U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1997
[ ] 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.
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(Name of small business issuer in its charter)
Colorado 84-1261240
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(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
1401 Walnut St., Ste., 540, Boulder, Colorado 80302
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(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
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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 ___
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form,
and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its' most recent fiscal year was
$19,196,835.
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 17, 1997 was $14,452,429.
The number of shares of the Registrant's no par value common
stock outstanding as of September 17, 1997 was 8,712,300.
DOCUMENTS INCORPORATED BY REFERENCE: Certain Exhibits, as
set forth in the Exhibit Index. Exhibit index begins on
sequentially numbered page 40.
PART I
Item 1. Business
General
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As of June 30, 1997, Pro-Dex, Inc. (or the "Company") or was
the parent company of four operating subsidiaries, Biotrol Inter-
national,Inc. ("Biotrol"), Challenge Products,Inc. ("Challenge"),
Micro Motors, Inc. ("Micro"), and Oregon Micro Systems, Inc.
("OMS"). Biotrol manufactures and distributes infection control
products for the dental industry. Challenge manufactures fluoride
and related products for preventive dentistry. Micro, a manu-
facturer 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.
During the year ended June 30, 1997, the Company disposed of
its Pnu-Light operation by unwinding the transaction pursuant to
which it acquired Pnu-Light Tool Works, Inc. ("Pnu-Light"). The
Company also sold substantially all of the assets, excepting only
the accounts receivable and certain leasehold interests, of its
Pro-Dex Management, Inc. ("DCM") subsidiary. See "Divestitures
During Year Ended June 30, 1997".
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 History
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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. The parties allocate approximately $2,700,000 of the
purchase price to the patents. The balance of $4,000,000 is
allocated to the stock of OMS. The underlying assets and net
book 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 Bank and Trust, N.A., 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 3.5
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 laws. 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-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. See "Divestitures During Year Ended
June 30, 1997."
Divestitures During Year Ended June 30, 1997
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On April 25, 1997, the Company completed the unwinding of its
previous acquisition of the assets of Pnu-Light, including United
States Patent No. 5,267,129 entitled "Pneumatic Lighting
Apparatus." The decision of the Board of Directors was
previously announced in February 1997. The anticipated synergy
between Pro-Dex' Micro Motors subsidiary and Pnu-Light did not
meet expectations and, in accordance with procedures contained
in the Pnu-Light Asset Purchase Agreement, Martech, Inc. (the
surviving successor of Pnu-Light Tool Works, Inc. reconveyed to
the Company 368,483 shares of the Company common stock that were
originally issued to Martech, Inc. in May, 1996.
The Company,in exchange for the 368,483 shares, assigned the
Pneumatic Lighting Apparatus Patent to Martech, Inc. subject to a
non-exclusive, fully paid, worldwide license to the technology
and the proprietary information which are retained by Pro-Dex.
On June 11, 1997, the Company completed the sale of the
assets and business, exclusive of accounts receivable, of Pro-Dex
Management, Inc., the Company's dental clinic management
subsidiary in California ("DCM"). The effective date of sale was
May 31, 1997. The decision of the Board of Directors to explore
the feasibility of a sale of the subsidiary was discussed by the
Company in previous reports. The sale of assets transaction was
made with Professional Dental Management, L.L.C., a California
limited liability company ("PDM"). Dr. M. Larry Kyle is the
managing member of PDM and prior to the sale was president of DCM
and a member of the Company's Board. See "Item 12 - Certain
Relationships and Related Party Transactions." The terms of the
sale provide that PDM assume DCM liabilities of approximately
$670,000 in exchange for the inventory and equipment of DCM. DCM
retains its accounts receivable in the net amount of
approximately $1,800,000 which will be collected, with the
assistance of PDM, over the ensuing 12 to 24 months. The losses
from operations of DCM have been reported by the Company on the
basis of discontinued operations since the Company's Board of
Directors announcement of the intention to sell the business and
assets of DCM. If the allowance for doubtful accounts is not
adequate to insure the realization of the net amount of DCM's
receivables, additional losses from discontinued operations could
occur in future years.
Products Offered by Biotrol
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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 ChoiceTM" label. These products
include fluoride gels and rinses in addition to prophylaxis
pastes and related preventive dentistry products.
Biotrol has entered into a marketing agreement with
Challenge, whereby it markets Challenge's branded products. In
the opinion of management, this inter-corporate marketing
agreement does not undercut Biotrol's ability to enter into other
non-exclusive marketing agreements. Over fifty-nine percent
(59%) 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 relationships will be terminated by a
supplier or manufacturer. Biotrol holds no franchises and has no
exclusive arrangements with any of its suppliers or
manufacturers. Should a product become unavailable for any
reason from a significant vendor, such unavailability could have
a negative impact on Biotrol's business.
At the present time, Biotrol is usually able to fill orders
within forty-eight hours. During the year ended June 30, 1997,
Biotrol continued to maintain its record for improved customer
service and turn-around time. At June 30, 1997, Biotrol had no
order backlog, and had virtually no backlog at June 30, 1996.
Biotrol does not typically experience seasonal fluctuations in
its orders.
Products Offered by Challenge
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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 ChoiceTM", "Dual-XTM", "DentaliteTM", and "Prophy Gems
TM", which are marketed under the "Perfect ChoiceTM" label.
Biotrol markets challenge products through the current Biotrol
sales force and distributors.
Forty-three percent (43%) 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-nine percent (69%) of Challenge's revenues are derived
from sales to its two largest customers. The largest portion of
such revenues, constituting fifty-one percent (51%) of total
sales are to Biotrol, under Challenge's marketing agreement with
Biotrol. Management considers that the inter-company nature of
the relationship with Biotrol affords somewhat greater security
of continuity of relationship than could ordinarily be expected.
Nevertheless, if any material adverse 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
ChoiceTM" and "Prophy GemTM" 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, 1997, Challenge had a backlog of
$129,000, the largest proportion of which related to timing of
orders for private label products not due for immediate shipment.
At June 30, 1996, Challenge had a backlog of $88,000. Challenge
does not typically experience seasonal fluctuations in its
orders, and expects to fill all its orders during the current
fiscal year.
DCM - Dental Center Operations
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Pro-Dex provided dental services through its DCM subsidiary
from 1978 until substantially all of the assets, excepting the
accounts receivable and certain leasehold interests, of that
subsidiary were sold effective May 31, 1997, pursuant to the
direction of the Board of Directors and as previously disclosed.
The Company has reported the financial statements of DCM as a
"discontinued operation" since July 1, 1995. Prior to the sale,
dental services were provided by independent dentists contracting
with DCM to operate in the facilities leased by DCM using DCM
management services. DCM management services included the
establishment of business procedures and the development and
implementation of promotional activities. DCM equipped and
staffed the dental offices to facilitate the practice of general
and orthodontic dentistry. Dentists directed all treatment plans
and maintained control over all services provided in each office.
Each dentist contracting with DCM was licensed to practice
dentistry in California. See "Divestitures During Year Ended
June 30, 1997".
Products Offered By Micro Motors
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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 "DynatorqTM", "DynaproTM", "DynaliteTM",
"DynasurgTM", and "Micro HandpieceTM".
Seventy-three percent (73%) of Micro sales in the year ended
June 30, 1997 were accounted for by sales of dental hand-pieces.
Such private label and branded hand-pieces are sold to original
equipment manufacturers and under an exclusive marketing
agreement by the Company's Biotrol International, Inc.
subsidiary. Previously, Micro Motors handpieces were marketed 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."
Approximately twenty-two (22%) of Micro sales in the year
ended June 30, 1997, consisted of sales of miniature pneumatic
motors for industrial and medical use. Such motors are marketed
through an independent pneumatic distribution network.
At the present time, Micro is usually able to fill orders
within sixty (60) days. At June 30, 1997, Micro had a backlog of
orders of approximately $3,122,000, which it believed to be firm.
At June 30, 1996, Micro had a backlog of approximately $1.9
million. 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.
Products Offered by OMS
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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. OMS
markets its multi-axis circuit boards through outside sales
representatives. For the present, OMS' 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 respect, OMS has benefited from consulting
services provided in the year ended June 30, 1996 and 1997 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. 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. See "Item 12 - Certain Relationships and Related
Party Transactions."
OMS' two largest customers account for thirty-three percent
(33%) of its sales, with the largest of such customers accounting
for twenty-three percent (23%) 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, 1997, the backlog for OMS
was approximately $697,000, as compared to $634,000 as of June
30, 1996. 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.
Competition
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Certain products manufactured and distributed by the Company's
subsidiaries are undifferentiated in nature from competing
products offered by several other large manufacturers and
distributors. Intensified competition in the future may result
in price reductions, reduced revenues and profit margins, and
loss of market share, which would adversely affect the Company's
business, consolidated results of operations and financial
condition.
