the Company will be able to sell the net assets of this operation for
at least equal to their recorded value. Management's current plans are to sell
various assets of PDM and to provide financing to the buyer of the assets.
Sales of PDM were approximately $2,420,000 for 1996 and $2,635,000 for 1995.
Operating expenses were approximately $2,466,000 and $2,797,000 for 1996 and
1995. These amounts are presented in the statement of operations as discontinued
operations, net of applicable income tax benefits of approximately $14,000 and
$55,000 for 1996 and 1995.
At June 30, 1996, the net assets of PDM consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Receivables $ 1,867,000
Inventories 262,000
Depreciated cost of equipment 320,000
Current liabilities (230,931)
Deferred revenues $ (208,485)
</TABLE>
F-16
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
- ---------------------
During the year ended June 30, 1996, the Company changed its certifying
accountant. Effective November 3, 1995, Henry Vanderzee ceased to serve as the
independent accountant to audit the Company's financial statements. Mr.
Vanderzee served as the Company's independent certifying accountant for the
fiscal years ended June 30, 1995 and June 30, 1994, as well as prior years. The
former accountant was removed by action of the Board of Directors, effective
November 3, 1995. On such date, the Board of Directors appointed McGladrey &
Pullen, L.L.P. as the Company's independent certifying accountant for its
financial statements for the year ended June 30, 1996. McGladrey & Pullen,
L.L.P. had audited the financial statements of Oregon Micro Systems, Inc. and
Micro Motors, Inc., two subsidiaries acquired by the Company on July 26, 1995,
for the fiscal years of such companies ended March 31, 1995. Shareholders
ratified the appointment of McGladrey & Pullen, L.L.P. at the Annual Meeting of
Shareholders on February 27, 1996.
The accountants' report on the Company's financial statements for the year
ended June 30, 1996, and the former accountant's report on the financial
statements for the years ended June 30, 1995 and June 30, 1994, contained no
adverse opinion or disclaimer of opinion, and none of such reports was qualified
or modified as to uncertainty, audit scope or accounting principals. During the
years ended June 30, 1994 and June 30, 1995, and the subsequent interim period
preceding resignation of the former accountant, there were no disagreements with
the former accountant on any matter of accounting principles or practices,
financial statement disclosure or audit scope or procedure. During the year
ended June 30, 1996, there were no disagreements with McGladrey and Pullen,
L.L.P. on any matter of accounting principles or practices, financial statement
disclosure, or audit scope or procedures. The Company's Board of Directors has
requested that McGladrey Pullen, L.L.P. serve as the Company's certifying
accountants for the year ending June 30, 1997, and that firm has consented to so
serve.
-24-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
------------------------------------------------------------------
SECURITIES EXCHANGE ACT OF 1934
-------------------------------
OFFICERS AND DIRECTORS
- ----------------------
As of June 30, 1996, the officers and directors of the Company were as
follows:
NAME AGE POSITION
- ---------------------- --- -------------------------------
Kent E. Searl 55 Chairman of the Board, Director
Ronald G. Coss 59 Vice Chairman, Director
Charles E. Strait 48 President, Director
George J. Isaac 51 Vice President, Director
Richard N. Reinhardt 64 Director
Robert A. Hovee 54 Director
John B. Zaepfel 60 Director
KENT E. SEARL is a co-founder of the Company and served as President until
-------------
July 1995. He has served as a director of the Company or its predecessor since
its inception in 1978. In addition to serving as Chairman of the Board, Mr.
Searl is an ex officio non-voting member of the Compensation Committee of the
Board of Directors. Since August 1969, he has also served as Chairman of the
Board of Directors of Professional Sales Associates, Inc. ("PSA"), a national
dental equipment manufacturers' representative, which he co-founded. PSA began
marketing products of Micro Acquisition subsidiary in 1995 and had marketed
dental equipment products of Micro Motors prior to the merger. Mr. Searl
currently also serves as an officer and director of two other businesses. Mr.
Searl was elected by the shareholders of the Company to serve as a Class III
Director until June 30, 1999 or the election and qualification of his successor.
RONALD G. COSS founded Micro Motors in 1971 and has served as its Chairman
--------------
since inception. Mr. Coss has served as the Vice Chairman of the Company's
Board of Directors since July 26, 1995, and is currently serving as President of
Micro, pending selection of a successor. Mr. Coss also serves as an ex officio
non-voting member of the Audit Committee of the Board of
-25-
<PAGE>
Directors. Mr. Coss has been the primary engineer in development of Micro's
products since its inception and invented the technologies which are the subject
of the letters patent now owned by Micro. Mr. Coss is currently one of the
Trustees of the Micro Motors Employee Stock Ownership Plan, a shareholder of the
Company. Mr. Coss was elected by the shareholders of the Company, to serve as a
Class III Director until June 30, 1999 or the election and qualification of his
successor.
CHARLES E. STRAIT has served as the President of Micro Motors, Inc. since
-----------------
1991, began serving on that company's Board of Directors in 1991, and became a
member of the Company's Board of Directors on July 26, 1995. He has extensive
financial consulting experience and served as managing partner of The Westhaven
Group, a management consulting firm specializing in strategic planning,
acquisition analysis and management team building in Westminster, California.
Mr. Strait received his B.S. in Business Administration from Loyola University
of Los Angeles with a dual major in General Management and Finance. Mr. Strait
was elected by the shareholders of the Company, to serve as a Class I Director
until June 30, 1998 or the election and qualification of his successor.
GEORGE J. ISAAC has served as a consultant to the Company and its
---------------
predecessor since 1978, and became a member of the Company's Board of Directors
on July 26, 1995. He serves as an ex officio member of both the Audit
Committee and the Compensation Committees of the Board of Directors, and is Vice
President, Secretary and Chief Financial Officer of the Company. Mr. Isaac has
been a certified public accountant with Joseph B. Cohan and Associates,
Worcester, Massachusetts since 1969, became a partner in 1977 and served as its
president from 1991 to 1996. He is a member of the Board of Directors of
Professional Sales Associates, Inc. and the Commerce Bank and Trust of
Worcester, MA, and recently completed a term as a member of the Board of
Directors of the Medical Center of Central Massachusetts. Mr. Isaac's
accounting firm specialized in handling medical and dental related accounts.
Mr. Isaac received a B.S. in Business Administration from Clark University in
Worcester, Massachusetts. Mr. Isaac was elected by the shareholders of the
Company, to serve as a Class I Director until June 30, 1998 or the election and
qualification of his successor.
RICHARD N. REINHARDT has served as a Director of the Company and its
--------------------
predecessor since 1990. He is a member of the Audit Committee and the
Compensation Committee of the Board of Directors. Mr. Reinhardt has served as
President and director of Professional Sales Associates, Inc. ("PSA") since he
co-founded that firm in 1969. PSA is a national manufacturers' representative
organization that represents manufacturers in the dental equipment market. Mr.
Reinhardt was elected by the shareholders of the Company, to serve as a Class
II director until June 30, 1997 or the election and qualification of his
successor.
