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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-KSB
[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, 1999
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No Fee Required)
Commission File Number 0-14942
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PRO-DEX, INC.
(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
(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 $ 18,342,000.
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 13,
1999 was $ 7,583,716.
The number of shares of the Registrant's no par value common stock
outstanding as of September 13, 1999 was 8,787,300.
DOCUMENTS INCORPORATED BY REFERENCE: Certain Exhibits, as set forth in
the Exhibit Index. Exhibit index begins on sequentially numbered page 39.
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PART I
Item 1. Business
Forward-Looking Statements
When used in this Report on Form 10-KSB, the words "expects,
"anticipates", "estimates", "believes", "hopes", "intends", "forecasts" and
similar expressions are intended to identify forward-looking statements.
These statements which are not historical or current facts are made pursuant
to the safe harbor provisions of Section 27A of the Securities Act and Section
21E of the 1934 Act and the Company intends that such forward-looking
statements be subject to those safe harbor provisions for such statements.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date of this report.
While forward-looking statements represent management's best judgment as to
what may occur in the future, they are subject to risks, uncertainties and
important factors beyond the control of the Company that could cause actual
results and events to differ materially from historical results of operations
and events as well as those presently anticipated or projected. These factors
include adverse economic conditions, entry of new and stronger competitors,
capital availability, unexpected costs and failure to capitalize upon access
to new clientele. Other risks and uncertainties which may affect
forward-looking statements about the Company's business and prospects include,
but are not limited to, the ramifications of the continued industry
consolidation of dental dealers and distributors, managed health care,
increasingly limited acquisition opportunities, the Company's ability to
effectively integrate operations of acquired companies, dealer acceptance and
support of new products, maintaining favorable supplier relationships, Y2K
issues of various customers and vendors, the inability to engage qualified
human resources as needed, and general economic conditions. The Company
disclaims any obligations subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statement
or to reflect the occurrence of anticipated or unanticipated events.
General
Pro-Dex, Inc. (or the "Company") is a Colorado based holding company
doing business through four wholly owned operating subsidiaries, Biotrol
International, Inc. ("Biotrol"), Challenge Products, Inc. ("Challenge"), Micro
Motors, Inc. ("Micro"), and Oregon Micro Systems, Inc. ("OMS"). Biotrol is
located in Louisville, Colorado, and manufactures and distributes infection
control products, and distributes preventive products, handpieces, ultrasonic
scalers and a full line of hand care products for the dental industry.
Challenge is located in Osage Beach, Missouri, and manufactures fluoride and
related products for preventive dentistry, as well as cosmetic bleaching
materials for home use which are dispensed by the dentist. Micro, of Santa
Ana, California, manufactures a complete line of handpieces for the dental
industry, and miniature pneumatic motors with dental, medical and industrial
applications. OMS is headquartered in Beaverton, Oregon where it designs and
manufactures motion controllers used to control the motion of servo and
stepper motors, predominantly for the medical analysis equipment and
semiconductor industries.
In 1996 the Company obtained a $10,000,000 credit facility from Harris
Bank. The credit facility requires that the Company meet certain financial
covenants. On June 30, 1999, the Company did not meet certain of the
financial covenants and Harris Bank has requested that the Company find
alternative financing sources to replace the Harris facility. See "Item 6 -
Management's Discussion and Analysis".
The Company incurred unusual charges of $7,389,000 for the year ended
June 30, 1999. The charges include the write-off of goodwill at the Micro
subsidiary for $4.8 million, the write off of a receivable from the sale of a
former segment of the business in the amount of approximately $1.75 million,
and charges to operations for the remaining portion of employment, consulting,
and non-compete contracts deemed to have no future value to the Company. See
"Pro-Dex Consolidated Financial Statements - Note 6."
Pro-Dex, Inc. was organized in March 1978 as a California corporation.
It was reincorporated in May 1994 as a Colorado corporation. The Company's
principal headquarters are located at 1401 Walnut Street, Suite 540, Boulder,
Colorado 80302.
Divestitures
On June 12, 1997, the Company completed the sale of certain assets of its
dental clinic management ("DCM") subsidiary in California. The Company
retained ownership of approximately $1,800,000 in net accounts receivable.
During 1998, the purchaser collected $650,000 of the receivables, but due to
financial difficulties was only able to remit $50,000 to the Company. In
October 1998, the purchaser was reorganized and in consideration of the
successor to the purchaser's guarantee of the collection of the full net
amount of the accounts receivable, the Company agreed to restructure the
balance owed of $1,750,000 in exchange for a five year 6% promissory note
totaling $850,000, 5% cumulative preferred stock in the successor entity then
valued at $900,000, and warrants to acquire common stock in the successor
entity. The financial condition of the purchaser of the dental centers is
poor, and management believes that it is unlikely it will be able to collect
the 6% promissory note of $850,000. Nor does it believe that the convertible
preferred stock of $900,000 has any future value. Consequently, the Company
has taken an unusual charge for the write-off of the promissory note and the
convertible preferred stock in the amount of $1,750,000 in the fourth quarter
of 1999. See "Pro-Dex, Inc. Consolidated Financial Statements - Note 6."
In April 1997, the Company completed the unwinding of its acquisition of
Pnu-Light Tool Works, Inc. ("Pnu-Light"). The Company acquired the assets of
Pnu-Light, a developer of patented pneumatic lighting mechanisms for hand
tools, in May 1996 in exchange for 368,483 shares of the Company's common
stock. The Company anticipated that Pnu-Light's patented lighting apparatus
would complement the pneumatic motors used in dental handpieces manufactured
by Micro. The anticipated synergy between Pnu-Light and Micro did not meet
the Company's expectations. Accordingly, and pursuant to the procedures
contained in the Pnu-Light Asset Purchase Agreement, all of the shares of its
common stock issued in the transaction for the Pnu-Light assets were returned
to the Company. In exchange for the reconveyance of its shares, the Company
assigned the patent covering the pneumatic lighting apparatus to Pnu-Light's
successor entity, while retaining a nonexclusive, fully paid, worldwide
license to the technology.
In conjunction with its previously announced intent to make acquisitions
as part of its long-term commitment to the growth and development, the Company
retained the investment banking firm of Cleary Gull Reiland & McDevitt, Inc.
(now, Tucker Anthony Cleary Gull). Tucker Cleary is currently acting as the
Company's financial advisor and assisting the Company in evaluating strategic
options in its ongoing effort to grow through acquisitions and to attract
greater institutional and retail participation in its stock.
Description of Subsidiary Business
Biotrol
Biotrol is a manufacturer, distributor and marketer of dental and related
products. Biotrol specializes in infection control products, preventive
dental products, handpieces, ultrasonic scalers, and hand care products. Its
infection control products work effectively as a system for eliminating
cross-contamination of infectious organisms in the dental operatory.
Biotrol's infection control system includes five major categories of products:
surface cleaners and disinfectants; instrument immersion cleaners and
disinfectants; a dental evacuation system cleaner; general barrier, and a full
line of hand care products. Biotrol markets an extensive line of professional
preventive dental products manufactured for Biotrol by Challenge under the
name "Perfect Choice(tm)". These products include fluoride gels and rinses,
in addition to prophy pastes and related preventive dental products. In July
1997, Biotrol began offering a full line of dental handpieces manufactured by
Micro. Biotrol also markets an extensive line of ultrasonic scalers
manufactured in Sweden.