Research and Development
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The Company has a number of research and development
programs in place at its various subsidiaries. The Company
considers these product development programs to be of importance
in both maintaining and improving its market position. The
amounts spent on research and development activities in 1996 and
1997 were approximately $ 913,875 and $ 1,092,006, respectively.
Employees
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At June 30, 1997, the Company had approximately 138 full and
part-time employees (excluding independent contractors). At that
time, 4 full-time employees were assigned to corporate
headquarters, and devoted substantially all of their time to the
operations of the Company. Challenge employed approximately 15
persons, Biotrol employed approximately 32 persons, and Micro
employed 69 persons as of June 30, 1997. OMS employed 18
individuals, 15 full-time and 3 part-time.
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
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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") was 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 four 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, 1997, the Company's
contribution with respect to the 401(k) Plan was set at $35,156,
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 $45,000 may be contributed to the
Plan for the year ending June 30, 1998.
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 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, which would have,
expired if not exercised prior to July 26, 1997, have been
extended by agreement and due to expire July 26, 1999, and
concurrent registration rights expire July 26, 2000.
Government Regulations
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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 DCM, 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 non-complying products. As is common in
the industry, certain of Biotrol's products and processes has
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).
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 non-complying 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 has 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).
Micro's dental hand-pieces are currently not 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. Should the FDA develop regulations governing Micro's
products, Micro intends to comply 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 its products or processes. Management believes
that OMS follows Current Good Manufacturing Processes (CGMP).
Patents, Trademarks and Licensing Agreements
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The Company currently holds letters patent relating to the
multi-axis motion control circuit boards manufactured by OMS and
to the prophy ring technology utilized by Challenge. In
addition, Micro holds letters patent relating to its miniature
pneumatic motor's products. Patents held by the Company and Micro
Motors have varying expiration dates, none of which will expire
earlier than 2005. Further, the Company has retained a
non-exclusive, paid up, worldwide license to the letters patent
relating to the pneumatic light for incorporation into hand-
tools. The Company has conducted limited review of the letters
patent acquired in connection with the OMS and Micro 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 and OMS 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 and OMS 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
"DynatorqTM", "DynaproTM", "DynaliteTM", "DynasurgTM", and "Micro
HandpieceTM". Challenge Products Inc.'s products are sold under
the trade name "DentaliteTM", in both the United States and
Canada. In addition, Challenge offers its new line of
preventative dental products under its "Perfect ChoiceTM"
tradename. Challenge also markets its "Prophy GemsTM" dental
prophylaxis product under its "Perfect ChoiceTM" trademark in
both the United States and Canada.
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. 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. See "Item 12 - Certain Relationships and
Related Party Transactions."
Biotrol's office, assemblage and warehouse facility is
located at 650 South Taylor Avenue, Suite 20, 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 $7,965, 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
East Columbine Avenue, 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
$28,237. 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 $7,289, with the lease to terminate on May 31,
1999.
The Company continues to lease space in Sears' stores in
connection with its former dental clinic management operation.
All but one of those leases expired in 1997, as indicated below.
The company currently subleases the remaining space to the new
owner of the dental clinic management operations under identical
terms. It in turn subleases the space to the new owner of the
dental clinic management operation under identical terms.
Details of the 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 ended 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 ended 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 ended 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 ended February 8, 1997.
Professional Dental Management, L.L.C., the purchaser of
certain assets of the Company's DCM subsidiary, is currently
renegotiating the above-expired leases on its own behalf.
Item 3. Legal Proceedings
On July 9, 1997, Cottrell Ltd., Englewood, Colorado
("Cottrell") filed a civil action in the U.S. District Court for
the District of Colorado against Biotrol International, Inc.
("Biotrol"), a wholly owned subsidiary of the Company and the
Company. The complaint demands that Biotrol (and the Company)
stop advertising and selling hard surface cleaners and
disinfectants under labels Cottrell alleges contain exaggerated
claims. The complaint seeks compensation for lost profits and
other compensation in an amount to be determined at trial.
Both Biotrol and Cottrell sell cleaning solutions to dental
dealers. The products are used to disinfect countertops and
other hard surfaces in dental offices. The U.S. Environmental
Protection Agency ("EPA") regulates such products and reviews
advertising and labeling claims made about the products by
manufacturers. The thrust of the action involves a Biotrol
product identified as "Birexse". Cottrell's complaint alleges
that, according to EPA standards, Birexse should be used the same
day it is mixed. Cottrell makes a competing product that must be
used the same day it is mixed, according to its label. It is the
Company's position that "Birexse" labeling is consistent with
that approved by the EPA.
The Company's management is currently investigating the
claims and intends to vigorously defend against the action.
Based on the Company's current understanding of the relevant
facts and law, management does not expect that the outcome of
these legal proceedings will have a material adverse effect on
the consolidated financial condition, operating results, or
liquidity of the Company. See "Pro-Dex Consolidated Financial
Statements - Note 4."
Item 4. Submission of Matters to a Vote of Security Holders
During the year ended June 30, 1997, three proposals were
submitted to the vote of security holders at the Company's annual
meeting, held in Newport Beach, California, on November 13, 1996.
The Company's Inspector of Elections reported that the holders of
5,162,143 shares, comprising 57% of the Company's common stock
voted in person at the meeting. The following matters were
approved, each of which was described in further detail in an
information statement filed with the Securities and Exchange
Commission and transmitted prior to the meeting to the
shareholders of record as of the record date:
Proposal 1. To elect Richard N. Reinhardt (with 5,162,143
votes), Robert A. Hovee (with 5,162,143 votes), and John B.
Zaepfel (with 5,162,143 votes) as members of the Company's Board
of Directors. See "Item 9 - Management" for biographical
information.
Proposal 2. To authorize the amendment of the Directors'
Stock Option Plan, to grant options to non-employee directors on
commencement of service as a director, as well as to expressly
authorize such further grants of options not more often than
annually as the Board of Directors shall determine by vote of the
disinterested directors, with 5,162,143 votes in favor. See
"Item 10 - Director Compensation."
Proposal 3. To ratify selection of McGladrey & Pullen,
L.L.P. as the independent certifying accountants of the Company's
financial statements for the year ending June 30, 1998, with
5,162,143 in favor, 0 opposed, and 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 MarketTM 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 - 1996 High Bid Low Bid
------------------ -------- -------
First quarter $3.06 $2.25
Second quarter 3.63 2.13
Third quarter 4.56 3.06
Fourth quarter 6.00 3.75
Fiscal Year - 1997 High Bid Low Bid
------------------ -------- -------
First quarter $4.88 $3.31
Second quarter 4.25 2.31
Third quarter 2.81 1.25
Fourth quarter 2.50 1.38
On September 17, 1997, the last sale price of the common
stock as reported by NASDAQ was $2.44 per share. The last sale
price reported on NASDAQ on June 30, 1997 was $2.38 per share.
The above quotations reflect inter-dealer prices, without
retail mark-up, markdown, or commissions and may not necessarily
represent actual transactions.
At June 30, 1997, the approximate number of holders of
record of the Company's common stock was 414. 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, and in accordance with the company's credit
agreement with the bank, it is prevented from paying dividends
without prior consent.
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.
(All amounts in thousands except per share data)
Year ended June 30,
1997 1996
---- ----
Statement of Operations Data (1)
Net sales $ 19,197 $ 20,571
Cost of sales 8,162 8,509
---------- ----------
Gross profit 11,035 12,062
Operating expenses 10,945 9,469
---------- ----------
Net operating income 90 2,593
Net other income (expense) (1,229) (975)
Income taxes (credits) (252) 358
---------- ----------
Income (loss) from continuing
operations (887) 1,260
Loss from discontinued operations (696) (85)
---------- ----------
Net income (loss) $ (1,583) $ 1,175
========== ==========
(1) Includes transactions and balances of Micro Motors, Inc. and
Oregon Micro Systems, Inc. (acquired July 26, 1995), for the
applicable periods subsequent to such acquisitions.
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 assumptions regarding factors such as (1) market
acceptance of the products of each 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 manufacturers), (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 stable
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) 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.
Results of Operations for the Fiscal Year Ended June 30, 1997
- -------------------------------------------------------------
Compared to Fiscal Year Ended June 30, 1996.
- -------------------------------------------
Net sales by subsidiary follows:
Increase/
1997 1996 (Decrease)
---- ---- ----------
Biotrol $ 5,720,127 $ 5,398,443 $ 321,684
Challenge 1,324,844 1,279,410 45,434
Micro Motors 7,978,755 9,116,523 (1,137,768)
Oregon Micro Systems 4,836,770 5,312,648 (475,878)
(Inter-company sales) (663,661) (535,949) (127,712)
------------ ------------ ------------
$19,196,835 $20,571,075 $(1,374,240)
============ ============ ============
The increase in sales at Biotrol for the year ended June 30,
1997 is primarily attributable to an increase in sales of certain
infection control products, and the complete line of preventative
care dental products. At Challenge, an increase in sales of
preventative care products to Biotrol mainly contributed to the
overall increase in sales for the year ended June 30, 1997.