ROBERT A. HOVEE began serving on the Company's Board of Directors on
---------------
February 27, 1996. He serves as a member of both the Audit Committee and the
Compensation Committee. Currently, Mr. Hovee serves as President of the Orange
County Biomedical Industry Council and the Orange County Biocommerce
Association, both California non-profit associations. Formerly Mr. Hovee was
Chief Executive Officer and President of Life Support Products, Inc. a maker of
-26-
<PAGE>
emergency medical products of which he was a co-founder, prior to its
acquisition by Allied Healthcare Products, Inc. He has also served as a
director and chairman of Infrasonic, Inc., an infant respirator manufacturer.
Mr. Hovee, who is active in many charities, serves as a co-chair of a University
of California-Irvine Center for the Health Sciences fund-raising project. Mr.
Hovee received a B.A. in Business Administration and a B.A. in Business
Administration-International Business from the University of Washington,
Seattle, Washington as well as a Bachelor of Foreign Trade and a Master of
Foreign Trade from the American Graduate School of International Management
(Thunderbird) in Glendale, Arizona. Mr. Hovee was elected by the Board of
Directors, to serve as a Class II Director until the first to occur of the next
shareholders' meeting, June 30, 1997 or the election and qualification of his
successor.
The following additional individual has been elected to serve as a member
of the Board of Directors since June 30, 1996:
JOHN B. ZAEPFEL has served as director of the Company since August 27,
---------------
1996, and commenced service on the Company's Compensation Committee on September
16, 1996. Previously, Mr. Zaepfel served on the advisory committee advising the
Board of Directors of Micro Motors, Inc., prior to its merger into Micro in July
of 1995. Mr. Zaepfel spent fifteen years as the Chief Executive Officer of CPG
International, Inc., which he founded in 1985 in a leveraged buy-out of a
division of a wholly owned subsidiary of Times Mirror, Inc. Prior to its
private sale in 1989, CPG International, Inc. was a $90 million operating
company, manufacturing and marketing art, engineering and media supplies. Prior
to forming CPG International, Inc., Mr Zaepfel was President and CEO of Chartpak
and Picket Industries, wholly owned subsidiaries of Times Mirror, Inc. Mr.
Zaepfel previously served as a director of Ideal School Supplies, Inc., when it
was a publicly traded company, and was director of six privately held companies.
Currently, Mr. Zaepfel is Chairman of the Board of Acordia of Southern
California, a wholly owned subsidiary of Anthem, Inc., listed on the New York
Stock Exchange, Inc. Mr. Zaepfel previously served as a director of
Varitronics, Inc., previously quoted on NASDAQ, Inc. and currently serves as a
director of Remedy Temp, Inc., a public company quoted on NASDAQ, Inc. Mr.
Zaepfel is a graduate of the University of Washington and holds a Master in
Business Administration from the University of Southern California. Mr. Zaepfel
was elected by the Board of Directors, to serve as a Class II Director until the
first to occur of the next shareholders' meeting, June 30, 1997 or the election
and qualification of his successor.
BUSINESS EXPERIENCE OF KEY MANAGEMENT OF SUBSIDIARIES.
- -----------------------------------------------------
Set forth below is information concerning certain key management personnel
of the Company's operating subsidiaries:
DR. M. LARRY KYLE has served as Vice President and Chief Executive Officer
-----------------
of PDM since its inception as a dental clinic management business in 1978. He
is a licensed dentist in the State of California and is responsible for PDM's
relationships with its independent contractor dentists and for supervision of
administration of PDM's dental centers. Dr. Kyle served as a director of the
Company and its predecessor from 1990 through 1995.
-27-
<PAGE>
CHARLES J. BULL founded Challenge Products, Inc. in 1978 and has served as
---------------
its President, and Chief Executive Officer since its inception as a dental
products business. Mr. Bull has developed more than 40 chemical products used
in the industry, as well as a process for high speed filling of a patented
prophy ring. See "Item 12 - Certain Relationships and Related Party
---
Transactions."
GARY GARLEB has served as Vice President and General Manager of OMS, since
-----------
it was acquired by the Company in July of 1995. Prior to that time, he served
as Vice President for Operations and Manufacturing of Micro Motors from 1974 to
1995. Mr. Garleb is currently a Trustee of the Micro Employee Stock Ownership
Plan ("Micro ESOP"), a shareholder of the Company, which has demand registration
rights in respect of its restricted shares.
RICK COSS has served as Director of Corporate Development for the Company,
---------
since October 1995. Mr. Coss had served as a Vice President of Micro Motors,
prior to its July 26, 1995 acquisition by Micro. His current responsibilities
include development of training programs, coordination of information systems
and special projects. Mr. Coss holds a B.A. from the University of California.
Mr. Coss' father is Mr. Ronald G. Coss, the Company's Vice Chairman.
CARL CHESTELSON has served as Chief Financial Officer of Micro or its
---------------
predecessor since 1982. Mr. Chestelson holds a B.A. degree in Business
Administration from California State University-Northridge. Mr. Chestelson is
currently one of the Trustees of the Micro ESOP.
COMPLIANCE WITH SECTION 16
- --------------------------
Based solely upon its review of Forms 3, 4, and 5 and written
representations of officers and directors, the Company is not aware of any
failure of any officer, director or owner of 10% or more of the outstanding
securities of the Company to make timely filings in accordance with the
requirements of Section 16.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The following table summarizes executive compensation paid by the Company
during the last three fiscal years to the Company's Chairman and the four other
most highly compensated executives.
-28-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------- ----------------------
AWARDS PAYOUTS
------ -------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPEN- STOCK UNDERLYING LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION (1) AWARDS OPTIONS/SAR PAYOUTS SATION (7)
- ------------------ ----- ------ ------ ---------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KENT E. SEARL Chairman 1996 $150,000 - - - 100,000 (3) - -
and Chief Executive 1995 $ 0.00 - - - 50,000 - -
Officer(2) 1994 $ 0.00 - - - 52,051 - -
RONALD G. COSS Vice 1996 $360,000 - - - None - -
Chairman (4) 1995 N/A - - - N/A - -
1994 N/A - - - N/A - -
CHARLES E. STRAIT 1996 $175,000 - - - None(5) - -
President, Director(5) 1995 N/A - - - N/A - -
1994 N/A - - - N/A - -
GEORGE J. ISAAC Vice 1996 $170,000 - - - 200,000(3) - -
President, Chief 1995 N/A - - - 50,000 - -
Financial Officer, 1994 N/A - - - - - -
Secretary-Treasurer,
Director (6)
DR. M. LARRY KYLE 1996 $114,000 - - - None - -
President of PDM 1995 $114,672 - - - 50,000 - -
Subsidiary 1994 $106,120 - - - 50,000 - -
- -----------------------
</TABLE>
(1) The aggregate amount of perquisites or other personal benefits received by
any officer or director for which no other annual compensation is indicated
did not exceed the lesser of $50,000 or 10% of such officer or director's
annual salary.
(2) Mr. Searl received no compensation from the Company during the fiscal years
ended June 30, 1995 and 1994. Mr. Searl was granted options under the 1994
Stock Option Plan in 1995 and under the Directors' Stock Option Plan in
1994.