Biotrol products are distributed exclusively through dental dealers. Two
distribution companies control more than fifty percent (50%) of the sales of
dental products through dealers. Forty six percent (46%) of Biotrol's sales
are attributable to these two companies 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 two customers may be financially detrimental to
Biotrol.
Relationships with its various suppliers and manufacturers are considered
to be excellent. Biotrol 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 its suppliers or manufacturers, excepting only
its exclusive right to market Amdent ultrasonic scalers in North America.
Biotrol has surveyed its suppliers, manufacturers, and customers to determine
whether or not each of them will be Y2K compliant in an effort to minimize the
impact of that event. It has developed contingency plans to include, but not
be limited to, the identification of new suppliers and capability of
implementing manual systems should the need arise. Should such contingency
plans fail for any reason, such failure could have a negative impact on
Biotrol's business.
At the present time, Biotrol is usually able to fill orders within 48
hours. At June 30, 1999, Biotrol had no significant order backlog, and had no
backlog at June 30, 1998. Biotrol does not typically experience seasonal
fluctuations in its orders.
Challenge
Challenge manufactures products used by dentists for the prevention of
dental disease and home use tooth brightening products which are dispensed by
the dentist. The majority of its business is the formulation and manufacture
of gels, pastes, rinses, and whiteners for in-office and/or home treatments
for the prevention of dental diseases and improvement in cosmetic appearance.
Its products are sold under the Challenge labels of "Perfect Choice(tm)",
"Dual X(tm)", "Dentalite(tm)", and "Prophy Gems(tm)", which are marketed under
the "Perfect Choice(tm)" label. Biotrol markets Challenge's branded products
through Biotrol's sales force and distributors.
Fifty eight percent (58%) of Challenge's products are formulated,
packaged, and sold under private label agreements through dental manufacturers
and distributors other than Biotrol. 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.
Seventy percent (70%) of Challenge's revenues are derived from sales to
its three largest customers. The largest portion of such revenues,
constituting thirty seven percent (37%) of total sales are attributable to
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 three largest customers, such change may be detrimental to Challenge.
Challenge's relationships with its various suppliers and distributors are
considered 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 distributor. Challenge holds no franchises and
has no exclusive arrangements with any of its suppliers or distributors,
excepting only that license from Dunhall Pharmaceuticals, Inc. for the
manufacture of tooth whitening products. Challenge has surveyed its
suppliers, manufacturers, and customers to determine whether or not each of
them will be Y2K compliant in an effort to minimize the impact of that event.
It has developed contingency plans to include, but not be limited to, the
identification of new suppliers and capability of implementing manual systems
should the need arise. Should such contingency plans fail for any reason,
such failure could have a negative impact on Challenge's business.
Challenge usually fills orders for its branded "Perfect Choice(tm)" and
"Prophy Gem(tm)" products within 30 days. Private label customers usually
anticipate a 30 to 60-day lead-time for the delivery of products. As of June
30, 1999, Challenge had no backlog. Future orders not yet due for shipment
were $273,626 on June 30, 1999. At June 30, 1998, Challenge had no backlog
and future orders of $260,261. Challenge does not typically experience
seasonal fluctuations in its orders, and expects to fill all of its orders
during the current fiscal year.
Micro Motors
Micro manufactures and distributes a complete line of dental handpieces
for the dentist and hygienist, as well as miniature pneumatic motors for use
in dental, medical, and industrial devices. The branded handpiece line is
sold by Biotrol to dental distributors, who in turn market directly to the
dentist. Micro products are sold under the trademarks "Dynatorq(tm)",
"Dynapro(tm)", "Dynalite(tm)", "Dynasurg(tm)", and "Micro Handpiece(tm)".
Micro's industrial products are sold directly to original equipment
manufacturers. Sixty five percent (65%) of Micro's sales in the year ended
June 30, 1999 were accounted for by sales of dental handpieces.
Approximately twenty nine percent (29%) of Micro's sales in the year
ended June 30, 1999 consisted of sales of miniature pneumatic motors for
industrial and medical applications. Micro's pneumatic motors are marketed
through an independent distribution network.
Micro 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. Micro holds no franchises
and has no exclusive arrangements with any of its suppliers or manufacturers.
Micro has surveyed its suppliers, manufacturers, and customers to determine
whether or not each of them will be Y2K compliant in an effort to minimize the
impact of that event. It has developed contingency plans to include, but not
be limited to, the identification of new suppliers and capability of
implementing manual systems should the need arise. Should such contingency
plans fail for any reason, such failure could have a negative impact on
Micro's business.
At the present time, Micro is usually able to fill orders within sixty
(60) days. At June 30, 1999, Micro had a backlog of $406,371. Future orders
of approximately $1.2 million had been placed as of June 30, 1999. At June
30, 1998, Micro had a backlog of approximately $2.2 million which reflected
future orders as well. 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.
OMS
OMS designs and manufactures motion controllers to control the motion of
motors used predominantly in medical analysis equipment and semiconductor
equipment. OMS's products are profitably marketed at prices, which compare
favorably with any alternative products. As in any high-technology area, it
is important for OMS to continue development efforts to achieve continued
market acceptance. Last year OMS introduced a new generation of motion
control products in its PC 104 line. The development and introduction of the
PC 104 line has allowed OMS to retain its position within the motion control
industry. OMS believes its PC 104 technology has been well accepted and plans
to continue the introduction of advanced products. The introduction of the PC
104 line and the planned introduction of PCI will reduce impact that the
highly volatile semi-conductor industry has had on OMS, as well as to
significantly broaden OMS's market in less cyclical industries.
OMS's two largest customers account for forty three percent (43%) of its
sales, with the largest of such customers accounting for twenty eight percent
(28%) 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 relationship with any
customer representing a significant percentage of OMS sales may be financially
detrimental to OMS. The Asian monetary crisis that negatively impacted OMS in
fiscal 1998 appears to have abated resulting in the return to more normal
ordering patterns within the industry. Future orders at OMS have rebounded to
almost pre-Asian monetary crisis levels.
OMS 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. OMS holds no franchises and
has no exclusive arrangements with any of its suppliers or manufacturers. OMS
has surveyed its suppliers, manufacturers, and customers to determine whether
or not each of them will be Y2K compliant in an effort to minimize the impact
of that event. It has developed contingency plans to include, but not be
limited to, the identification of new suppliers and capability of implementing
manual systems should the need arise. Should such contingency plans fail for
any reason, such failure could have a negative impact on OMS's business.
At the present time, OMS is usually able to fill its orders within 24
hours. At June 30, 1999, OMS had virtually no backlog and future orders of
approximately $675,322 as compared to $574,016 as of June 30, 1998. 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
Certain products manufactured and distributed by the Company's
subsidiaries are comparable to competing products offered by several other
manufacturers and distributors. Intensified competition resulting from the
consolidation occurring within the dental industry 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
The Company maintains research and development programs in 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 1999 and 1998 were
approximately $1,700,000 and $1,410,000, respectively. Micro increased
research and development expenses in anticipation of expanding its customer
base to the medical device industry. Challenge increased research and
development expenditures in order to service existing OEM customers as well as
broaden their product lines to take advantage of new market opportunities.