Sales to private label customers of Challenge decreased by 11%
from $743,461 for the year ended June 30, 1996 to $661,163 for
the year ended June 30, 1997. Micro Motors experienced
the loss of a large private label customer for its dental
hand-pieces. Sales of its branded hand-piece line did not
increase sufficiently to offset the loss of the private label
business. Efforts are being made to develop new private label
customers to replace the lost business. In April, the Company
announced that Micro Motors had entered into an exclusive long-
term agreement with Tycom, Inc. to supply Electric Control
Systems and Handpieces for Tycom's "Quantec" endodontic product
line. Also, effective July 1, 1997, the marketing and sales
responsibility for the branded hand-piece line has been shifted
from an independent sales organization to the sales force already
in place at Biotrol. In anticipation of that event as well as
the introduction of several new products scheduled for fiscal
year ended June 30, 1998, Biotrol increased its sales force from
11 to 16 people. During the first half of the year sales at the
Company's OMS subsidiary were below the same period in the
previous fiscal year due to the downturn in demand for
semiconductor fabrication equipment. Sales to that industry
decreased by approximately 14% for the first six months of year
ended June 30, 1997.
Beginning in the latter part of the third quarter of the
current fiscal year, and continuing into the fourth quarter sales
have increased at OMS as a result of the rebound in the
semiconductor industry. Also, sales of infection control and
preventative dental products at the Company's Biotrol subsidiary
increased 7% over the previous quarter ended June 30, 1996.
Overall Company sales for the fourth quarter ended June 30, 1997
increased 2% to $5,600,000 from $5,500,000 in the fourth quarter
ended June 30, 1996.
Overall net consolidated sales of the Company decreased 6.7%
from $20,571,000 in fiscal year ended June 30, 1996 to
$19,197,000 in fiscal year ended June 30, 1997.
Gross profits by subsidiary follows:
Increase/
1997 1996 (Decrease)
---- ---- ----------
Biotrol $ 3,108,763 $ 3,027,320 $ 81,443
Challenge 579,767 567,047 12,720
Micro Motors 3,605,723 4,236,007 (630,284)
Oregon Micro Systems 3,740,920 4,231,856 (490,936)
----------- ----------- ------------
$11,035,173 $12,062,230 $(1,027,057)
=========== =========== ============
Gross profit decreased 8.7% to $11,035,000 for the year
ended June 30, 1997 from $12,087,000 for the year ended June 30,
1996 primarily due to a decrease in sales. Gross profit dollars
increased at Biotrol and Challenge due to the increase in sales
at those subsidiaries. Gross profit dollars decreased at Micro
Motors and OMS primarily due to the decrease in revenue.
Gross profit as a percentage of sales decreased from 58.7%
in fiscal year ended June 30, 1996 to 57.5% in fiscal year ended
June 30, 1996. The decrease is attributed to an increase in
manufacturing costs that could not entirely be passed through to
customers.
Operating expenses increased 15.6% to $10,945,000 in fiscal
year ended June 30, 1997 from $9,469,000 in fiscal year ended
June 30, 1996. During the year ended June 30, 1997 the Company
incurred $463,000 of unusual one-time restructuring charges
including severance benefits paid to terminated employees. The
Company also increased its commitment to research and development
by spending an additional $179,000 during fiscal year ended June
30, 1997. Also, operating expenses for year ended June 30, 1996
include only eleven months of operations for Micro Motors and OMS
since the acquisition of those subsidiaries occurred on July 26,
1995. Due to the restructuring management estimates that the
reduction of its employee workforce along with other operational
changes will provide an anticipated $900,000 of future annual
cost savings.
The Company's effective tax rate on income (loss) from
continuing operations was 22.1% in 1997 and 22.2% in 1996. For
1997 the tax benefit rate was reduced mainly because of non-
deductible expense items of $149,000, primarily goodwill. For
1996 the tax rate was reduced because of a change in the
valuation allowance for deferred tax assets of $432,000.
Realization of deferred tax assets is dependent on generating
sufficient taxable income prior to the expiration of the loss
carryforwards. Although realization is not assured, management
believes it is more likely than not that the net deferred tax
assets will be realized for the following reasons. During 1997,
the Company incurred losses from discontinued operations of
$696,000 (net of tax benefit). These operations have been
eliminated. In addition, the Company incurred approximately
$827,000 in one-time charges to operations for severance
benefits paid to terminated employees, prepayment fees to
its previous lender and other unusual charges. As part of
this restructuring, management estimates that the reduction of
its employee workforce resulting in an anticipated $900,000
annual cost saving will also improve profitability in the future.
Management has provided a valuation allowance related to net
operating loss carryforwards, which are not expected to be
realized in a one-year period. The amount of the net deferred
tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the
carryforward period are reduced.
For 1997, income (loss) from continuing operations decreased
$2,146,000 from income of $1,260,000 for year ended June 30, 1996
to a loss of $887,000 for year ended June 30, 1997. In addition
to the unusual charges of $463,000 incurred in the current year
mentioned above, the Company charged to current year's earnings a
one-time prepayment penalty fee to its previous lender of
$365,000.
On April 25, 1997 pursuant to the acquisition agreement, the
Company completed the unwind of the Pnu-Light transaction. The
Company received all 368,483 shares of its stock, which were
issued as consideration for the purchase of the assets of Pnu-
Light. Losses sustained by Pnu-Light are reported as
discontinued operations and amounted to approximately $295,000
and $54,000 net of related tax benefits of $149,000 and $20,000
for 1997 and 1996 respectively.
On June 12, 1997, the Company completed the sale of certain
assets of its dental clinic management (DCM) operation In
California. Losses sustained by DCM are presented as
discontinued operations and amounted to approximately $401,000
and $32,000 net of related income tax benefits of approximately
$265,000 and $14,000 in 1997 and 1996. The Company retained
ownership of the accounts receivable of the dental clinic
management operation. The Company expects to receive with
assistance from the purchaser, net proceeds of approximately $1.8
million from the collection of those receivables over the next 12
to 24 months. If the allowance for doubtful accounts is not
adequate to realize the net amount of the DCM receivables,
additional losses from discontinued operations could occur in
future years.
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, 1997 remains strong with working capital on
that date of $6,938,000 compared with $5,309,000 at June 30,
1996. Cash and cash equivalents totaled $851,000 at June 30,
1997 compared to $407,722 at June 30, 1996. Net cash used in
operations was $986,000 for the year ended June 30, 1997. The
Company provided $1,042,000 in cash from operations for the year
ended June 30, 1996. Included in operating expenses are non-cash
items for amortization of goodwill and patents totaling $901,000
in 1997 and $712,000 in 1996. Although these expenses are
included in the calculation of net income (loss), they do not
represent a current use of cash.
The Company's principal source of liquidity during year
ended June 30, 1997 was cash on hand and a net increase in long
term borrowings of approximately $4,000,000. During year ended
June 30, 1996 the Company's principal source of liquidity was
provided from cash on hand and a net increase in both short and
long term borrowings of $3,611,000.
On July 26, 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 five-year
amortization period, and a $4,000,000 revolving line of credit
with a termination date on July 24, 1999. Both facilities
require monthly interest payments at the prime rate or at a
variable interest rate from 1.5% to 2% above LIBOR. The term
loan portion is payable in equal quarterly installments of
$200,000 through July 24, 2001, when the full amount of the then
unpaid balance of the note will be due. The term loan had an
outstanding balance on June 30, 1997 of $5,200,000. The revolver
portion of the facility had an outstanding balance at June 30,997
of $3,100,000. At June 30, 1997 $900,000 remained available
under the revolver/term agreement. As a condition of the credit
facilities, the Company is required to meet certain financial
covenants including minimum tangible net worth, debt to total
capitalization, interest coverage, fixed charge coverage, and
cash flow. In addition, the credit facility limits the amount of
dividends and capital expenditures in any one year. At June 30,
1997 the Company did not meet most of the financial covenants;
however, on September 26, 1997 the bank waived the current
covenants and amended the agreement such that management believes
the Company will be in compliance in the future.
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 1998. Capital expenditures for
the Company's operations for the year ended June 30, 1998 are
presently anticipated to be approximately $850,000.
Years Ended June 30, 1996 and 1997
- ----------------------------------
Net cash used by operating activities in 1997 was $986,000
compared to net cash provided from operating activities of
$1,042,000 in 1996. Increases in refundable income taxes of
$580,000, and decreases in accounts payable of $511,000 reduced
net cash in 1997. Net cash was reduced by increases in accounts
receivable of $1,535,000 in 1996.