(3) Options in the amount of 100,000 and 200,000 shares were granted to Messrs.
Searl and Isaac, respectively during the Company's fiscal year ended June
30, 1996, under the 1994 Stock Option Plan.
(4) Mr. Coss received no compensation from the Company prior to the year ending
June 30, 1996, as he was not then an employee of the Company and did not
serve on its Board of Directors. The Company is also obligated to pay Mr.
Coss $1 million over five years, commencing on July 26, 2001, under a Non-
Competition Agreement in connection with the merger of Micro Motors with
and into the Company's Micro Acquisition subsidiary. In addition, the
Company assumed two notes
-29-
<PAGE>
of Micro Motors payable to Mr. Coss in the aggregate amount of $938,450,
relating to termination of Mr. Coss' long term employment agreement with
Micro Motors and prior unpaid earned compensation.
(5) Mr. Strait received no compensation from the Company prior to the current
fiscal year ending June 30, 1996, as he was not then employed by the
Company and did not serve on its Board of Directors. Mr. Strait, as
President of Micro Motors, was compensated at a salary of $151,123 for the
fiscal year ended March 31, 1995 and $140,961 for the fiscal year ended
March 31, 1994. The options set forth in this chart do not include the
Micro Options granted in July of 1994, which were converted to options to
acquire 295,560 shares of the Company's common stock, under the 1994 Stock
Option Plan, pursuant to the vote of Shareholders at the Company's annual
meeting on February 27, 1996.
(6) Mr. Isaac received no compensation from the Company prior to the current
fiscal year ending June 30, 1996, as he was not then employed by the
Company and did not serve on its Board of Directors. During the fiscal
year ended June 30, 1995, Mr. Isaac was granted options to acquire 50,000
shares under the 1994 Stock Option Plan, in connection with his acceptance
of employment by the Company. See also note 3 to this chart.
(7) Employer contributions to the Pro-Dex, Inc. 401(k) Plan.
EMPLOYMENT AGREEMENTS
- ---------------------
Effective July 26, 1995, the Company entered into long term employment
agreements with a number of its executive officers and extended existing
employment agreements with certain other officers. The Company paid salaries in
an aggregate amount of $1,080,000 for all its officers and directors for the
year ending June 30, 1996.
Approximately 49.5% of executive compensation paid during the year ending
June 30, 1996 was paid to two officers of the Company who were officers of Micro
Motors prior to its merger with and into Micro. In connection with the closing
of the merger of Micro Motors with and into Micro, the Company agreed to pay
compensation for the year ending June 30, 1996 of $360,000 and $175,000,
respectively, to Messrs. Ronald G. Coss and Charles E. Strait, the former
Chairman and President respectively of Micro Motors, who now serve as Vice
Chairman and President of the Company. Mr. Coss had been compensated by Micro
Motors at a salary of $560,000 for the fiscal year ending March 31, 1995 and
$456,000 for the fiscal year ending March 31, 1994. Compensation to Mr. Coss
under the employment agreement is adjustable upward for inflation each July 1 of
the five year term of his employment agreement. On July 1, 1996, Mr. Coss'
salary was adjusted to provide that he will be paid $363,000, not including
other benefits, payments or compensation, for the year ending June 30, 1997.
Mr. Coss' employment agreement is renewable until terminated.
In addition to compensation to Mr. Coss under his employment agreement, the
Company is obligated to pay Mr. Coss $1 million over five years, commencing on
July 26, 2001 under a Non-Competition Agreement in connection with the merger of
Micro Motors with and into the Company's Micro subsidiary. Upon the merger, the
Company also assumed two notes payable by Micro Motors to Mr. Coss in the
aggregate amount of $938,450, relating to termination of Mr.
-30-
<PAGE>
Coss' long term employment agreement with Micro Motors and prior unpaid earned
compensation. See "Item 12 Certain Relationships and Related Party
---
Transactions."
In addition to the direct compensation Mr. Coss is to receive under his
employment agreement with the Company, he is to have reimbursement of reasonable
travel and entertainment expenses, a vehicle and auto expenses for business use,
country club dues and reasonable country club expenses, annual physical with a
prior recuperative period and paid accommodations, and six weeks annual leave.
In the event Mr. Coss does not use all or part of his six weeks annual leave,
his employment agreement permits him to elect to be paid cash in lieu of leave
not taken. Mr. Coss is required to reasonably forecast the amount of any cash
in lieu of leave, for purposes of the Company's financial forecasts. Mr. Coss
did not notify the Company that he elected to be paid cash in lieu of leave not
taken during the year ending June 30, 1996 and has indicated that he is unable
to forecast his leave for the year ending June 30, 1997.
On July 26, 1995, the Company entered into a long-term employment agreement
with Kent E. Searl, its Chairman. Until such date, Mr. Searl had received no
compensation for his services to the Company, other than grant of options
exercisable at the last bid price as of the date of grant. During the year
ended June 30, 1995, Mr. Searl was granted options to acquire 50,000 shares of
the Company's Common Stock, under the 1994 Stock Option Plan. On November 21,
1994, Mr. Searl was granted options to acquire 100,000 shares, under the 1994
Stock Option Plan, exercisable at the last bid price on the date of grant. Mr.
Searl is officed in the Company's headquarters offices in Boulder, Colorado, and
travels frequently to all the Company's subsidiaries. Under his employment
agreement with the Company, Mr. Searl was paid $150,000 for the year ended June
30, 1996. His salary under the employment agreement is to be $160,000 per annum
through June 30, 1997, and $170,000 per annum for the remainder of the three
year term of his employment agreement. The employment agreement accords Mr.
Searl three weeks annual leave, but provides for no alternative of cash in lieu
of leave untaken. In addition, Mr. Searl's employment agreement provides that
he may receive use of a car at Company expense, although to date Mr. Searl has
received limited reimbursement for use of a vehicle not provided by the Company.
Mr. Searl is also entitled to such other benefits as the Company's Board of
Directors determines to offer the Company's executive employees, and
reimbursement of reasonable expenses.
On July 26, 1995, Mr. Charles E. Strait entered into a long term employment
agreement with the Company. Currently, Mr. Strait serves as the Company's
President and is officed in the facilities occupied by the Company's Micro
subsidiary, but travels frequently to all of the Company's subsidiaries and its
Boulder, Colorado headquarters. The employment agreement provides that Mr.
Strait's salary as the Company's President and Chief Operating Officer will be
$175,000 annually through June 30, 1996, $185,000 July 1, 1996 through June 30,
1997, and $195,000 for the remainder of the three year term of the employment
agreement. Mr. Strait was compensated by Micro Motors at a salary of $151,123
for the fiscal year ending March 31, 1995 and $140,961 for the fiscal year
ending March 31, 1994. On February 27, 1996, the Company's shareholders voted
to convert certain Micro Motors options previously held by Mr. Strait into
options to acquire 295,560 options of the Company's common stock. Mr. Strait's
employment
-31-
<PAGE>
agreement provides for three weeks annual leave, but does not permit Mr. Strait
to elect to receive cash in lieu of leave untaken. Mr. Strait's employment
agreement provides that he may receive use of a vehicle at Company expense and
the Company has leased a vehicle primarily for his use in business. Mr. Strait
is also to receive reimbursement of reasonable expenses in connection with his
employment and such other benefits as the Company's Board of Directors
determines to make available to the Company's executive employees.