Employees
At June 30, 1999, the Company had approximately 151 full and part-time
employees (excluding independent contractors). At that time, four full-time
employees were assigned to corporate headquarters, and devoted substantially
all of their time to the operations of the Company. Challenge employed
approximately 19 persons, Biotrol employed approximately 36 persons, and Micro
employed 72 persons, four of which were part-time. OMS employed 20 persons.
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.
Government Regulations
The manufacture and distribution of dental products such as the Micro
handpieces, the infection control products and ultrasonic scalers marketed by
Biotrol, and the dental prophylaxis and bleaching products manufactured by
Challenge are subject to a number of state and federal regulatory bodies,
including state dental boards, the Environmental Protection Agency ("EPA"),
and the Food and Drug Administration ("FDA"). The statutes, regulations,
administrative orders, and advisories which affect the Company's businesses
are 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 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 deservedly enjoys a good reputation for
compliance with applicable regulations.
Several of Biotrol's products fall under the EPA's jurisdiction and are
registered with the EPA. The 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 have
been periodically the subject of routine reviews and investigations by the EPA
and FDA. Although certain products have been subject to action by the EPA in
the past, those actions were resolved to the satisfaction of Biotrol's
management and without recall or other interference with the operations of
Biotrol. While the Company's management is confident that Biotrol products
and processes fully comply with applicable laws and regulations, the Company
is unable to predict the outcome of any such investigation or review, pending
its completion. Management believes that Biotrol follows Quality System
Regulation (QSR).
The 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's products
and processes have been the subject of routine reviews and investigations.
While the Company's management is confident that Challenge's products and
processes fully comply with applicable laws and regulations, the Company is
unable to predict the outcome of any such investigation or review, pending its
completion. Management believes that Challenge follows QSR.
Micro's dental and medical handpieces are regulated by the FDA as Class 1
medical devices and certain materials processed by Micro are regulated by EPA.
Again, both the FDA and EPA have broad enforcement power to recall and
prohibit the sale of products, which do not comply with federal regulations,
and to order the cessation of non-compliant processes. No claim has been made
to date by FDA or EPA regarding any Micro products or processes.
Nevertheless, as is common in the industry, certain of Micro's products and
processes have been the subject of routine reviews and investigations. While
the Company's management is confident that Micro's products and processes
fully comply with applicable laws and regulations, the Company is unable to
predict the outcome of any such investigation or review, pending its
completion. Management believes that Micro follows QSR.
Management believes that OMS's business in the manufacture and
distribution of multi-axis circuit boards, including the processes and
materials, is conducted in a manner consistent with EPA regulations governing
disposition of industrial waste materials. Although the semiconductor and
computer chip industries are significantly impacted by the EPA regulations
applicable to the processes and materials used in production of computer chips
and computer chip components, OMS's management has undertaken measures, where
possible, to reduce OMS's exposure to risk of non-compliance. Most
significantly, OMS acquires pre-manufactured boards as platforms upon which to
place OMS technology. While the Company's management is confident that OMS
products and processes fully comply with applicable laws and regulations, the
Company is unable to predict the outcome of any investigation or review which
may in the future be undertaken respecting OMS or its products or processes.
Management believes that OMS follows QSR.
All Pro-Dex subsidiaries maintain ISO 9001 certified facilities, and
Biotrol has received EN 46001 certification.
Patents, Trademarks, and Licensing Agreements
The Company holds letters patent relating to the multi-axis motion
controllers manufactured by OMS, to the prophy ring technology utilized by
Challenge, and has made application to patent Challenge's new "bubble pack"
for bleaching materials. In addition, Micro holds letters patent relating to
its miniature pneumatic motor products. Patents held by the Company and Micro
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 conducted a 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. The Company is unable to
assess the validity, scope, or defensibility of its letters patent, and any
challenge to or claim of infringement relating to the Company's letters patent
could adversely affect the Company's Challenge, Micro and OMS operations.
Prior to the Company's acquisition of OMS, OMS and its founder entered
into a worldwide, 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 motor products, including "Dynatorq(tm)", "Dynapro(tm)",
"Dynalite(tm)", "Dynasurg(tm)", and "Micro Handpiece(tm)". Challenge's
products are sold under the trade name "Dentalite(tm)", in the United States
and Canada. In addition, Challenge offers its line of preventive dental
products under its "Perfect Choice(tm)" tradename. Challenge also markets its
"Prophy Gems(tm)" dental prophylaxis product under its "Perfect Choice(tm)"
trademark in both the United States and Canada. Biotrol has filed for federal
trademark protection for "Biotrol International, Inc.(tm)", "Birexse(tm)", and
"Perfect Care(tm)", as has OMS for "OMS-EZ".
Challenge is a party to an agreement with Dunhall Pharmaceuticals, Inc.
pursuant to which Challenge has a non-exclusive license to extend to its
customers a patented method for brightening teeth under a variety of product
names.
Except as noted above, 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 Executive offices are located at 1401 Walnut Street, Suite
540, Boulder, Colorado 80302. The Company leases these offices for $4,192 per
month, on a month to month basis, under a sub-lease from Professional Sales
Associates, Inc., a dental equipment marketing firm for which two of the
Company's directors are also directors and 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 sublease is subject to the terms
of the master lease. The master lease under which the Company sub-leases
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. 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 are located at 650
South Taylor Avenue, Suite 20, Louisville, Colorado 80027. Biotrol leases
21,600 square feet from a non-affiliated organization. Biotrol currently pays
a monthly rental of $14,846, which will escalate to $18,300 per month during
the final year of the lease term which expires in December 2003. 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, a new
4,000 square foot warehouse has recently been constructed on an adjacent 8.8
acre parcel owned by Challenge.
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 $29,147. The lease expires March 31, 2001.
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's 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 $7,498, which lease has been
extended to September 2000.
Item 3. Legal Proceedings
On January 21 1999, oral arguments were presented to the Tenth Circuit
Court of Appeals in Cottrell, Ltd. v. Pro-Dex, Inc. and Biotrol International,
Inc. The matter is on appeal from the December 1, 1997 decision of U.S.
District Judge Daniel B. Sparr dismissing an action filed against the Company
and Biotrol by Cottrell, Ltd. ("Cottrell"). Judge Sparr held that the
resolution of the complaint would require the Court to interpret and apply
regulations within the exclusive jurisdiction of EPA. Accordingly, the Court
granted the Company's and Biotrol's Motion to Dismiss, denied Cottrell's
Motion for Leave to Amend its Complaint, and dismissed the case in its
entirety. On the 10th of September 1999, the United States Court of Appeals
for the Tenth Circuit reversed the decision of Judge Daniel B. Sparr by which
he dismissed an action filed against the Company and Biotrol in the U.S.
District Court for Colorado by Cottrell, Ltd. ("Cottrell"). The Court agreed
with the Company with respect to its assertion that Cottrell should not be
permitted to bring a FIFRA action by simply identifying the same as a Lanham
Act claim, and, accordingly, that claim was dismissed. The Court disagreed,
however, with the Company stating that Cottrell had alleged sufficient facts
to support a Lanham Act claim independent of FIFRA. The case was remanded to
the District Court for further proceedings. See "Pro-Dex Consolidated
Financial Statements - Note 3."