Net cash used in investing activities was $490,000 and
$4,674,000 in 1997 and 1996 respectively. In 1996 cash used in
investing activities related primarily to the acquisition of new
subsidiaries. Net cash used in 1997 related primarily to the
acquisition of equipment.
Net cash provided by financing activities was $1,920,000 and
$3,655,000 in 1997 and 1996. Net cash from financing activities
was primarily provided by long term borrowings in both years.
Accounting Changes
- ------------------
Effective for annual and interim periods ending after
December 15, 1997, the Financial Accounting Standards Board
(FASB) has issued Statement No. 128, "Earnings Per Share", which
supercedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants
and convertible securities outstanding that trade in a public
market. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts.
Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per common
share from continuing operations. The adoption of Statement No.
128 would have no effect on 1997 reported (loss) per share.
The FASB has also issued Statement No. 131 "Disclosure about
Segments of an Enterprise and Related Information". Statement
No. 131 modifies the disclosure requirements for reportable
segments and is effective for the Company's year ending June 30,
1999. The Company has not determined the effect the adoption of
this Statement would have on the Company's reported segments.
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 in 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 limited by market
conditions, including international competition in many of the
Company's markets.
Other Matters
- -------------
Presently the Company's information technology systems are
inadequate to handle year 2000 requirements. Management is
reviewing recommendations to upgrade the Company's and each
subsidiary's entire information technology system. Many of the
software applications at each subsidiary will be improved and
made to comply with the year 2000 requirements. The operating
plan for fiscal year ended June 30, 1998 includes the estimated
cost to accomplish the improvements to the Company's information
technology capabilities.
Item 7. Financial Statements and Supplemental Data
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholder's Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
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,
1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended June 30,
1997 and 1996. These financial statements are the responsibility
of the Company's Management. Our responsibility is to express
opinion on these financial statements based on our audits.
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, 1997, and the results of
their operations and their cash flows for the years ended June
30, 1997 and 1996, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, L.L.P.
Anaheim, California
August 15, 1997, except for paragraph (a) of Note 3
As to which the date is September 26, 1997
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 851,108
Accounts receivable, net 3,496,479
Inventories, net 4,236,069
Deferred taxes 475,000
Refundable income taxes 645,613
Prepaid expenses 186,987
-------------
Total current assets 9,891,256
-------------
Property and equipment:
Land 102,992
Buildings 310,005
Equipment 3,476,274
Leasehold improvements 499,619
------------
Total property and equipment 4,388,890
Less accumulated depreciation (1,721,838)
-------------
Net property and equipment 2,667,052
-------------
Deferred taxes 505,000
Other 383,586
Intangibles, net 9,651,695
-------------
Total other assets 11,620,238
-------------
Total assets $ 24,178,546
=============
See "Notes to Consolidated Financial Statements." F-2
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
June 30, 1997
LIABILITIES & SHAREHOLDERS'EQUITY
Current liabilities:
Current portion of long-term debt $ 1,211,999
Accounts payable 797,071
Accrued expenses 973,705
-------------
Total current liabilities 2,982,775
Long-term debt, net of current portion 8,444,545
-------------
Total liabilities 11,427,320
-------------
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred shares, no
par value; 10,000,000 shares authorized;
78,129 shares issued and outstanding 282,990
Common shares, no par value; 50,000,000
shares authorized; 8,712,300 shares
issued and outstanding 14,632,445
Additional paid in capital 10,000
Accumulated deficit (2,115,095)
-------------
12,810,340
Receivable from employee stockownership
plan (ESOP) (59,114)
-------------
Total shareholders' equity 12,751,226
-------------
Total liabilities and shareholders' equity $ 24,178,546
=============
See "Notes to Consolidated Financial Statements." F-3
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending June 30, 1997 and 1996
1997 1996
---- ----
Net sales $ 19,196,835 $ 20,571,075
Cost of sales 8,161,662 8,508,845
------------- -------------
Gross profits 11,035,173 12,062,230
------------- -------------
Operating expenses:
Selling 4,025,611 3,719,329
General and administrative 4,463,217 4,123,454
Research and development 1,092,455 913,875
Amortization 900,723 712,277
Unusual charges 463,000
------------- -------------
Total operating expenses 10,945,006 9,468,935
------------- -------------
Income from operations 90,167 2,593,295
------------- -------------
Other income (expense):
Interest income 56,166 33,367
Interest expense (1997 includes
prepayment penalty of $364,526) (1,277,138) (1,021,032)
Other (7,542) 12,299
------------- -------------
Total (1,228,514) (975,366)
Income (loss) before income taxes
(credits) and loss from
discontinued operations (1,138,347) 1,617,929
Income taxes (credits) (251,643) 358,278
------------- -------------
Income(loss) before loss from
discontinued operations (886,704) 1,259,651
(Loss) from discontinued operations
(net of tax benefit) (696,041) (85,121)
------------- -------------
Net income (loss) $ (1,582,745) $ 1,174,530
============= =============
Earnings (1oss) per common
and common equivalent share:
Income (loss) from continuing
operations $ (0.10) $ 0.14
(Loss) from discontinued
operations (0.08) (0.01)
------------- -------------
Net income (loss) per share $ (0.18) $ 0.13
============= =============
Weighted average number of common
and common shares outstanding shares 9,010,115 8,921,688
See "Notes to Consolidated Financial Statements." F-4
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ending June 30, 1997 and 1996
Preferred Shares Common Shares
---------------- ---------------------
Number Number
of of
Shares Amount Shares Amount
------ --------- --------- -----------
Balances, June 30, 1995 78,129 $ 282,990 5,281,300 $ 5,347,445
Issuance of common shares
for purchase of
Micro Motors, Inc. 3,350,000 9,212,500
Exercise of common
share warrants 26,000 65,000
Issuance of common shares
for purchase of Pnu-
Light Tool Works, Inc. 368,468 2,072,715
Advance to ESOP
Net income
------ --------- --------- -----------
Balances, June 30, 1996 78,129 $ 282,990 9,025,783 $16,697,660
Rescission of Pnu-Light
acquisition (368,483) (2,072,715)
Exercise of stock options 55,000 7,500
Advance to ESOP
Net (loss)
------ --------- --------- -----------
Balances June 30, 1997 78,129 $ 282,990 8,712,300 $14,632,445
====== ========= ========= ===========
See "Notes to Consolidated Financial Statements." F-5
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ending June 30, 1997 and 1996
(Continued)
Addi-
tional
Paid-in Accumulated
Capital Deficit ESOP TOTAL
--------- ------------ --------- -----------
Balances, June 30, 1995 $ 10,000 $(1,706,880) $ 3,933,555
Issuance of common shares
for purchase of
Micro Motors, Inc. 9,212,500
Exercise of common
share warrants 65,000
Issuance of common shares
for purchase of Pnu-
Light Tool Works, Inc. 994,541 3,067,256
Advance to ESOP $(21,300) (21,300)
Net income 1,174,530 1,174,530
---------- ------------ --------- ------------
Balances, June 30, 1996 $1,004,541 $ (532,350) $(21,300) $17,431,541
Rescission of Pnu-Light (994,541) (3,067,256)
acquisition
Exercise of stock options 7,500
Advance to ESOP (37,814) (37,814)
Net (loss) (1,582,745) (1,582,745)
---------- ------------ --------- ------------
Balances, June 30, 1997 $ 10,000 $(2,115,095) $(59,114) $12,751,226
========== ============ ========= ============
See "Notes to Consolidated Financial Statements." F-5
(Continued)
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending June 30, 1997 and 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,582,745) $ 1,174,530
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,499,305 1,338,165
Provision for doubtful accounts 627,333 204,643
(Gain) on sale of property and
equipment (46,116)
Loss on disposition of business 7,512
Deferred taxes (194,700) (233,600)
Change in working capital components
net of effects of purchases and
divestitures:
(Increase) in accounts receivable (108,427) (1,535,396)
(Increase) decrease in inventories 182,836 (721,386)
(Increase) decrease in prepaid
expenses and refundable
income taxes (579,940) 381,604
Decrease in other assets 111,790 30,003
Decrease in accounts payable and
accrued expense (511,431) (140,900)
Increase in deferred revenu 14,964 53,411
Increase (decrease) in income
taxes payable (452,757) 536,943
Net cash provided by (used in) ------------ ------------
operating activities (986,260) 1,041,901
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition/divestiture of businesses 707 (4,326,309)
Proceeds from sale of equipment 7,500
Purchase of property and equipmen (490,778) (355,417)
Net cash flows (used in) investing ------------ ------------
activities (490,071) (4,674,226)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on revolving credit (1,848,392) 769,279
agreements
Proceeds from long-term borrowing 8,544,400 4,022,887
Principal payments on long term
borrowing (4,490,977) (1,180,787)
Loan origination fees (255,000)
Issuance of common stock 7,500 65,000
Advances to ESOP (37,814) (21,300)
------------ ------------
Net cash flows provided by financing
activities 1,919,717 3,655,079
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 443,386 22,754
Cash and cash equivalents,
beginning period 407,722 384,968
Cash and cash equivalents, ------------ ------------
end of period $ 851,108 $ 407,722
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash payments for interest $ 1,232,982 $ 1,053,447
Cash payments for income taxes 620,061 109,350
See "Notes to Consolidated Financial Statements." F-6
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Business
- ------------------
Pro-Dex, Inc. (the Company) is the parent of four operating
subsidiaries, Biotrol International, Inc. (Biotrol), Challenge
Products, Inc. (Challenge), Micro Motors, Inc. (Micro), and
Oregon Micro Systems, Inc. (OMS). 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.