On July 26, 1995, George J. Isaac began serving as the Company's Vice
President and Chief Financial Officer, and on September 21, he was elected the
Company's Secretary-Treasurer by the Board of Directors. Mr. Isaac was granted
options to acquire 50,000 shares of the Company's Common Stock, exercisable at
the last bid price as of the date of grant, upon his acceptance of employment,
during the fiscal year ended June 30, 1995, but received no other compensation
as an employee during such year. Mr. Isaac was granted options to acquire
200,000 shares exercisable at the last bid price as of the date of grant, on
November 21, 1995. The employment agreement with Mr. Isaac provides that he is
to receive a salary of $170,000 through June 30, 1996, $180,000 July 1, 1996
through June 30, 1997, and $190,000 for the remainder of the three year term of
the employment agreement. Mr. Isaac's employment agreement allows three weeks
annual leave, but any leave not taken is to be forfeited without compensation.
The employment agreement with Mr. Isaac provides that he may receive use of a
Company vehicle for business purposes. In addition, Mr. Isaac is entitled to
reimbursement of reasonable expenses at the discretion of the Board of Directors
and such other benefits as the Board of Directors determines to make available
to its executive employees.
The Company employs Dr. Kyle as Chief Operating Officer of its PDM
subsidiary, with responsibility for the dental clinics, under an informal
extension of an employment agreement with him which expired by its terms on June
30, 1992. The employment agreement with Dr. Kyle provided for annual cash
compensation to Dr. Kyle of $100,000, together with a bonus of 10% of PDM's pre-
tax earnings in excess of $300,000 during each fiscal year covered by the
agreement. During the year ended June 30, 1996, Dr. Kyle was paid $114,000 and
during the year ended June 30, 1995, Dr. Kyle was paid $114,672 under such
agreement, including both the salary and bonus. In addition, Dr. Kyle was
granted options to acquire 50,000 shares of the Company's Common Stock,
exercisable at the last bid price as of the date of grant.
On August 1, 1993, the Company entered into an employment agreement with
Mr. Charles L. Bull, President and Chief Operating Officer of Challenge
Products. Pursuant to that agreement, Mr. Bull is to be paid $100,000 annually
through December 31, 1998, with month to month renewal thereafter unless
terminated on 60 days prior written notice. Challenge Products is also required
to maintain a $300,000 split-dollar life insurance policy on Mr. Bull, payable
in accordance with his direction. The employment agreement provides that Mr.
Bull cannot compete, directly or indirectly, with Challenge for three years
following termination of employment.
-32-
<PAGE>
COMPENSATION TO DIRECTORS
- --------------------------
Beginning July 1, 1990, the Company established a fee of $1,000 per year
for each director. Through the year ended June 30, 1995, directors waived their
fees. During the year ended June 30, 1995, the three then serving directors
were granted options to acquire an aggregate 150,000 shares in recognition of
substantial efforts in obtaining the Micro and OMS acquisitions. In addition, a
new employee-director was granted options to acquire 50,000 shares for his
services in connection with such acquisitions and to induce him to accept
appointment to serve as the Company's Chief Financial Officer. In addition,
during the year ended June 30, 1995, the Company granted options to acquire
1,754 shares to Richard Reinhardt in accordance with the plan for such options
previously adopted by the Board with respect to non-employee directors. All
such options are exercisable at the last sale price on the date of grant.
During the year ended June 30, 1996, the Board of Directors determined that
experienced outside directors expect to receive directors' fees and stock
options in connection with such service. On September 21, 1995, the Board of
Directors adopted a proposal to pay directors' fees to non-employee directors in
the amount of $20,000 to each non-employee director annually for six regular
meetings and three meetings each of the Board's audit and Compensation
Committees. During the year ended June 30, 1996, $40,000 was paid as non-
employee director compensation. Employee directors receive only their usual
salaries and expenses in attendance at Board and Committee meetings for service
on the Board of Directors. In addition, in August 1996, the Board adopted a
proposal to grant 20,000 shares exercisable at the market price on the later of
the date on which a non-employee director commences service or the date the
grant was authorized, for each non-employee director, granting the same to
Messrs. Reinhardt, Hovee and Zaepfel. The Board of Directors intends to request
shareholder approval of an amendment to the Directors' Stock Option Plan to
expressly authorize such grants at the next annual meeting. During the year
ended June 30, 1996, Messrs. Reinhardt and Hovee were each granted options to
acquire 1,200 shares of the Company's common stock, under the Directors' Stock
Option Plan, exercisable at $4.17 share, the last sale price for the Company's
common stock quoted for NASDAQ on June 30, 1996, the date of grant, pursuant to
the previously adopted plan for grant of options.
OPTIONS GRANTED DURING THE LAST FISCAL YEAR .
- --------------------------------------------
The following table provides information on options granted to the
Directors during the year ended June 30, 1996.
OPTIONS GRANTED DURING YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OPTIONS EXERCISE POTENTIAL
GRANTED PRICE EXPIRATION VALUE (1)
NAME (#) $/SH) DATE ($)
- -------------------------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Kent E. Searl/(2)/ 100,000 $2.13 11-21-05 $ 416,000
Charles E. Strait /(3)/ 295,560 $2.50 7-14-04 1,081,750
</TABLE>
-33-
<PAGE>
George J. Isaac /(2)/ 200,000 $2.13 11-21-05 832,000
Richard N. Reinhardt /(4)/ 1,200 $4.17 6-30-06 3,144
Robert A. Hovee /(4)//(5)/ 1,200 $4.17 6-30-06 3,144
- ---------------------
(1) Potential value is based on the assumption that the price of the stock will
appreciate at an annual compounded rate of 5% until the applicable
expiration dates.
(2) Mr. Searl and Mr. Isaac were granted the indicated options pursuant to the
1994 Stock Option Plan.
(3) Mr. Strait acquired the indicated options pursuant to the vote of the
Company's shareholders at the Annual Meeting to convert previously granted
options to acquire Micro shares to options under the 1994 Stock Option
Plan.
(4) Mr. Reinhardt and Mr. Hovee were granted the indicated options pursuant to
the Directors' Stock Option Plan.
(5) This table does not include the grant to Messrs. Reinhardt, Hovee and
Zaepfel of options to acquire 20,000 shares each in August of 1996,
exercisable at $3.31, $3.31 and $3.93, respectively.