On June 12, 1997 the Company sold the assets of its DCM dental clinic
management subsidiary to Professional Dental Management, LLC. Subsequent to
that sale, Professional Dental Management, LLC was restructured and the
survivor, Consolidated Dental Management, Inc., among other things, assumed
liability for leases of dental clinic offices situated in Sears' store in
north-central California. On May 9, 1999, due to the poor financial condition
of the Consolidated, Sears required the Company to guaranty Consolidated's
performance under those leases. See "Pro-Dex Consolidated Financial Statements
- - Note 3."
Plaut V. Biotrol, et al, D'Meo et al. Biotrol is one of 16 named
defendants, excluding John Does 1-100, in these two matters which are part of
what has been designated "New Jersey Latex Litigation" cases. The cases have
been centralized and are proceeding under the terms of a variety of case
management orders. Plaut v. Biotrol has been selected as one of three
"Bellwether" cases and is expected to proceed to trial in February 2000. The
claim has been submitted to Biotrol's product liability carrier, Chubb
Insurance Companies. Defense counsel has been assigned and is defending the
Biotrol subsidiary. See "Pro-Dex Consolidated Financial Statements - Note 3."
In 1998, Micro successfully settled a civil action alleging patent
infringement by Micro. On July 6, 1998, Miyad, Inc., a California corporation
("Miyad"), filed a patent infringement action in the U.S. District Court
against Implant Technologies, Ltd. ("ITL"), its principal, Courtney Emery
("Emery"), and Micro. The complaint alleged contributory infringement,
inducement of infringement, and breach of a confidentiality agreement. The
matter was dismissed with prejudice by the U. S. District Court on November
28, 1998.
The manufacture and distribution of certain products by subsidiaries of
the Company involves a risk of legal action, and, from time to time, the
Company and its subsidiaries are named as defendants in lawsuits. While the
Company's management is confident that these matters will not have a material
adverse impact on the financial condition of the Company, there can be no
certainty that the Company may not ultimately incur liability.
Item 4. Submission of Matters to a Vote of Security Holders During the Year
Ended June 30, 1999
No matter was submitted to a vote of the Company's shareholders during
the fourth quarter ended June 30, 1999.
PART II
The Company's no par value common stock is quoted under the symbol "PDEX"
on the automated quotation system of the National Association of Securities
Dealers Small Cap Market ("NASDAQ"). The range of the high and low quarterly
sales prices quotations for the Company's common stock as quoted by NASDAQ for
the past two fiscal years is provided below.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Fiscal Year - 1999 High Low
----------------------------------------------------
First quarter $2.06 $1.25
Second quarter 2.25 1.18
Third quarter 1.87 1.18
Fourth quarter 2.00 1.21
Fiscal Year - 1998 High Low
----------------------------------------------------
First quarter $2.56 $1.75
Second quarter 3.50 2.31
Third quarter 2.94 2.06
Fourth quarter 2.31 1.75
On September 13, 1999, the last sale price of the common stock as
reported by NASDAQ was $1.50 per share. The last sale price reported on
NASDAQ on June 30, 1999, was $1.34 per share.
At June 30, 1999, the approximate number of holders of record of the
Company's common stock was 377. This number does not include beneficial
owners including holders whose shares are held in nominee or "street" name.
The Company has not paid a cash dividend with respect to its common
stock, and has no present intention to pay cash dividends in the foreseeable
future. The current policy of the Company's board of directors is to retain
earnings to provide funds for the operation and expansion of its business.
Future dividends, if any, will be determined by the Board of Directors in
light of the circumstances then existing, including the Company's earnings and
financial requirements and general business conditions. The Company's credit
arrangements with Harris Bank restrict the right of the Company to declare and
pay cash dividends without prior consent.
On June 30, 1999, the Company did not meet NASDAQ's tangible net equity
requirements of $2,000,000. Management believes that future profits and an
equity contribution will bring the Company into compliance within the current
fiscal year.
Item 6. Management's Discussion and Analysis
The following discussion and analysis provide information that the
Company's management believes is relevant to an assessment and understanding
of the Company's results of operations and financial condition for the two
years ended June 30, 1999 compared to the same periods of the prior years.
This discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report. This
Report contains certain forward-looking statements and information. The
cautionary statements should be read as being applicable to all related
forward-looking statements wherever they may appear. The Company's actual
future results could differ materially from those discussed herein.
Selected Financial Data
The following table sets forth selected financial data regarding the
Company's financial position and operating results. This data should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and "Management's discussion and Analysis."
(All amounts in thousands except per share data)
Year ended June 30,
1999 1998
---- ----
Statement of Operations Data
Net sales $ 18,342 $ 22,648
Cost of sales 9,763 10,018
----------- -----------
Gross profit 8,579 12,630
Unusual charges 7,389
Operating expenses 11,444 11,243
----------- -----------
Net operating income (loss) (10,254) 1,387
Net interest (expense) (971) (882)
Income tax (expense) credit 2,291 (151)
----------- -----------
Net income (loss) $ (8,934) $ 354
=========== ===========
Results of Operations for Fiscal Year Ended June 30, 1999, Compared to Fiscal
Year Ended June 30, 1998
Net sales by subsidiary follows:
Increase/
1999 1998 (Decrease)
- ------------------------------------------------------------------------------
Biotrol $ 8,170,000 $ 8,457,000 $ (287,000)
Challenge 2,176,000 1,753,000 423,000
Micro Motors 6,019,000 8,394,000 (2,375,000)
Oregon Micro Systems 3,713,000 5,768,000 (2,055,000)
(Intercompany sales) (1,736,000) (1,724,000) (12,000)
-------------- -------------- --------------
$ 18,342,000 $ 22,648,000 $ (4,306,000)
============== ============== ==============
Net sales decreased $4.3 million (19.0%) to $18.3 million for the year
ended June 30, 1999 from $22.6 million for the year ended June 30, 1998.
Sales at Biotrol for the year ended June 30, 1999 decreased by 3.4% over
the year ended June 30, 1998. The decline is mainly attributable to the
following two circumstances: Biotrol attempted to increase its export
business by offering its products at discounted prices to existing and new
export customers. Soon after the export business increased, management
discovered that a majority of its new export business was being resold to
Biotrol's domestic customers on the gray market. Many domestic customers
notified Biotrol's management that they were able to buy Biotrol products on
the gray market. The favorable pricing to exporters was immediately
terminated, and the exporters ceased purchasing products. Management
estimates that approximately $600K of revenue was lost during the year to
domestic customers because of the gray market sales. In addition, within the
past year, three of Biotrol's four largest customers merged resulting in an
overstock condition for Biotrol's products. By the end of the current fiscal
year the situation seems to have stabilized, and order quantities from the
merged customers have reverted to pre-merger levels. Sales to the merged
customer were approximately $542,000 below sales to the three separate
customers during the same period in the prior year. There is evidence that
the disruption in distribution of products to Biotrol's customers has not hurt
the demand for its products by the end user. Biotrol's independent market
share information source indicates that Biotrol increased its market share of
key products for the year ended June 30, 1999 over the year ended June 30,
1998.
At Challenge Products, sales for the year ended June 30, 1999 increased
by 24.1% over the year ended June 30, 1998. Sales to private label customers
and wholesale customers of Challenge increased by 57.4% to $1,365,000 for the
year ended June 30, 1999, from $867,000 for the year ended June 30, 1998. New
products and increased marketing efforts to new private label customers are
the main reasons for the increase in sales. Inter-company sales to Biotrol
decreased 8.5% to $811,000 for the year ended June 30, 1999 from $887,000 for
the year ended June 30, 1998, primarily due to the inventory consolidation
condition experienced by Biotrol.