The Company extends credit to its customers, all on an unsecured
basis, on terms that it establishes for individual customers.
Customers are located predominately in the United States. Many
of the Company's products are regulated by a number of state and
federal regulatory bodies, including the Environmental Protection
Agency ("EPA") and the Food and Drug Administration ("FDA").
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, there
exists an ongoing risk that one or more of its activities may at
some point be determined to be non-compliant. Notwithstanding
the risks inherent in the Company's business sectors, management
believes that each of the Company's subsidiaries enjoys a good
reputation for compliance with applicable regulations.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All significant inter-
company accounts and transactions have been eliminated.
Revenue Recognition
- -------------------
Revenue on product sales is recognized upon shipment to the
customer. The Company sells some of its products with a warranty
that provides for repairs or replacement of any defective parts
for a period after the sale. At the time of the sale, the
Company accrues an estimate of the cost of providing the warranty
based on prior experience.
Cash and Cash Equivalents
- -------------------------
The Company considers highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
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 $ 709,528
Work in process 352,367
Finished goods 3,265,174
-----------
Total 4,327,069
Reserve for slow moving inventories 91,000
-----------
Total inventories, net $ 4,236,069
===========
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,
equipment-- 3 - 10 years; leasehold improvements 7 years.
Leasehold improvements are depreciated over the shorter of the
term of the lease or their estimated useful lives.
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
$1,613,000.
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.
Advertising
- -----------
The Company expenses the cost of advertising the first time the
advertising takes place. No amounts are included in the
Company's balance sheet for deferred advertising costs. The
Company incurred advertising expenses of approximately $500,000
and $581,000 in 1997 and 1996, respectively.
Reclassifications
- -----------------
Certain items in the June 30, 1996 financial statements have been
reclassified to be comparable with the financial statement
classifications for the year ending June 30, 1997. These
reclassifications have no effect on shareholders' equity or net
income as of and for the year ending June 30, 1996.
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 than not
that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of
enactment.
Use of Estimates
- ----------------
The preparation of financial statements 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.
Earnings Per Share
- ------------------
Earnings per share are 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.
Fully dilutive earnings per share have not been presented, as
there is no effect on earnings per share.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standard Board (FASB) has issued
Statement No. 128, "Earnings Per Share", which supersedes APB
Opinion No. 15. Statement No. 128 requires the presentation of
earnings per share by all entities that have common stock or
potential common stock, such as options, warrants and convertible
securities outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to
present basic earnings per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce
a loss or increase the income per common share from continuing
operations. All entities required to present per share amounts
must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is
not permitted. The adoption of Statement No. 128 would have no
effect on 1997 reported (loss) per share.
The FASB has also issued Statement No. 131 "Disclosure about
Segments of an Enterprise and Related Information". Statement
No. 131 modifies the disclosure requirements for reportable
segments and is effective for the Company's year ending June 30,
1999. The Company has not determined the effect of the adoption
of this Statement would have on the Company's reported segments.
Fair Value of Financial Instruments
- -----------------------------------
The method and assumptions used to estimate the fair value of
long-term debt, 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.
The fair value of trade accounts receivable and accounts payable
approximate carrying value.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable includes amounts due for dental services
rendered to patients under an extended term payment arrangement
totaling $2,429,627. General dentistry billings may be paid over
ten monthly installments and billings for orthodontic services
are paid over a twenty-four month installment arrangement. These
receivables were generated by the Company's Dental Clinic
Management (DCM) operation. In June 1997, the Company sold this
operation to PDM and no longer provides this service (Note 9).
It is estimated that the Company will collect $900,000 of the DCM
accounts receivable within the next 12 months. The balance is
included in long-term trade accounts receivable. Accounts
receivable are stated net of an allowance of $707,702.
Management has estimated their reserve based on current
information available. However, future changes in payment
trends, the economy or other factors could effect the amount of
the required reserve.
NOTE 3 - LONG-TERM DEBT
Following is a summary of long-term debt:
Revolving/term loan from bank (a) $ 8,300,000
Secured note bearing interest at 11%, maturing
August, 2000, payable at $14,728 per month (b) 454,298
Secured note to former owner of acquired business
bearing interest at 12.25%, maturing $40,000
quarterly, including interest to October, 2000 417,195
Loan secured by certain equipment bearing
interest at 9.1%, maturing $7,096 monthly,
including interest to May 30, 1999 149,495
Mortgage payable secured by land and building,
bearing interest at 2% over prime, maturing
$1,967 monthly due November 12, 1997. This note
is normally renewed for successive one-year terms. 181,289
Other secured notes at various interest
rates and various maturities. 154,267
-----------
Total 9,656,544
Less current portion 1,211,999
-----------
Total long-term debt $ 8,444,545
===========
(a) The Company has 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 five-year
amortization period, and a $4,000,000 revolving line of
credit with a termination date on July 24, 1999. Both
facilities require monthly interest payments at the prime
rate or at a variable interest rate from 1.5% to 2% above
LIBOR. The term loan portion is payable in equal quarterly
installments of $200,000 through July 24, 2001, when the
full amount of the then unpaid balance of the note will be
due. The term loan had an outstanding balance on June 30,
1997 of $5,200,000. The revolver portion of the facility
had an outstanding balance at June 30, 1997 of $3,100,000.
At June 30, 1997, $900,000 remained available under the
revolver/term loan. The Company is required to meet certain
financial covenants including minimum tangible net worth,
debt to total capitalization, interest coverage, fixed
charge coverage, and cash flow. In addition, the credit
facility limits the amount of dividends and capital
expenditures in any one year. At June 30, 1997, the Company
did not meet most of the financial covenants; however,
on September 26, 1997, the bank waived the current covenants
and amended the agreement such that management believes the
Company will be in compliance in the future.
(b) These amounts are due to the former owner of Micro Motors
and the Company's largest shareholder and are subordinated
to the bank debt discussed above.
Aggregate maturities on long-term debt for the next five
years is as follows: 1998, $1,211,999; 1999, $3,612,706;
2000, $1,148,781; and 2001, $3,683,058.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Micro Motors leases office and warehouse facilities from the
Company's largest shareholder. The Company and its subsidiaries
also lease other office and warehouse facilities from unrelated
parties under lease agreements expiring from February 1999
through March 2001. These leases generally require the Company
to pay insurance, taxes, and other expenses related to the leased
space. Total rent expense was $902,187 and $810,763 including
approximately $335,000 paid to the Company's largest shareholder
for the years ended June 30, 1997 and 1996. Future minimum lease
payments for the years ending June 30, amount to 1998, $879,006;
1999, $872,971; 2000, $355,867; 2001, $261,281; total of
$2,369,125, including $1,306,066 to the Company's largest
shareholder. The Company subleases the dental centers occupied
by DCM under lease agreements expiring at various dates until
March 1999 (Note 9). Future minimum sublease receipts for the
years ending June 30 amount to 1998, $327,504, and for 1999,
$327,504.
On July 9, 1997, Cottrell Ltd., Englewood, Colorado ("Cottrell")
filed a civil action in the U.S. District Court for the
District of Colorado against Biotrol International, Inc.
("Biotrol"), a wholly owned subsidiary of the Company and the
Company. The complaint demands that Biotrol (and the Company)
stop advertising and selling hard surface cleaners and
disinfectants under labels Cottrell alleges contain exaggerated
claims. The complaint seeks compensation for lost profits and
other compensation in an amount to be determined at trial.
Both Biotrol and Cottrell sell cleaning solutions to dental
dealers. The products are used to disinfect countertops and
other hard surfaces in dental offices. The U.S. Environmental
Protection Agency ("EPA") regulates such products and reviews
advertising and labeling claims made about the products by
manufacturers. The thrust of the action involves a Biotrol
product identified as "BirexSE". Cottrell's complaint alleges
that, according to EPA standards, Birexse should be used the same
day it is mixed. Cottrell makes a competing product that must be
used the same day it is mixed, according to its label. It is the
Company's position that "BirexSE" labeling is consistent with
that approved by the EPA.