The following table provides information on exercise of stock options
during the year ended June 30, 1996 by executives and directors and value of
unexercised options at June 30, 1996:
SHARES ACQUIRED ON EXERCISE OF OPTIONS AND VALUE OF OPTIONS
HELD BY EXECUTIVES AND DIRECTORS
AT JUNE 30, 1996
<TABLE>
<CAPTION>
Number of Shares Value of
Underlying Unexercised In
Unexercised the Money
Options at Options at
FY-End (#) FY-End(1)
----------- ---------
Exercise Value Exercisable/ Exercisable/
Name (#) Realized Unexercisable Unexercisable
- ----------------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Kent E. Searl - - 202,051/0 $378,569/0
Charles E. Strait - - 295,560/0 493,585/0
George J. Isaac - - 250,000/0 491,500/0
Richard N. Reinhardt - - 105,005/0 175,884/0
Robert A. Hovee - - 1,200/0 0/0
- --------------------
</TABLE>
(1) The indicated value has been determined based upon the difference between
the exercise price and the fair market value of the securities underlying
the options on June 30, 1996.
(2) Potential value is based on the assumption that the price of the Company's
common stock will appreciate at an annual compounded rate of 5% until the
applicable expiration date of such options.
_______________
-34-
<PAGE>
1988 STOCK OPTION PLAN.
- ----------------------
In 1988, the Company adopted its 1988 Stock Option Plan (the "Plan")
pursuant to which the Company's Board of Directors was authorized to issue
options to purchase up to 150,000 shares of the Company's Common Stock to
employees, directors and consultants of the Company. The option exercise price
must equal fair market value of the Common Stock on the date of grant. No
options to purchase shares of Common Stock were granted under the 1988 Plan
during the fiscal year ended June 30, 1996. At June 30, 1996, options to
purchase an aggregate of 80,000 shares of the Company's Common Stock were
outstanding under this Plan, with options to purchase 30,000 shares exercisable
at $0.25 per share by a former director and options to purchase 25,000 shares
each, exercisable at $1.74 and $1.25 per share, respectively, by two unrelated
parties. On July 5, 1996, the Company registered the shares underlying the
options theretofore granted under the 1988 Stock Option Plan on a Form S-8 filed
with the Securities and Exchange Commission. Although none of the options under
the Plan had been exercised prior to June 30, 1996, all but 25,000 of such
options have now been exercised. The Company's Board of Directors intends to
eliminate the 1988 Stock Option Plan during the year ending June 30, 1997, by
merging such Plan into the 1994 Stock Option Plan.
1994 STOCK OPTION PLAN.
- ----------------------
On May 25, 1994, the Company's shareholders adopted its 1994 Stock Option
Plan (the "Plan"), pursuant to which the Company's Option Committee was
authorized to issue options to purchase up to 500,000 shares of the Company's
Common Stock to employees of the Company. At the Annual Meeting of shareholders
on February 27, 1996, the shareholders approved an increase in the number of
shares authorized for grant of options under the Plan to 1.5 million shares. In
addition, the shareholders also approved conversion of options to acquire shares
of Micro, granted to Micro employees prior to the acquisition to options to
acquire 591,120 shares of the Company's common stock at an exercise price of
$2.50 per share, under the 1994 Stock Option Plan. The 1994 Stock Option Plan
was adopted to advance the interests of the Company and its shareholders by
affording employees an opportunity for investment in the Company. The
Compensation Committee has sole discretion to select which employees of the
Company will be granted options, the number of shares subject to option, the
timing of such option grants, when the options may be exercised, and the
exercise price. The exercise price of options must be at least equal to the
fair market value of the Common Stock on the date of grant. The maximum term of
options granted under the Plan is ten years. In addition to the conversion of
Micro Options approved by shareholders on February 27, 1996, the Board of
Directors granted options to purchase 300,000 shares to employees, with an
exercise price of $2.75 per share, during the current fiscal year ended June 30,
1996. As of June 30, 1996, there were outstanding options under the 1994 Stock
Option Plan to acquire 1,141,120 shares of the Company's common stock.
DIRECTORS' STOCK OPTION PLAN.
- ----------------------------
On May 25, 1994, the Company's shareholders adopted its Directors' Stock
Option Plan (the "Plan") pursuant to which the Company was authorized to issue
options to purchase up to
-35-
<PAGE>
200,000 shares of the Company's Common Stock to non-employee Directors of the
Company. At the February 26, 1996 Annual Meeting, the Company's shareholders
approved an increase in the number of shares authorized for grant of options
under the Directors' Stock Option Plan to 500,000 shares. The Plan was adopted
to advance the interests of the Company and its shareholders by attracting
qualified non-employee Directors, whose participation and guidance contribute to
the successful operation of the Company. The Board of Directors has previously
adopted a resolution which provides that options to purchase $5,000 share value
of Common Stock shall be granted to non-employee Directors, effective July 1 of
each year. The exercise price of options must be at least equal to the fair
market value of the Common Stock on the date of grant. The maximum term of each
option is ten years. During the year ended June 30, 1996, options to purchase
1,200 shares were granted to each of Messrs. Reinhardt and Hovee, with an
exercise price of $4.17 per share. Subsequent to June 30, 1996, the Board of
Directors granted options in the amount of 20,000 shares each to Messrs.
Reinhardt, Hovee and Zaepfel, upon commencement of their service on the Board of
Directors of the Company as outside directors, with an exercise price of $3.31,
$3.31and $3.93, respectively, the last price reported on NASDAQ for the date
prior to the later of commencement of service on the Board of Directors or the
grant of options by the Board of Directors. While the Board of Directors
believes that the Directors' Stock Option Plan currently permits the grant of
options on commencement of an experienced outside director's service on the
Board of Directors, as well as subsequently, it intends to seek shareholder
approval at the next Annual Meeting for an amendment to the Directors' Stock
Option Plan to explicitly provide for such grants. As of June 30, 1996, there
were outstanding options under the Directors' Stock Option Plan to acquire
58,256 shares of the Company's common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Set forth in the following table is information as of June 30, 1996, with
respect to the beneficial shareholdings of the Company's common stock, by all
directors, individually, and all officers and directors as a group, and
beneficial owners of 5% or more of such common stock.
-36-
<PAGE>
BENEFICIAL SHAREHOLDINGS OF DIRECTORS, OFFICERS AND
OWNERS OF MORE THAN 5% OF COMMON STOCK
PERCENT
NAME AND ADDRESS NO. OF SHARES OF CLASS(1)
- --------------------------------- ------------------------- -----------
Kent E. Searl
1401 Walnut St., Suite 500
Boulder, CO 80302 983,930/(2)//(3)//(4)/ 10.87%
Ronald G. Coss
1401 Walnut St., Suite 500
Boulder, CO 80302 2,493,528/(5)/ 27.55%
Richard N. Reinhardt
1401 Walnut St., Suite 500
Boulder, CO 80302 487,184/(2)//(3)//(4)//(6)/ 5.38%
Charles E. Strait
1401 Walnut St., Suite 500
Boulder, CO 80302 295,560/(7)/ 3.27%
George J. Isaac
1401 Walnut St., Suite 500
Boulder, CO 80302 251,000/(3)/ 2.77%
Mr. Robert A. Hovee
1401 Walnut St., Suite 500
Boulder, CO 80302 1,200/(6)/ 0.13%
All officers and directors as a
group (6 persons) 4,187,173 46.42%
/(2)//(3)//(4)//(5)//(6)//(7)//(8)/
Micro Motors Employee
Stock Ownership Plan
151 E. Columbine 1,099,805/(5)/ 12.15%
Santa Ana, California
- ---------------------
(1) Calculated pursuant to Rule 13d-3 under Exchange Act.