At Micro Motors, sales for the year ended June 30, 1999 decreased
$2,375,000 or 28.3% from the year ended June 30, 1998, partly due to the
affects of the consolidation of its major customers. New management was
installed at the beginning of the current fiscal year to improve internal
systems, upgrade and innovate the product portfolio, and to uncover new
markets for its core products. During the year Micro completed the integration
of a state of the art operating system that will also facilitate a major
portion of its Y2K compliance plan. Completion of the certification process
to the Medical Device Directive in conjunction with ISO 9001 Certification
placed Micro Motors in a position to self-certify products with the CE mark
required for European distribution. Lastly, the product portfolio was
enhanced with the development of two major projects; the highspeed dental
handpiece, and the ModSquad electric motor controller system. The ModSquad
electric controller is capable of opening up significant opportunities in both
the dental and medical markets. Since the end of the current year Micro has
received over $1 million in orders for its new ModSquad products.
Sales at OMS decreased by 35.6% from the previous year. OMS continues to
depend heavily on the semiconductor industry for its revenue base. During the
current year that industry suffered a severe slump due to an over supply of
computer chips on the market. This in turn caused a decrease in the demand for
semiconductor fabrication equipment. In addition, many customers of OMS sell
heavily into the Asian semiconductor market. Due to the monetary crisis
experienced by Asia during 1998, sales of fabrication equipment to Asian
customers declined. Orders and sales for the last quarter of the current
fiscal year indicate that the slump in demand for semiconductor fabrication
equipment has ended. It was reported by Semiconductor Equipment and Materials
International (SEMI) that the North American-based manufacturers of
semiconductor equipment posted a June 1999 Book-to-Bill ratio of 1.24 as
compared to a .6 ratio as of June 1998. A book-to-bill of 1.24 means $124 in
orders were received for each $100 worth of products shipped. OMS is
employing a business strategy to reduce its exposure to the cycles of the
semiconductor equipment manufacture industry. Included in that strategy has
been the development of a family of embedded motion control products, and
expansion into new distribution channels. The new products will enable OMS to
compete in new industries such as industrial controls, aerospace,
communication, and food processing equipment. They are priced competitively,
are easy to use, and are manufactured with the latest surface mount
technology.
The distribution channels for dental products continue to contract and
consolidate. Two distribution companies control more than 50% of the sales of
dental products sold through dealers. These large distributors are demanding
among other things that suppliers are ISO 9000 certified, Y2K compliant, and
have EDI and bar coding capabilities. To meet customer demands the company is
currently implementing new information technology that will facilitate Y2K
compliance, and provide EDI capabilities. Since Pro-Dex sells its dental
products exclusively through dealers, management is committed to providing the
necessary technology and regulatory support to satisfy its dealer customers.
Gross profits by subsidiary follows:
Increase/
1999 1998 (Decrease)
- ------------------------------------------------------------------------------
Biotrol $ 3,984,000 $ 4,543,000 $ (559,000)
Challenge 789,000 559,000 230,000
Micro Motors 1,108,000 3,271,000 (2,163,000)
Oregon Micro Systems 2,698,000 4,257,000 (1,559,000)
-------------- -------------- --------------
$ 8,579,000 $ 12,630,000 $ (4,051,000)
============== ============== ==============
Consolidated gross profit dollars decreased by 32.1% for the year ended
June 30, 1999 compared to the year ended June 30, 1998 mainly due to a decline
in revenue. At Micro Motors, the decrease in gross profit dollars was also
due to inefficiencies in manufacturing combined with a declining revenue base.
In addition, Micro increased its reserve for slow moving and obsolete goods by
$594,000 during the year.
Gross profit as a percentage of sales decreased 9.0 percentage points to
46.8% for the year ended June 30, 1999 compared to 55.8% for the year ended
June 30, 1998. The decline in gross profit percentage was caused mainly by
the absorption of fixed manufacturing overhead over a lower revenue base.
Operating expenses before unusual charges as a percentage of revenue were
62.4% for the year ended June 30, 1999 compared to 49.6% for the year ended
June 30, 1998. Operating expenses before unusual charges increased 1.8% to
$11,444,000 compared to $11,243,000 for the year ended June 30, 1998. During
1999, the Company incurred several one-time unusual charges that management
does not expect to incur in the future totaling approximately $7.4 million.
The charges include the write-off of goodwill at the Micro subsidiary for $4.8
million, the write-off of a receivable from the sale of a former segment of
the business amounting to $1.75 million, and charges of $839,000 to operations
for the remaining portion of employment, consulting, and non-compete contracts
deemed to have no future value to the Company. See Note 6 to the financial
statements for a further discussion of unusual charges.
During the year ended June 30, 1999, the Company continued the
implementation of its new information technology systems to modernize its
accounting and manufacturing processes as well as implement its Y2K plan. The
costs associated with the implementation totaled approximately $200,000 during
the year ended June 30, 1999. During the year ended June 30, 1998, the
Company incurred charges related to training and maintenance costs associated
with a major overhaul of its information technology systems, and costs to
achieve ISO 9001 certification for all its divisions. The Company's growth
plans require the development of new products. Consistent with that goal the
Company increased its commitment to research and development by spending
$1,700,000 during fiscal year ended June 30, 1999, compared to $1,410,000 for
year ended June 30, 1998, a 20.6% increase. The Company incurred other
operating expenses during the year that, while not unusual, management
considers excessive as a result of the significant restructuring that occurred
within the operating units. Some of the items include severance costs of
$92,000, consulting fees of $186,000, and sales and marketing expenses related
to export problems of $96,000.
For 1999, loss from continuing operations was $2,865,000 before unusual
charges of $7,389,000. Loss from continuing operations for the year ended
June 30, 1999 was ($10,254,000) including unusual charges compared to income
from operations of $1,387,000 for the year ended June 30, 1998. Loss from
operations at the Micro Motors subsidiary before unusual charges was
($2,005,000) or 70.0% of the total loss from operations before unusual
charges. Micro Motors loss resulted from reduced revenue, increased R & D
expense totaling $1,113,000 for the year ended June 30, 1999 compared to
$580,000 for the year ended June 30, 1998, and several costs related to
management and organization changes made during the year.
Interest expense for the year ended June 30, 1999 was $1,032,000 compared
to $931,000 for the year ended June 30, 1998. Included in interest expense
for the current year are additional charges for the acceleration of the
write-off of loan fees for $65,000, and the payment for the waiver of loan
covenant violations for $100,000.
The Company's effective tax rate on income (loss) from operations was
20.4% in 1999, and 29.9% in 1998. The effective tax rate is lower than
anticipated for fiscal year ended June 30, 1999 because no deferred tax asset
is recorded for the write-off of $4,800,000 of goodwill. The effective tax
rate is lower for fiscal year ended June 30, 1998 due to the elimination of a
valuation allowance against existing deferred tax assets. Management expects
future effective tax rates to approximate 40%. At June 30, 1999, management
believes it is more likely than not that the recorded tax assets of $2,900,000
will be realized based on its expectation of future profitability combined
with tax planning strategies (See Note 4 to the financial statements). The
amount of tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
Net loss for the year ended June 30, 1999 was $8,934,000 or $1.02 per
share. The unusual charges discussed above had the effect of increasing net
losses in 1999 by $6,353,000 or $0.72 per share. The write-off of $4,800,000
in goodwill in the current year will reduce amortization expense in future
years by $240,000 annually or $.02 per share.