The Company's management is currently investigating the
claims and intends to vigorously defend against the action.
Based on the Company's current understanding of the relevant
facts and law, management does not expect that the outcome of
these legal proceedings will have a material adverse effect on
the consolidated financial condition, operating results, or
liquidity of the Company.
NOTE 5 - INCOME TAXES
The provision for income taxes (credits) for the years ended June
30, 1997 and 1996 is as follows:
1997 1996
---- ----
Current federal taxes (credits) $ (160,943) $ 471,878
Current state taxes (credits) (70,000) 120,000
Deferred taxes (20,700) (233,600)
----------- ----------
$ (251,643) $ 358,278
=========== ===========
A reconciliation of expected tax expense (credit) to the amount
computed by applying the federal statutory income tax rates to
income (loss) before income taxes (credits) and net loss from
discontinued operations is as follows:
1997 1996
---- ----
Federal income taxes (credits)
computed at the statutory rate $ (399,000) $ 566,100
Change in valuation allowance 55,000 (432,000)
State income taxes (credits) (70,000) 120,000
Non-deductible items,
primarily amortization of goodwill 149,000 139,000
Other 13,357 (34,822)
----------- -----------
$ (251,643) $ 358,278
=========== ===========
Deferred income tax assets and liabilities in the accompanying
balance sheet at June 30, 1997 consist of the following:
1997
----
Assets:
Net operating loss carryforwards $ 296,000
Contract payable 248,000
Accrued expenses 128,000
Accounts receivable 306,000
Intangible assets 68,000
Inventories 171,000
Other 48,000
-----------
Total deferred tax assets 1,265,000
Valuation allowance (285,000)
-----------
Net deferred tax assets $ 980,000
===========
Net deferred tax assets of $475,000 are included in the
accompanying balance sheet as current assets. The remaining
deferred tax assets of $505,000 are included in the accompanying
balance sheet as long term assets.
A portion of these deferred tax assets reflects the benefit of a
$875,000 tax loss carryforward, which expires $620,000 in 2003
and $255,000 in 2004. Utilization of these loss carryforwards is
limited under income tax rules to $480,000 in 1998 and $280,000
per year thereafter. Realization of deferred tax assets is
dependent on generating sufficient taxable income (approximately
$2.5 million) prior to the expiration of the loss carryforwards.
Although realization is not assured, management believes it is
more likely than not that the net deferred tax assets will be
realized for the following reasons. During 1997, the Company
incurred losses from discontinued operations of $696,000 (net of
tax benefit). As discussed in Note 9, these operations have been
eliminated. In addition, the Company also incurred approximately
$827,000 in one-time charges to operations for severance benefits
paid to terminated employees, prepayment fees to its previous
lender and other unusual charges. As part of this restructuring,
management estimates that the reduction of its employee workforce
resulting in an anticipated $900,000 annual cost saving will also
improve profitability in the future. Management has provided a
valuation reserve of $285,000 related to the net operating loss
carryforwards, which are not expected to be realized within a one
- -year period. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period
are reduced.
NOTE 6 - STOCK OPTIONS AND WARRANTS
The Board of Directors and the shareholders 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. There are 1,159,196 shares
remaining in the option plans, which are available for grant in
future years. In addition, the Company has issued warrants to
acquire 113,000 shares, exercisable at an average price of $2.17
and expiring on July 26, 2005.
Transactions involving the stock options are summarized as
follows:
1997 1996
-------------- --------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
------------- ------ ----- ------ -----
Outstanding at beginning
of year 1,366,996 $2.22 435,876 $1.93
Granted 20,000 3.93 (a)931,120 2.36
Exercised (55,000) .14
Forfeited (442,560) 2.50
---------- ----- ---------- -----
Outstanding at end of year 889,436 $2.19 1,366,996 $2.22
========== ===== ========== =====
Exercisable at end of year 889,436 $2.19 1,366,996 $2.22
Weighted average fair
value per per option
granted during the year $1.81 $1.04
(a) Includes 591,190 options granted to owners of Micro options.
A further summary about fixed options outstanding June 30, 1997,
is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Average
Exercise Out- Contract- Exercise Number Exercise
Price standing ual Life Price Exercisable Price
- ------------- -------- --------- -------- ----------- --------
$ .25 25,000 6.5 years $ .25 25,000 $ .25
$1.75 - $2.50 842,682 8 years 2.20 842,682 2.20
$2.85 - $3.93 21,754 9 years 3.84 21,754 3.84
-------- --------- -------- ----------- --------
889,436 $2.19 889,436 $2.19
======== ========= ======== =========== ========
The three option plans are substantially similar and call for the
vesting as approved by the Board of Directors (usually upon
grant), and allow for the options to be outstanding for a period
of ten years.
Grants under the Company's stock option plans are accounted for
following APB Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recognized for grants
under the plan. Had compensation cost for the stock-base
compensation plans been determined based on the grant date fair
values of awards (the method described in FASB Statement No.
123), reported net income (loss) and earnings (loss) per common
share would have been adjusted to the proforma amount shown
below:
1997 1996
---- ----
Net income (loss)
As reported $ 1,582,745 $ 1,174,530
Pro forma (1,605,166) 963,518
Net income (loss) per common
and common equivalent share
As reported $ (0.18) $ 0.13
Pro forma (0.18) 0.11
The fair value of each grant is estimated at the grant date using
the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1997,
respectively: no dividend rate for all years; price volatility of
31% in 1996 and 43% in 1997; risk-free interest rates of
approximately 5.9% in 1996 and 6.8% in 1997; and expected lives
of five years.
NOTE 7 - PREFERRED SHARES
Holders of Series A preferred shares have no voting, dividend, or
redemption rights. In the event of liquidation or dissolution,
preferred shareholders are entitled to receive $3.60 per share.
Each preferred share is convertible into one common share at the
option of the holder.
NOTE 8 - 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 years ended June 30, 1997 and 1996 the Company
contributed $35,156 and $36,232, respectively, as a matching
contribution to the 401(k) plan.
In 1973, Micro established an Employee Stock Ownership Plan
(ESOP), who's shares of stock in Micro, upon acquisition of Micro
by the Company, were converted to restricted Company shares of
common stock. At June 30, 1997, this restriction had lapsed.
For the years ended June 30, 1997 and 1996, the Company did not
make any contributions to the ESOP. During the years ended June
30, 1997 and 1996, the Company advanced funds to the ESOP
totaling $37,800 and $21,300, respectively, in order for it to
purchase stock from Plan participants.
NOTE 9 - BUSINESS ACQUISITIONS, DIVESTITURES, AND DISCONTINUED
OPERATIONS
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 $2,693,000. 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 $283,000 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., (Pnu-Light) a
developer of pneumatic light mechanisms for hand tools, for
common stock. The purchase agreement called 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 with a minimum value assigned to the net assets
purchased of $4,000,000, subject to certain adjustments. The
agreement also provided that if the computed value based on the
prescribed formula does not exceed $4,000,000, the Company had
the option to rescind the transaction. The Company issued
368,483 shares of stock at acquisition and 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 was being
amortized over a 15-year period by the straight-line method.
On April 25, 1997, consistent with the decision of its Board of
Directors as announced on February 12, 1997, the Company
completed the rescission of the Pnu-Light transaction. In
accordance with the agreement, the Company received all 368,483
shares of the Company's stock, which were issued as consideration
for the purchase of the assets. Losses sustained by Pnu-Light
are reported as discontinued operations and amounted to
approximately $295,000 and $54,000, net of related tax benefits
of $149,000 and $20,000 for 1997 and 1996 respectively. Revenues
generated by this subsidiary in 1997 and 1996 were immaterial.
On June 12, 1997, the Company completed the sale of its Dental
Clinic Management (DCM) operation in California. In exchange for
inventory and property and equipment the purchaser assumed
approximately $670,000 of the Company's liabilities. In
addition, with assistance of the purchaser, the Company expects
to receive the net proceeds from the collection of approximately
1.8 million in existing net accounts receivable over the next 24
months. Revenues of DCM were approximately $1,986,000 and
$2,420,000 in 1997 and 1996. Operating expenses were
approximately $2,652,000 and $2,466,000 in 1997 and 1996. These
amounts are presented as losses from discontinued operations in
the statement of operations and are reported net of applicable
income tax benefits of approximately $265,000 and $14,000 in 1997
and 1996. At June 30, 1997 no assets of the discontinued
operations remain other that the DCM accounts receivable
discussed above.
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.