(2) Includes 250,000 shares of Common Stock, 58,229 shares of Preferred Stock
convertible share-for-share into Common Stock at any time, and Warrants to
acquire 13,000 shares of Common Stock owned of record by Professional Sales
Associates, Inc. ("PSA"). Messrs. Searl and Reinhardt are officers and
directors of PSA and may be deemed to beneficially own PSA's shares. Mr.
Searl, individually, owns of record 400,750 shares of Common Stock and
19,900 shares of Preferred Stock. Mr. Reinhardt, individually, owns of
record 56,950 shares. In addition, Mr. Reinhardt's spouse, individually,
owns 4,000 shares which are attributed to him in this chart.
(3) Includes options held by Messrs. Searl, Reinhardt and Isaac to purchase
50,000 shares (each) shares of the Company's Common Stock at $2.50 per
share. Also includes options held by Messrs. Searl and Reinhardt to
purchase 50,000 shares (each) at $1.75 per share. Also includes options
held by Messrs. Searl and Isaac to purchase 100,000 and 200,000,
respectively, of the Company's Common
-37-
<PAGE>
Stock at $2.13 per share. These shares have been added to outstanding
shares in calculating each director's individual percentage of beneficial
ownership.
(4) Includes options held by Messrs. Searl and Reinhardt to purchase 2,051
shares (each) of the Company's Common Stock at $2.43 per share and Mr.
Reinhardt to purchase 1,754 shares of the Company's Common Stock at $2.85
per share. These shares have been added to outstanding shares in
calculating each director's individual percentage of beneficial ownership.
(5) Includes 604,893 shares of the Company's Common Stock held by the Micro
Motors ESOP which are held by such ESOP for the benefit of Mr. Coss. Such
shares held by the ESOP for the benefit of Mr. Coss are included in the
total opposite Mr. Coss' name and also included in the total opposite the
name of the Plan. Mr. Coss is one of three Trustees of such Plan, and does
not have sole voting or dispositive power over shares held by the Plan.
(6) Includes options of Messrs. Reinhardt and Hovee to acquire 1,200 shares
each of the Company's Common Stock at $4.17 per share. The Table does not
include options of Messrs. Reinhardt, Hovee and Zaepfel to acquire 20,000
shares each of the Company's Common Stock at $3.31, $3.31, and $3.93,
respectively, granted subsequent to June 30, 1996.
(7) Includes options of Mr. Strait to acquire 295,560 shares of the Company's
Common Stock at $2.50 per share, pursuant to conversion of options to
acquire Micro granted prior to the Micro acquisition, approved by the
Company's shareholders on February 27, 1996.
(8) The officers and directors as a group currently have in the aggregate,
together with their affiliates, voting power with respect to 2,601,335
currently issued and outstanding shares of Common Stock, not including in
such number the convertible preferred stock or options treated as shares of
Common Stock attributed to them for the purpose of this chart. Shares held
by the Micro Motors ESOP have not been included in computing the voting
power number in this footnote or in stating the vote controlled by officers
and directors elsewhere in this proxy statement, but shares held by the
Micro Motors ESOP for the benefit of Mr. Coss are included the amount of
his beneficial ownership and the total held by all officers and directors
as a group reported in the chart.
_______________
Set forth in the following table is information as of June 30, 1996 with
respect to the beneficial shareholdings of all directors, individually, and all
officers and directors as a group, and beneficial owners of more than five
percent of the Company's Series A Preferred Stock.
BENEFICIAL SHAREHOLDINGS OF DIRECTORS, OFFICERS AND
OWNERS OF MORE THAN 5% OF PREFERRED STOCK
PERCENT
NAME AND ADDRESS NO. OF SHARES OF CLASS
- ------------------------------------- ---------------- ---------
Kent E. Searl
1401 Walnut Street, Suite 500
Boulder, CO 80302 78,129(1) 100.0%
Richard N. Reinhardt
1401 Walnut Street, Suite 500
Boulder, CO 80302 58,229(1) 74.5%
-38-
<PAGE>
All officers and directors as a
group (3 persons) 78,129 (1) 100.0%
Professional Sales Associates, Inc.
1401 Walnut Street, Suite 500
Boulder, CO 80302 58,229 74.5%
- ------------
(1) Includes 58,229 shares owned of record by Professional Sales Associates,
Inc. ("PSA"). Messrs. Searl and Reinhardt are officers and directors of
PSA and may be deemed to beneficially own PSA's shares. Mr. Searl,
individually, owns of record 19,900 shares (24.2% of the outstanding shares
of Preferred Stock). Mr. Reinhardt owns no shares of Preferred Stock
individually.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
----------------------------------------------------
In 1993, when the Company acquired Challenge, Mr. Charles Bull and
Challenge entered into a royalty agreement and license agreement, both effective
July 1, 1993 and extending to December 31, 1998. Under the license agreement,
Mr. Bull granted Challenge Products an exclusive license to manufacture,
distribute and market a patented prophy ring in return for execution of the
acquisition agreements and a royalty agreement providing for certain payments in
respect of sales targets never achieved. In June 1996, Mr. Bull, the Company
and Challenge entered into a letter agreement by which they agreed that the
royalty agreement was rescinded as void ab initio, for failure to accurately
reflect the intent of the parties. In addition, the parties agreed that the
exclusive paid up license conferred by the license agreement should be evidenced
by an assignment of all rights in the prophy ring patent. Mr. Bull continues to
serve as President of Challenge, and received $110,000 in compensation for his
services as President of Challenge, in the year ended June 30, 1996.
On July 26, 1995, in connection with the merger of Micro Motors with and
into Micro, the Company issued 3,350,000 shares of the Company's Common Stock in
exchange for all the issued and outstanding stock of Micro Motors, all as more
fully described in the Company's Form 8-K dated July 26, 1995, which is
incorporated herein. The Micro Motors Employee Stock Ownership Plan (the "Micro
ESOP") holds 1,099,805 of the shares issued in connection with the acquisition
of Micro, and has certain limited demand registration rights in respect thereof,
exercisable from July 26, 1996 through July 26, 1997, at the expense of the
Micro ESOP. In addition, the Micro ESOP has limited concurrent registration
rights, sharing costs on a pro-rata basis, in the event the Company should
undertake an underwritten public offering prior to July 26, 2000. In addition,
shareholders at the Company's Annual Meeting on February 27, 1996 approved
conversion of outstanding options of Micro Motors Incentive Stock Option Plan
into options to acquire 591,120 shares of the Company's Common Stock.