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, 1999
is weak, with working capital on that date of approximately negative
$4,000,000. 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 December 31, 1999. Both facilities
require monthly interest payments at the prime rate plus one-half percent.
The term loan portion is payable in equal quarterly installments of $200,000
through December 31, 1999, 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,
1999, of $3,800,000. The revolver portion of the facility had an outstanding
balance at June 30, 1999, of $4,000,000. At June 30, 1999, there was no
availability under the revolver. Harris Bank has requested that the Company
find alternative financing services to replace their facility. 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, 1999, the Company did not meet certain of the financial
covenants of the credit facilities. On July 24, 1999, the bank waived the
current covenants and amended the future covenants. However, at July 31,
1999, the Company did not meet the amended net tangible worth covenant due to
the write off of the $1.75 million receivable from a former segment. Other
than the net worth covenant, management believes the Company will be in
compliance with these covenants in the future.
Management is currently investigating financing options which would
replace their current banking relationship and has engaged an outside
investment banker to assist them in locating and securing this financing.
These options include the issuance of additional preferred stock of between $2
to $4 million. It is believed that with such additional financing, the
Company could secure a traditional asset-based lending structure to replace
the remaining bank debt. Management is also investigating a possible
synergistic merger partner. Should the Company be unable to secure
replacement financing, the Board has authorized management to pursue the sale
of one of its operating subsidiaries in order to raise sufficient funds to
satisfy the current working capital needs of the Company as well as pay down
the bank debt as necessary. Management is currently evaluating this option.
During the year the Company has been unable to make timely payments to
some of its creditors. Management has maintained communication with these
vendors and due, in part, to the mostly excellent relationships with the same,
deferred payment terms have been negotiated with most vendors. To date no
vendors have suspended parts deliveries or services needed by the Company.
Accounting Changes
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during
the period from non-owner sources; and SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these Statements did not impact the Company's
financial position, results of operations or cash flow. Both Statements were
adopted for fiscal year 1999, with earlier application permitted.
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. 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.
Year 2000 Systems Assessments and Preparedness
The Year 2000 problem arises because many information systems and devices
containing embedded technology use two digits rather than four digits to
identify a year. Calculations in date-sensitive systems using two digits
could result in system failures and errors that disrupt normal business
operations as the Year 2000 approaches.
Early in 1998, Pro-Dex conducted an assessment of Year 2000 compliance of
all of its major information technology systems, non-information technology
systems with date-sensitive software and embedded microprocessors and products
the Company manufactures or sells to customers. Pro-Dex developed detailed
plans to resolve all major issues by the end of Fiscal 1998. As of June 30,
1999, the Company estimates that it is over 90% complete with its efforts to
remediate current systems or implement new systems that are Year 2000
compliant. The majority of the remaining efforts are anticipated to be
completed before the end of the third quarter of 1999. Pro-Dex has
substantially completed its effort to assess non-compliant embedded technology
including its assessment of the products it has delivered to customers.
Pro-Dex expects that only one of its four company units will be involved
in any significant compliance efforts in 1999. Continuing projects include
the completion of lower priority information technology systems. Efforts in
fiscal year 2000 will shift from systems projects to identifying areas of
other business risk and developing contingency plans where appropriate.
The Company and its subsidiaries initiated formal communications with key
suppliers and service providers to determine the potential risk to its
operations in the event these third parties fail to resolve Year 2000 issues.
Pro-Dex and each division have substantially completed assessment of suppliers
and service providers. If Pro-Dex determines that there is a risk to its
operations due to a third party Year 2000 compliance failure, appropriate
contingency plans will be implemented to address such risk. The extent of
this risk, however, cannot be determined with any degree of certainty due to
the number of small suppliers and service providers used by the Company and
its subsidiaries, and the reliance of all operations on basic utility service
providers.
Pro-Dex's investment in information technology represented a significant
percentage of capital expenditures for the year ending June 30, 1999. The
Company estimates that total capital expenditures related to the
implementation of its Enterprise Resource Planning ("ERP") system will be
approximately $1.7 million over 3 - 5 years, and that it incurred
approximately $40,000 per quarter in expense related to Year 2000 efforts.
Pro-Dex has incurred approximately 90% of the capital expenditures as of June
30, 1999. The majority of these expenditures relate to new systems
installations. Although the timing of new systems installations was
influenced by the Year 2000 problem, the Company would have installed these
systems in any event.
While it is possible that the Company will not complete the systems
projects scheduled in 1999 due to a variety of factors, including but not
limited to the significant shortage of qualified information systems
personnel, the Company is taking actions it believes necessary for the timely
completion of those projects. Management believes that it is unlikely that
such projects will be delayed to the extent that the Company suffers any
material adverse effects due to noncompliance. In the unlikely event,
however, that the remaining systems projects are not completed prior to
experiencing significant noncompliance ramifications, results of operations
could be adversely affected.
In addition to the Company's internal risks and of those posed by third
parties with whom the Company deals with directly, there remain additional
Year 2000 risks and uncertainties that could affect Pro-Dex. These risks
include utility and communication failures and governmental, economic and
market responses to the Year 2000 issue. While Pro-Dex continues to believe
that these Year 2000 matters will not have a material adverse impact on its
results of operations, liquidity or financial condition, the ultimate impact
on Pro-Dex of the Year 2000 problem remains uncertain.
The foregoing statements regarding both our internal and external Year
2000 goals are forward looking statements. Pro-Dex's Year 2000 project
capital expenditures, estimated percentage of completion and estimated
completion dates are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the availability of
certain resources, third-party modification plans and other factors. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated.