Additional information regarding cash flows from these
acquisitions is as follows:
Micro Motors OMS Pnu-Light Total
------------ --- --------- -----
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) (226,197) (2,297,512)
Issuance of common (9,212,500) (3,067,256) (12,279,756)
stock
------------ ----------- ------------ -------------
$ 39,066 $4,292,471 $ (5,228) $ 4,326,309
============ =========== ============ =============
Additional information regarding cash flows from these
dispositions is as follows:
Pnu-light DCM Total
---------- --- -----
Working capital disposed
of net of cash and
cash equivalens $ 83,509 $ (228,658) $ (145,149)
Long Term assets 3,040,229 491,667 3,531,896
Debt assumed (57,533) (261,251) (318,784)
Common stock returned (3,067,256) (3,067,256)
------------- ----------- ------------
Net $ (1,051) $ 1,758 $ $707
============= =========== ============
NOTE 10- SEGMENT INFORMATION
A summary of information about the Company's continuing
operations by segment follows:
Fiscal years ended June 30,
1997 1996
---- ----
Revenues
Infection control products $ 4,421,658 $ 4,205,175
Preventive dentistry products 2,495,754 2,193,608
Medical/dental equipment 8,106,314 9,395,593
Circuit boards 4,836,770 5,312,648
(Inter-company sales) (663,661) (535,949)
------------ -------------
$ 19,196,835 $ 20,571,075
============ =============
Income (loss) from operations
Infection control products $ 100,517 $ 267,538
Preventative dentistry products (126,380) 15,713
Medical/dental equipment (a) (1,154,795) 257,424
Circuit boards 1,270,825 2,052,620
------------- -------------
$ 90,167 $ 2,593,295
============= =============
Assets
Infection control products $ 1,284,860 $ 1,232,735
Preventative dentistry products 1,469,103 1,257,435
Medical/dental equipment 12,856,927 14,299,363
Circuit boards 4,575,612 5,213,700
Pro-Dex Corporate 3,992,044 6,324,255
------------- -------------
$ 24,178,546 $ 28,327,488
============= =============
Depreciation and amortization
Infection control products $ 56,886 $ 46,710
Preventative dentistry products 114,014 107,040
Medical/dental equipment 739,348 722,154
Circuit boards 570,861 373,783
Pro-Dex Corporate 4,146 16,158
------------- -------------
$ 1,485,255 $ 1,265,845
============= =============
Capital Expenditures
Infection control products $ 62,810 $ 51,832
Preventative dentistry product 103,807 35,087
Medical/dental equipment 49,273 134,362
Circuit boards 133,354 54,937
Pro-Dex Corporate 8,355 9,591
------------- -------------
$ 357,599 $ 285,809
============= =============
The Company had foreign sales in the amount of $816,062 in 1997
and $807,015 in 1996.
(a) Includes non-recurring unusual charges of $463,000.
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.
McGladrey & Pullen, L.L.P. served as the Company's
independent certifying accountants for the years ended June 30,
1997 and June 30, 1996. The reports of McGladrey & Pullen,
L.L.P. contained no adverse opinion or disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope, or
accounting principals. During the Company's two most recent
years there were no disagreements with accountants on any matter
of accounting principles or practices, financial statement
disclosure, or audit scope or procedure. The Company's Form
10KSB and the financial statements set forth therein is
incorporated herein by reference and delivered to the
shareholders herewith. McGladrey & Pullen, L.L.P. expects to be
present at the Meeting, will have an opportunity to make a
statement if they so desire, and are expected to be available to
respond to appropriate questions.
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, 1998, and that firm has
consented to so serve.
PART III
Item 9. Directors, Executive Officers and Control Persons;
Compliance with Securities Exchange Act of 1934
Officers and Directors
- ----------------------
As of June 30, 1997, the officers and directors of the
Company were as follows:
NAME AGE POSITION
---- --- --------
Kent E. Searl 56 Chairman of the Board, Director
Ronald G. Coss 60 Vice Chairman, Director
George J. Isaac 52 Vice President, Director
Richard N. Reinhardt 65 Director
Robert A. Hovee 55 Director
John B. Zaepfel 61 Director
Kent E. Searl is a co-founder of the Company and currently
serves as Chairman of the Board, Chief Executive Officer, and
Acting President. 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 acted as marketing
representative for dental handpiece products of the Micro Motors,
Inc. subsidiary until June 30, 1997, at which time Biotrol
International, Inc. began marketing those products. 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. He currently serves as the Vice-
Chairman of the Company's Board of Directors, and also serves as
an ex officio non-voting member of the Audit Committee of the
Board of 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.
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 recently completed terms as a member of the
Board of Directors for the Commerce Bank and Trust of Worcester,
MA, and 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, 2000 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 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 in
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, 2000 or the election and qualification of his
successor.
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. 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, 2000 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:
Daniel S. Reinhardt joined Biotrol International, Inc. as a
sales representative in September 1988. He was promoted to
National Sales Manager in January of 1991, and, effective January
1, 1997, Mr. Reinhardt was made Vice President and Chief
Operating Officer of Biotrol International, Inc.
Charles L. 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 its acquisition 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
recently resigned as 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.
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.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Secur- All
Other Re- ities Other
Annual strict- Under- Com-
Compen- ed lying LTIP pen-
Name and sation Stock Options/ Pay- sation
Principal Position Year Salary Bonus (1) Awards SA outs (6)
- ------------------ ---- -------- ----- ---- ------ -------- ---- ------
Kent E. Searl 1997 $160,000 - - - None - -
Chairman and Chief 1996 150,000 - - - 100,000(3) - -
Executive 1995 0.00 - - - 50,000 - -
Office(2)
Ronald G. Coss 1997 $364,320 - - - None - -
Vice Chairman(4) 1996 360,000 - - - None - -
1995 N/A - - - N/A - -
George J. Isaac 1997 $180,000 - - - None - -
Vice President, 1996 170,000 - - - 200,000(3) - -
Chief Financial 1995 N/A - - - 50,000 - -
Officer, Secretary-
Treasurer,
Director(5)
Dr. M. Larry Kyle 1997 $90,390 - - - None - -
President of DCM 1996 114,000 - - - None - -
Subsidiary 1995 114,672 - - - 50,000 - -
Charles E.Strait(7)1997 $185,000 - - - None - -
1996 175,000 - - - None - -
1995 N/A - - - N/A - -
Charles L. Bull 1997 $113,276 - - - None - -
1996 110,000 - - - None - -
1995 100,000 - - - None - -
Gary Garleb 1997 $111,435 - - - None - -
1996 101,826 - - - 98,505(8) - -
1995 98,568 - - - None - -
(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 year ended June 30, 1995. 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 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 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 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. Isaac received no compensation from the Company prior to
the fiscal yea r 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.
(6) Employer contributions to the Pro-Dex, Inc. 401(k) Plan.
(7) Mr. Strait received no compensation from the Company prior
to the fiscal year ending June 30, 1996, as he was not then
employed by the Company and did not serve on its Board of
Directors. On January 22, 1997, Mr. Strait resigned his
position as President of the Company, and as a member of
the Board of Directors for health reasons. Management has
decided to continue Mr. Strait's salary until a deter-
mination has been made on his pending disability claim with
his disability insurance carrier.
(8) Mr. Garleb received no compensation from the Company prior
to the year ending June 30, 1996, as he was not employed by
the Company. The options set forth in this chart were
converted from the Micro options granted in July, 1994 to
options to acquire 98,505 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.
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
$964,153 for all its officers and directors for the year ending
June 30, 1997.
Ronald G. Coss currently serves as Vice Chairman of the
Company. Mr. Coss had, prior to the merger of Micro Motors, Inc.
with Pro-Dex, Inc., 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. Annual base
compensation to Mr. Coss under the employment agreement is
$360,000 and is adjustable upward for inflation each July 1 of
the five year term of his employment agreement, for which, for
the year ending June 30, 1997, compensation owed Mr. Coss was
$364,320, not including other benefits, payments or compensation.
However, due to poor operating performance, in February 1997
certain management employees, to include Mr. Coss, agreed to a
temporary reduction in base salary which reduction is reflected
by his actual salary of $352,320 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. 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, 1997 and has indicated that he is unable to forecast his
leave for the year ending June 30, 1998.
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 located 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 was to be $160,000 per
annum through June 30, 1997, however, due to poor operating
performance, Mr. Searl deferred his contract right to the
increase in his compensation and further agreed to a temporary
base salary reduction. Compensation due Mr. Searl for the
remaining year of the three year term of his employment agreement
is $170,000 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. Pursuant to that
agreement, Mr. Strait's salary as the Company's President and
Chief Operating Officer for the year ending June 30 1997 was
$184,333. That employment agreement also provides that, upon a
determination of disability, the Company is obligated to pay Mr.
Strait for a period of ninety days until his disability insurance
coverage commences. Mr. Strait has made application for such
benefits and a determination of the same is pending.
On July 26, 1995, George J. Isaac began serving as the
Company's Vice President and Chief Financial Officer, and on
September 21, 1995 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. . However, due to poor operating
performance, in February 1997 certain management employees, to
include Mr. Isaac, agreed to a temporary reduction in base salary
which reduction is reflected by his actual compensation of
$171,000 for the year ending 30 June 1997. 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.