Pursuant to the Merger Agreement, Ronald G. Coss entered into a Non-
Competition Agreement pursuant to which he is to be paid $1 million over five
years, with payment commencing in the sixth year after closing. In addition,
Mr. Coss executed an employment agreement with the Company, pursuant to which he
is to be paid $360,000 annually as Vice
-39-
<PAGE>
Chairman of the Company under his employment agreement, adjustable upward for
inflation, representing a reduction from the more than $560,000 which he had
been paid as the Chairman of Micro, despite his greater responsibilities with
the Company. In addition to compensation payable under the employment agreement
between the Company and Mr. Coss, he is entitled to certain executive employee
benefits and perquisites.
Prior to the merger transaction, Mr. Coss also entered into an agreement to
terminate his long term employment contract with Micro Motors, for an additional
$677,400, payable over five years, at 11% interest per annum. At the closing
contemplated by the Merger Agreement, the Company assumed Micro Motor's
obligation under the termination agreement, as well as Micro's obligation under
a note for $261,050 in prior unpaid earned compensation. In connection with the
closing of the transactions under the Merger Agreement, the Company also entered
into a flexible Line of Credit Loan Agreement, whereby Mr. Coss may borrow as
much as $500,000 from the Company, at 7% interest, with repayment of the loan to
occur as an offset of obligations owed by the Company to Mr. Coss in respect of
the Non-Competition Agreement and employment agreement.
In connection with the acquisition of OMS, the Company borrowed $500,000
from an unrelated third party pursuant to a Loan Agreement and Promissory Note.
Fifty percent (50%) of the outstanding balance of obligations to the lender, at
any time, is jointly guaranteed by Professional Sales Associates, Inc. ("PSA")
and Mr. Kent E. Searl (the Company's Chairman). In connection with the loan,
the lender was granted a ten year warrant to acquire 26,000 shares of the
Company's Common Stock exercisable at the market price of the Company's shares
at $2.50 per share exercise price. Warrants to acquire 13,000 shares of the
Company's Common Stock were issued to PSA exercisable at $2.50 per share.
Messrs. Kent E. Searl, Richard N. Reinhardt and George J. Isaac, directors of
the Company, are directors of PSA. No warrants were issued to Mr. Searl. The
unrelated third party loan which PSA guaranteed was repaid on July 26, 1996,
when the Company entered into a loan agreement with Harris Bank.
The Company currently markets certain of the dental equipment manufactured
by Micro through PSA, a firm for which Messrs. Searl, Reinhardt and Isaac are
directors. The arrangements with PSA continue a relationship between PSA and
Micro Motors established on an negotiated arms' length basis prior to the merger
of Micro Motors into Micro. In electing to continue such relationship with PSA,
the disinterested members of the Board of Directors determined the relationship
is in the best interest of the Company. While the Company believes that the
terms of the relationship between PSA and Micro are no less favorable to the
Company than comparable relations with third parties, more favorable terms may
have been obtainable on a negotiated basis with another third party sales
organization.
The Company leases its offices in Boulder, Colorado from PSA, a firm for
which Messrs. Searl, Reinhardt and Isaac are directors, as sub-lessees under a
master lease between PSA and a third party unrelated to PSA or the Company. The
sublease between the Company and PSA is on a month to month basis. The Company's
monthly lease payments are $1,883, which is equal to the amount of the lease
payments due from PSA to the third party lessor, on a per square foot
-40-
<PAGE>
basis. The Company's management believes that the monthly rental is comparable
to rents charged for comparable properties in the market area. Nevertheless, the
terms of the sub-lease, including price, may not be as favorable to the Company
as lease terms which might have been negotiated with a third party in an arm's
length transaction.
Micro leases its offices and manufacturing facility in Santa Ana,
California from Ronald G. Coss, currently a director of the Company, at a
monthly rental of $27,383. The Company's management believes that the monthly
rental is comparable to rents charged for comparable properties in the market
area. Nevertheless, the terms of the lease, including price, may not be as
favorable to the Company as lease terms which might have been negotiated with a
third party in an arm's length transaction.
On October 10, 1995, the Company granted warrants to acquire 100,000 shares
to Mr. Carl Militello, pursuant to a Warrant Agreement between Mr. Militello and
the Company. Such warrants are exercisable at the last bid price as of the date
of grant of $2.13. Such warrants were issued as consideration to Mr. Militello
for services to the Company, including investor relations and financial
consulting services. Mr. Militello is not a related party.
On May 11, 1996, the Company and its Pnu-Light subsidiary entered into an
Asset Purchase Agreement with Pnu-Light Tool Works, Inc., a Missouri corporation
("Pnu-Light Tools") and Mr. Marty J. Anderson, its principal shareholder,
acquired substantially all the assets of Pnu-Light Tool Works, Inc., a Missouri
corporation ("Pnu-Light Tools") including a letter patent relating to pneumatic
light mechanisms to be used in conjunction with hand-tools (the "Patent"). The
initial consideration for acquisition of Pnu-Light Tools assets, including the
Patent, was issuance of 368,483 restricted shares of the Company's common stock.
Pnu-Light Tools has certain limited concurrent registration rights in respect of
the shares issued it, which rights are exercisable from May 11, 1997 through May
11, 1999. In the event of exercise of registration rights, Pnu-Light Tools is
required to pay its pro rata share of the costs of such registration and any
offering. Additional consideration for acquisition of the Pnu-Light assets is
payable by issuance of additional stock, based upon an interim calculation as of
December 31, 1997, and a final calculation as of June 30, 1999. The total
purchase price is to equal five (5) times the net after tax earnings of Pnu-
Light for the year ending June 30, 1999, with a minimum total consideration of
$4 million giving credit against such minimum for (a) the greater of (i) the
fair market value, as of the date of issue, of the Company's stock previously
issued as consideration or (ii) the fair market value, as of June 30, 1999, of
the Company's stock previously issued as consideration, (b) patent related costs
incurred subsequent to closing, (c) excess payables, and (d) research and
development costs incurred within 120 days after closing. In addition, the
Company, at the Company's sole option, may unwind the transaction at any time
prior to payment of final consideration as of June 30, 1999, provided that the
value of total consideration payable at 5 times net after tax earnings shall not
then exceed $4 million. Prior to the Company's Pnu-Light acquisition, Micro
manufactured Pnu-Light's patented tools in its facility in California, under
contract with Pnu-Light Tools. In addition to assuming certain duties to
provide further information to complete the transfer of technical information in
connection with the assignment of the Patent relating to his inventions, Mr.
Anderson agreed to be employed by Challenge under
-41-
<PAGE>
a three (3) year Employment Agreement between Mr. Anderson, Challenge and Pnu-
Light, at an annual salary of $60,000. Mr. Anderson is also obligated under a
Non-Competition Agreement not to compete, directly or indirectly, with the
businesses of Pnu-Light or the Company, or any business which continues such
businesses, whether undertaken by Pnu-Light, the Company, or any successor.
On July 5, 1996, the Company filed a Form S-8 to register the shares of
common stock underlying options theretofore granted pursuant to its 1988
Employee Stock Option Plan. Dr. Kyle, President of PDM and a former director of
the Company, held 30,000 of such options, exercisable at $0.25 per share.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) EXHIBITS
--------
(a)(1) and (a)(2) See Item 7.
(b) See Form 8-K filed by the Company dated July 26,
1995 and Form 8-K filed by the Company dated May
11, 1996.