Item 7. Financial Statements and Supplemental Data
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2 & F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Item 8. Changes and Disagreements with Accountants on Accounting and
Financial Disclosures
none
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, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended June 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of June 30, 1999, and the results of their operations and their
cash flows for the years ended June 30, 1999 and 1998, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Anaheim, California
August 27, 1999
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 107,000
Accounts receivable, net of allowance for doubtful accounts
of $40,000 3,157,000
Inventories, net 4,699,000
Deferred taxes 1,200,000
Prepaid expenses 148,000
---------------
Total current assets 9,311,000
---------------
Property and equipment:
Land 103,000
Buildings 542,000
Equipment 5,095,000
Leasehold improvements 313,000
---------------
Total property and equipment 6,053,000
Less accumulated depreciation (2,942,000)
---------------
Net property and equipment 3,111,000
---------------
Other assets:
Deferred taxes 1,700,000
Other 354,000
Intangibles, net 3,222,000
---------------
Total other assets 5,276,000
---------------
Total assets $ 17,698,000
===============
See "Notes to Consolidated Financial Statements." F-2
- ---
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - CONTINUED
June 30, 1999
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,691,000
Accounts payable 3,048,000
Accrued expenses 1,590,000
---------------
Total current liabilities 13,329,000
Long-term debt, net of current portion 143,000
---------------
Total liabilities 13,472,000
---------------
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred shares, no par value;
10,000,000 shares authorized; 78,129 shares issued and
outstanding 283,000
Common shares, no par value; 50,000,000 shares authorized;
8,787,300 shares issued and outstanding 14,838,000
Accumulated deficit (10,744,000)
---------------
4,377,000
Receivable for stock purchase (151,000)
---------------
Total shareholders' equity 4,226,000
---------------
Total liabilities and shareholders' equity $ 17,698,000
===============
See "Notes to Consolidated Financial Statements." F-3
- ---
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending June 30, 1999 and 1998
1999 1998
--------------- --------------
Net sales $ 18,342,000 $ 22,648,000
Cost of sales (Includes rent paid to a
director of $340,000 for 1999 and 1998.) 9,763,000 10,018,000
--------------- ---------------
Gross profits 8,579,000 12,630,000
--------------- ---------------
Operating expenses:
Selling 4,604,000 4,315,000
General and administrative 4,356,000 4,613,000
Research and development 1,700,000 1,410,000
Amortization 784,000 905,000
Unusual charges 7,389,000
--------------- ---------------
Total operating expenses 18,833,000 11,243,000
--------------- ---------------
Income (loss) from operations (10,254,000) 1,387,000
--------------- ---------------
Other income (expense):
Interest income 61,000 49,000
Interest (expense) (1,032,000) (931,000)
--------------- ---------------
Total (971,000) (882,000)
--------------- ---------------
Income (loss) before income taxes (credits) (11,225,000) 505,000
Income taxes (credits) (2,291,000) 151,000
--------------- ---------------
Net income (loss) $ (8,934,000) $ 354,000
--------------- ---------------
Basic and diluted earnings (loss) per common
and common equivalent share $ (1.02) $ 0.04
See "Notes to Consolidated Financial Statements." F-4
- ---
<TABLE>
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ending June 30, 1999 and 1998
<CAPTION>
Preferred Shares Common Shares
-----------------------------------------------
Number Number Additional Receivable
Of of Paid-In Accumulated for Stock
Shares Amount Shares Amount Capital Deficit Purchase Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 78,129 $283,000 8,712,300 $14,632,000 $10,000 ($2,115,000) ($59,000) $12,751,000
Exercise of stock options - - 25,000 44,000 - - (44,000) --
Exercise of stock warrants - - 50,000 107,000 - - (107,000) --
Stock-based compensation - - 55,000 - - - 55,000
Termination of ESOP - - - - (10,000) (49,000) 59,000 --
Net income - - - - - 354,000 - 354,000
------ -------- --------- ----------- -------- ------------- ---------- ------------
Balance, June 30, 1998 78,129 283,000 8,787,300 14,838,000 -0- (1,810,000) (151,000) 13,160,000
Net (loss) - - - - - (8,934,000) - (8,934,000)
------ -------- --------- ----------- -------- ------------- ---------- ------------
Balance, June 30, 1999 78,129 $283,000 8,787,300 $14,838,000 $ -0- ($10,744,000) ($151,000) $4,226,000
====== ======== ========= =========== ======== ============= ========== ============
</TABLE>
See "Notes to Consolidated Financial Statements." F-5
- ---
PRO-DEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending June 30, 1999 and 1998
1999 1998
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (8,934,000) $ 354,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,430,000 1,516,000
Provision for doubtful accounts 10,000 16,000
Loss on note receivable 1,750,000 --
Goodwill impairment 4,800,000 --
Stock-based compensation - 55,000
Deferred taxes (1,980,000) 60,000
Change in working capital components net of
effects from purchases and divestitures:
(Increase) decrease in accounts
receivable 195,000 (650,000)
(Increase) in inventories (247,000) (216,000)
Decrease in prepaid expenses 73,000 612,000
(Increase) decrease in other assets 93,000 (40,000)
Increase in accounts payable and
accrued expense 2,474,000 392,000
--------------- --------------
Net cash provided by (used in) operating
activities (336,000) 2,099,000
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (875,000) (810,000)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) borrowings on revolving
credit agreements 1,950,000 (250,000)
Proceeds from long-term borrowings 267,000 189,000
Principal payments on long-term borrowings (899,000) (2,079,000)
--------------- --------------
Net cash flows provided by (used in)
financing activities 1,318,000 (2,140,000)
--------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 107,000 (851,000)
Cash and cash equivalents, beginning of period -0- 851,000
--------------- --------------
Cash and cash equivalents, end of period $ 107,000 $ -0-
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for interest $ 702,000 $ 798,000
Cash payments for income taxes 22,000 6,000
Issuance of common stock for a note
receivable - 151,000
See "Notes to Consolidated Financial Statements." F-6
- ---
PRO-DEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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 cleaning,
whitening, and protecting 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
motion control products used predominantly in the computer chip manufacturing
industry. A surplus of semiconductor production capacity and the Asian
economic crisis has significantly reduced the computer chip fabrication
equipment industry. OMS is heavily dependent on this industry for its
revenue, and has experienced a decline in sales from 1998. 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 (the first-in, first-out
method) or market and consist of the following:
F-7
Raw materials $ 852,000
Work in process 486,000
Finished goods 4,249,000
----------------
Total 5,587,000
Reserve for slow moving inventories (888,000)
----------------
Total inventories, net $ 4,699,000
================
Property and Equipment
Property and equipment are recorded 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, 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
$3,005,000.
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. An asset is deemed
impaired if the sum of the expected future cash flows is less than the
carrying amount of the asset. Impaired assets are valued at the lower of
recorded cost or fair value.
Advertising
The Company expenses the cost of advertising the first time the
advertising takes place. The Company's balance sheet contains no deferred
advertising costs. The Company incurred advertising expenses of approximately
$397,000 and $507,000 in 1999 and 1998, respectively.
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.
F-8
Earnings Per Share
Basic earnings per common share data has been computed on the basis of
the weighted-average number of common shares outstanding during each period
presented. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from continuing
operations.
Fair Value of Financial Instruments
The method and assumptions used to estimate the fair value of long-term
debt, which approximates the carrying value, is based on interest rates for
instruments with similar terms and remaining maturities.
Stock-based Compensation
The Company accounts for stock-based employee compensation under the
requirements of Accounting Principles board (APB) Opinion No. 25, which does
not require compensation to be recorded if the consideration to be received is
at least equal to fair value at the measurement date. Non-employee
stock-based transactions are accounted for under the requirements of the
Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standard (SFAS) No. 123 "Accounting for Stock Based Compensation"
which requires compensation to be recorded based on the fair value of the
securities issued or the services received, whichever is more reliably
measurable. The Company determines fair value at the measurement date based
upon the trading price of its stock. The Company considers outside directors
as employees for the purpose of applying this Statement.
Segment Information
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Statement No. 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of Statement No. 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information. See Note 7 for disclosures about the Company's operating
segments.