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 a base salary of $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.
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 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, 1997, the Board of Directors
determined that experienced outside directors expect to receive
directors' fees and stock options in connection with such
service. To that end, the Board of Directors adopted a proposal
to pay directors' fees for non-employee directors in the amount
of $3,000 per quarter, together with $1,000 for each regular
meeting attended by non-employee directors and $500 for each
committee meeting held on a date other than a regular board
meeting. During the year ended June 30, 1997, $57,000 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
policy to grant each non-employee director an option to purchase
20,000 shares of common stock upon commencement of their service
with an additional option granted automatically each year to
purchase 10,000 shares. The maximum term of such options is ten
years. During the year ended June 30, 1997, Messrs. Reinhardt
and Hovee were each granted options to acquire 10,000 shares of
the Company's common stock, under the Directors' Stock Option
Plan, exercisable at $3.55 share, pursuant to the previously
adopted plan for grant of options. Mr. Zaepfel was granted
options to acquire 20,000 shares of the Company's common stock,
under the Directors' Stock Option Plan, exercisable at $2.44
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, 1997.
OPTIONS GRANTED DURING YEAR ENDED JUNE 30, 1997
Options Exercise Expir- Potential
Granted Price ration Value(1)
Name (#) $/SH) Date ($)
---------- ------- -------- ------- ---------
John B. Zaepfel(2) 20,000 2.44 8-27-06 30,800
(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. Zaepfel was granted the indicated options pursuant
to the Directors' Stock Option Plan.
(3) A disinterested majority of the Board has committed, in
furtherance of the Board's decision respecting the remunera-
tion of non-employee directors, automatic annual grants in
the amount of 10,000 shares, to Messrs. Hovee, and Reinhardt,
at the exercise price of $3.55, effective upon the
resolution of the Board reflecting the foregoing.
The following table provides information on exercise of
stock options during the year ended June 30, 1997 by executives
and directors and value of unexercised options at June 30, 1997:
SHARES ACQUIRED ON EXERCISE OF OPTIONS AND VALUE OF OPTIONS
HELD BY EXECUTIVES AND DIRECTORS
At June 30, 1997
Number
Of Shares Value of
Underlying Unexercised
Unexercise In the Money
Options at Options at
FY-End (#) FY-End (1)
Exer- Value ------------- -------------
cise Real- Exercisable Exercisable/
Name (#) ized Unexercisable Unexercisable
---- ----- ----- ------------- -------------
Kent E. Searl - - 202,051/0 $56,500/0
George J. Isaac - - 250,000/0 $50,000/0
Richard N. Reinhardt - - 123,805/0 $31,500/0
Robert A. Hovee - - 20,000/0 0/0
John B. Zaepfel - - 20,000/0 0/0
(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,
1997.
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, 1997. At June
30, 1997, options to purchase an aggregate of 25,000 shares of
the Company's common stock were outstanding under this Plan. A
former director exercised options to purchase 30,000. Options to
purchase 25,000 shares were exercised by a former consultant to
the company. 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.
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. As of June 30, 1997, there were
outstanding options under the 1994 Stock Option Plan to acquire
548,580 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 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 previously adopted a resolution, which
provides that options to purchase $5,000 share value of common
stock. During the year ended June 30, 1996, the Board of
Directors determined that experienced outside directors expect to
receive more substantial directors' remuneration in the form of
fees and stock options in connection with their service. To that
end, the Board of Directors adopted a proposal to pay directors'
fees for non-employee directors in the amount of $3,000 per
quarter, together with $1,000 for each regular meeting attended
by non-employee directors and $500 for each committee meeting
held on a date other than a regular board meeting. In addition,
in August 1996, the Board adopted a proposal to grant 20,000
shares to non-employee directors upon their commencement of
service on the Board. Mr. Zaepfel was granted options to acquire
20,000 shares of the Company's common stock, under the Directors'
Stock Option Plan, exercisable at $2.44 pursuant to the
previously adopted plan for grant of options. The maximum term
of each option is ten years. As of June 30, 1997, there were
outstanding options under the Directors' Stock Option Plan to
acquire 315,856 shares of the Company's common stock. A
disinterested majority of the Board has committed, in furtherance
of the Board's decision respecting the remuneration of non-
employee directors, automatic annual grants in the amount of
10,000 shares, to Messrs. Hovee, and Reinhardt, at the exercise
price of $3.55, effective upon the resolution of the Board
reflecting the foregoing.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Set forth in the following table is information as of June
30, 1997, 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.
BENEFICIAL SHAREHOLDINGS OF DIRECTORS, OFFICERS AND
OWNERS OF MORE THAN 5% OF COMMON STOCK
Number Percent
Name and Address of Shares of Class(1)
---------------- --------- -----------
Kent E. Searl
1401 Walnut St., Suite 540
Boulder, CO 80302 993,930 (2)(4)(5) 11.03%
Ronald G. Coss
1401 Walnut St., Suite 540
Boulder, CO 80302 2,493,528 (6) 27.68%
Richard N. Reinhardt
1401 Walnut St., Suite 540
Boulder, CO 80302 510,984 (2)(4)(5)(7)(8) 5.78%
George J. Isaac
1401 Walnut St., Suite 540
Boulder, CO 80302 254,000 (4) 2.82%
Robert A. Hovee
1401 Walnut St., Suite 540
Boulder, CO 80302 20,000 (7)(8) 0.13%
John B. Zaepfel
1401 Walnut St., Suite 540
Boulder, CO 80302 20,000 (7) 0.22%
All officers and directors as
a group (6 persons) 3,995,213 (2)(3)(4)(5) 44.34%
(6)(7)(8)(9)
Micro Motors Employee
Stock Ownership Plan
151 E. Columbine
Santa Ana, California 1,075,359 (6) 11.94%
(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 benefi-
cially own PSA's shares. Mr. Searl, individually, owns of
record 410,750 shares of common stock and 19,900 shares of
Preferred Stock. Mr. Reinhardt, individually, owns of record
58,950 shares. In addition, Mr. Reinhardt's spouse, in-
dividually, owns 7,000 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, re-
spectively, of the Company's common 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 benefi-
cial ownership.
(5) Includes 584,377 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, Hovee, and Zaepfel to
acquire 20,000 shares each of the Company's common stock at
$2.44 per share.
(7) Includes options of Messrs. Reinhardt and Hovee to acquire
10,000 shares each of the company's common stock at $3.55
per share.
(8) The officers and directors as a group currently have in the
aggregate, together with their affiliates, voting power with
respect to 2,639,851 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 com-
puting the voting power number in this footnote or in
stating the vote controlled by officers and directors else-
where in this proxy statement, but shares held by the Micro
Motors ESOP for the benefit o f 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.
(9) A disinterested majority of the Board has committed, in
furtherance of the Board's decision respecting the re-
muneration of non-employee directors, automatic annual
grants in the amount of 10,000 shares, to Messrs. Hovee,
and Reinhardt, at the exercise price of $3.55, effective
upon the resolution of the Board reflecting the foregoing.
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
Number Percent
Name and Address 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%
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 $113,276 in compensation
for his services as President of Challenge, in the year ended
June 30, 1997.
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. The Micro Motors
Employee Stock Ownership Plan (the "Micro ESOP") holds 1,075,359
of the shares issued in connection with the acquisition of Micro.
The number of shares owned by the ESOP has been adjusted to
reflect the correct allocation as between the ESOP and remaining
shareholders at the time of the merger. The number of shares
originally allocated to the ESOP was erroneously calculated
and reported as 1,099,805. The ESOP has certain limited demand
registration rights in respect thereof, exercisable from July 26,
1996 through July 26, 1999, 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, 2002. 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 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 and Trust,
N.A.
The Company, prior to July 1, 1997, marketed certain of the
dental equipment manufactured by Micro through PSA, a firm for
which Messrs. Searl, Reinhardt, and Isaac are directors. The
terms and condition of the agreement with PSA were a continuance
of the relationship between PSA and Micro Motors established on
negotiated arms' length basis prior to the merger of Micro Motors
into Micro. Micro Motors, Inc. dental handpieces previously
marketed by PSA are currently being marketed by the Biotrol
International, Inc. subsidiary of the Company, effective July 1,
1997.
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 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 $28,237. 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 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 DCM and a former director of the Company, held
30,000 of such options, all of which were 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 Forms 8-K filed by the Company dated May 11,
1997, June 12, 1997, and August 5, 1997.
(c) See Exhibit Index.
EXHIBIT INDEX
Exhibit Document Page
No. Number
- -------- --------------------------------------------- ------
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).
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).
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).
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.
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.
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<PERIOD-END> JUN-30-1997
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282,990
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