(c) See Exhibit Index. (Available Upon Request).
-42-
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Document Pages
- -------- ----------- ------------
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).
7.1 Pro-Dex, Inc. Form 8-K dated July 26,
1995 (incorporated herein by reference
to the Company's Form 8-K dated July
26, 1995) and Financial Supplement to
Form 8-K dated July 26, 1995
(incorporated herein by reference to
the Company's Form 10-KSB, dated June
30, 1995, and Supplement to Form 8-K,
contained therein.)
7.2 Merger Agreement between Pro-Dex, Inc.,
Micro Systems Acquisition Corporation,
and Micro Motors, Inc., dated July 26,
1995 (incorporated herein by reference
to Exhibit 7.1 to the Company's Form
8-K dated July 26, 1996).
7.3 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).
7.4 Pro-Dex, Inc. Form 8-K dated May 11,
1996 (incorporated herein by reference
to the Company's Form 8-K dated May 11,
1996).
10.1 Form of Turnkey Management Agreement
between Pro-Dex, Inc. and its
Contracting Dentists (incorporated
herein by reference to Exhibit 10.1 to
Pro-Dex, Inc. Registration Statement
No. 33-35790).
10.2 Lease Agreement dated December 1, 1984
between Sears Roebuck and Co. and
Pro-Dex, Inc. (Sun Valley) and
amendment thereto dated as of November
9, 1987 (incorporated herein by
reference to Exhibits 10.8 and 10.29 to
Pro-Dex, Inc. Registration Statement
No. 33-35790).
-43-
<PAGE>
10.2(a) Agreement to Extend Lease Agreement
(Exhibit 10.2 Sun Valley) dated May 5,
1994.
10.3 Leaseback Agreement dated December 19,
1985 between Pro-Dex, Inc. and
Fowler/Searl Partnership (incorporated
herein by reference to Exhibit 10.13 to
Pro-Dex, Inc. Registration Statement
No. 33-6623).
10.4 Lease Agreement dated November 24, 1986
between Sears Roebuck and Co. and
Pro-Dex, Inc. (Santa Rosa) and
amendment thereto dated as of January
7, 1988 (incorporated herein by
reference to Exhibits 10.16 and 10.28
to Pro-Dex, Inc. Registration Statement
No. 33-35790).
10.4(a) Agreement to Extend Lease Agreement
(Exhibit 10.4 Santa Rosa) dated May 4,
1994.
10.5 Pro-Dex, Inc. 1988 Stock Option Plan
(incorporated herein by reference to
Exhibit 10.23 to Pro-Dex, Inc. Form
10-K for the year ended June 30, 1988
File No. 0-14942).
10.6 Lease Agreement dated March 2, 1988
between Sears Roebuck and Co. and
Pro-Dex, Inc. (Sunrise Mall), and
extension/amendment dated May 2, 1991
(incorporated herein by reference to
Exhibits 10.25 and 10.25(a) to Pro-Dex,
Inc. Registration Statement No.
33-35790).
10.6(a) Agreement to Extend Lease Agreement
(Exhibit 10.6 Sunrise Mall) dated July
6, 1994.
10.7 Lease Agreement dated March 2, 1988
between Sears Roebuck and Co. and
Pro-Dex, Inc. (Florin Mall) and
extension/amendment dated May 2, 1991
(incorporated herein by reference to
Exhibits 10.26 and 10.26(a) to Pro-Dex,
Inc. Registration Statement No.
33-35790).
10.7(a) Agreement to Extend Lease Agreement
(Exhibit 10.6 Florin Mall) dated July
6, 1994.
10.8 Lease Agreement effective as of
December 1, 1988 between Sears Roebuck
and Co. and Pro-Dex, Inc. (Arden Fair)
and amendment thereto effective as of
April 1, 1989 (incorporated herein by
reference to Exhibits 10.32 and 10.33
to Pro-Dex, Inc. Registration Statement
No. 33-35790).
-44-
<PAGE>
10.9 Employment Agreement between Pro-Dex,
Inc. and M. Larry Kyle, D.D.S. dated
June 28, 1990 (incorporated herein by
reference to Exhibit 10.34 to Pro-Dex,
Inc. Registration Statement No.
33-35790).
10.13 Lease Agreement between Equity Colorado
Phase II and Biotrol International,
Inc. dated August 1991 (incorporated
herein by reference to Exhibit 10.40 to
Pro-Dex, Inc. Registration Statement
No. 33-35790).
10.13(a) First Amendment to Lease (Exhibit
10.13) dated January 31, 1994.
10.14 Loan Agreement between Biotrol
International, Inc. and A-T Realty Co.
dated May 29, 1991 (incorporated herein
by reference to Exhibit 10.43 to
Pro-Dex, Inc. Registration Statement
No. 33-35790).
10.15 Employment Agreement dated effective
August 1, 1993 between Challenge
Products, Inc. and Charles L. Bull
(incorporated herein by reference to
Exhibit 10.15 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 1994 Stock Option Plan (incorporated
herein by reference to Exhibit 10.21 to
Pro-Dex, Inc. Registration Statement
No. 33-74397).
10.18 Director's Stock Option Plan
(incorporated herein by reference to
Exhibit 10.22 to Pro-Dex, Inc.
Registration Statement No. 33-74397).
10.19 Lease Agreement dated December 29, 1993
between Fuoti Insurance Agency, Inc. &
James C. & Susan E. Fuoti and Pro-Dex,
Inc. & M. Larry Kyle, DDS.
(Incorporated herein by reference to
the Exhibit 10.23 to the Company's Form
10-KSB dated June 30, 1994).
-45-
<PAGE>
10.20 Consulting Agreement and
Non-Competition Agreement, between
Pro-Dex, Inc. and L. Wayne Hunter,
dated July 26, 1995 (incorporated
herein by reference to Exhibit 10.1 to
the Company's Form 8-K dated July 26,
1996).
10.21 Employment Agreement between Ronald G.
Coss and Pro-Dex, Inc., dated July 26,
1995 (incorporated herein by reference
to Exhibit 10.2 to the Company's Form
8-K dated July 26, 1996).
10.22 Agreement to Terminate Long Term
Employment Agreement between Micro
Motors, Inc. and Ronald G. Coss, dated
July 26, 1995 (incorporated herein by
reference to Exhibit 10.3 to the
Company's Form 8-K dated July 26, 1996).
10.23 Asset Purchase Agreement between
Pro-Dex, Inc., Pnu-Light Acquisition
Corporation, and Marty J. Anderson,
dated May 11, 1996 (incorporated herein
by reference to Exhibit 10.23 of the
Company's Form 10-KSB dated June 30,
1996, as originally filed).
10.24 Letter Agreement, regarding rescission
of Royalty Agreement between Pro-Dex,
Inc., Challenge Products, Inc. And
Charles Bull, dated June __, 1996,
together with Assignment of
Patent(incorporated herein by reference
to Exhibit 10.23 of the Company's Form
10-KSB dated June 30, 1996, as
originally filed).
23.1 Consent of McGladrey & Pullen, LLP
-46-