NOTE 2 - LONG-TERM DEBT
Following is a summary of long-term debt:
Revolving/term loan from bank (a) $ 7,800,000
Secured note bearing interest at 11%, maturing
August 2000, payable at $14,728 per month (b) 147,000
Secured note to former owner of acquired business
bearing interest at 12.25%, payments of $40,000
quarterly, including interest to October 2000 183,000
F-9
Mortgage payable secured by land and building,
bearing interest at 1% over prime, maturing
$2,321 monthly, including interest, due
November 12, 1999
This note is normally renewed for successive
one-year terms. 156,000
Notes payable to officers of the Company bearing
interest at rates ranging from 8.5% to 9.1%, due
on demand 267,000
Other secured notes at various interest rates and
various maturities 281,000
----------------
Total 8,834,000
Less current portion 8,691,000
----------------
Total long-term debt $ 143,000
================
(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 of December 31, 1999. The revolving line of credit is
subject to a borrowing base limit equal to the sum of 80% of eligible
receivables, 50% of eligible inventories, 60% of eligible fixed assets and an
intangible asset advance amount of $1,400,000. Both facilities require monthly
interest payments at the prime rate (7.75% at June 30, 1999). The term loan
portion is payable in equal quarterly installments of $200,000 through
December 31, 1999, when the full amount of the then unpaid balance of the note
will be due. In addition, all proceeds from the sale of long-term assets in
excess of $50,000 and all proceeds from the issuance of equity securities
shall be applied to reduce the term loan. The term loan had an outstanding
balance at June 30, 1999, of $3,800,000. The revolver portion of the facility
had an outstanding balance at June 30, 1999, of $4,000,000. At June 30, 1999,
no amounts were 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, 1999, the
Company did not meet certain of the financial covenants; however on July 24,
1999, the bank waived the current covenants and amended the future covenants.
In addition, the amendment requires the payment of a fee of $140,000 in July
1999, August 1999, and September 1999, if the Company is not in compliance
with certain provisions of the agreement.
(b) This amount is due to the former owner of Micro Motors and the
Company's largest shareholder and are subordinated to the bank debt discussed
above.
Aggregate annual maturities on long-term debt for the next five years are
as follows: 2000, $8,691,000; and 2001, 143,000.
NOTE 3 - 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 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 $764,000 and $970,000, including approximately $340,000 paid
to the Company's largest shareholder for the years ended June 30, 1999 and
F-10
1998, respectively. For the years ending June 30, 1999 and 1998, the Company
received $0 and $307,000 of sublease payments from DCM, the purchaser of its
dental center operations. Management believes the Company is no longer
obligated under the dental center leases and these obligations were assumed by
DCM. Future minimum lease payments for the years ending June 30, are; 2000,
$641,000; 2001, $501,000; 2002, $214,000; 2003, $110,000; for a total of
$1,466,000, including $612,000 to the Company's largest shareholder.
On the 10th of September 1999, the United States Court of Appeals for the
Tenth Circuit reversed the decision of Judge Daniel B. Sparr by which he
dismissed an action filed against the Company and Biotrol in the U.S. District
Court for Colorado by Cottrell, Ltd. ("Cottrell"). The Court agreed with the
Company with respect to its assertion that Cottrell should not be permitted to
bring a FIFRA action by simply identifying the same as a Lanham Act claim,
and, accordingly, that claim was dismissed. The Court disagreed, however,
with the Company stating that Cottrell had alleged sufficient facts to support
a Lanham Act claim independent of FIFRA. The case was remanded to the
District Court for further proceedings.
On June 12, 1997 the Company sold the assets of its DCM dental clinic
management subsidiary to Professional Dental Management, LLC. Subsequent to
that sale, Professional Dental Management, LLC was restructured and the
survivor, Consolidated Dental Management, Inc., among other things, assumed
liability for leases of dental clinic offices situated in Sears' store in
north-central California. On May 9, 1999, due to the poor financial condition
of the Consolidated, Sears required the Company to guaranty Consolidated's
performance those leases of up to approximately $200,000.
Biotrol is one of 16 named defendants, excluding John Does 1-100, in
these two matters which are part of what has been designated "New Jersey Latex
Litigation" cases. The cases have been centralized and are proceeding under
the terms of a variety of case management orders. Plaut v. Biotrol has been
selected as one of three "Bellwether" cases and is expected to proceed to
trial in February 2000. The claim has been submitted to Biotrol's product
liability carrier, Chubb Insurance Companies.
The Company and its subsidiaries are currently party to other disputes,
which involve or may involve litigation and claim unspecified damages.
Management believes that the outcome of the above matters will not have a
material adverse effect on the consolidated financial statements of the
Company. However, the ultimate outcome in any litigation involves
uncertainty. Management is unable to estimate the magnitude of the exposure
to the Company in these matters. No accruals have been provided for in the
accompanying consolidated financial statements.
NOTE 4 - INCOME TAXES
The provision for income taxes (credits) for the years ended June 30,
1999 and 1998 is as follows:
1999 1998
--------------- --------------
Current state taxes (credits) $ (11,000) $ 91,000
Deferred taxes (credits) (2,280,000) 60,000
--------------- --------------
$ (2,291,000) $ 151,000
=============== ==============
F-11
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) is as follows:
1999 1998
--------------- --------------
Federal income taxes (credits),
computed at the statutory rate $ (3,929,000) $ 177,000
Change in valuation allowance - (285,000)
State income taxes (credits) (337,000) 91,000
Non-deductible items, primarily goodwill 2,064,000 164,000
Other (89,000) 4,000
--------------- --------------
$ (2,291,000) $ 151,000
=============== ==============
Deferred income tax assets and liabilities in the accompanying balance
sheet at June 30, 1999 consist of the following:
Assets:
Net operating loss carryforwards $ 1,835,000
Contract payable 80,000
Accrued expenses 247,000
Intangible assets 710,000
Inventories 298,000
Other 71,000
--------------
Total deferred tax assets 3,241,000
Liabilities, property and equipment (341,000)
--------------
Net deferred tax assets $ 2,900,000
==============
Net deferred tax assets total $2,900,000 of which $1,200,000 are included
in the accompanying consolidated balance sheet as a current asset with the
remaining $1,700,000 included as long-term assets. A portion of these
deferred tax assets reflects the benefit of a $5,300,000 tax loss
carryforward, of which approximately $250,000 expires in 2003; $150,000
expires in 2004 and the balance of $4,900,000 expires in 2019. Realization of
these deferred tax assets relating to the net operating loss carryforwards is
dependent on the Company generating sufficient taxable income prior to the
expiration of the loss carryforwards. The remaining deferred tax assets do
not expire until such time as they become deductible losses at which point
they will expire in 20 years from the date they are deducted on the Company's
income tax returns. The Company will need to generate taxable income of
approximately $7.3 million in order to fully realize the deferred tax assets.
Although realization is not assured, management believes it is more likely
than not that the net deferred tax assets will be realized based on its
projected taxable income and the implementation, if necessary, of tax planning
strategies.
During 1999, the Company incurred several one-time expenses which
management does not expect to incur in the future. These expenses total
approximately $7.4 million and include the write off of goodwill at the Micro
subsidiary, the write off of a receivable from the sale of a former segment of
business, and charges to operations for the remaining portion of employment,
consulting and non-compete contracts deemed to have no future value to the
Company. (See "Note 6."). Management also believes the merger of three of
its customers, which resulted in a delay in orders from this newly
consolidated customer, negatively impacted the Company's 1999 results.
Considering these items, management has forecasted an increase in sales in
2000 of at least $3.5 million or 19%. Sales for the first two months of 2000
are above 1999 comparable sales by approximately 21%. As a result of the
one-time expenses and the forecasted increased sales levels, management has
projected that 2000 will generate a pre-tax profit of at least $1.6 million.
At this income level the deferred tax assets would be realized prior to the
expiration of the carryforward period.
F-12
Management and the Company's Board of Directors have also concluded that
should the Company not meet these projections, the Company would implement a
tax planning strategy to utilize the deferred tax assets prior to their
expiration. This strategy involves the sale of the OMS subsidiary to a third
party. Management has estimated that the value of this subsidiary is
sufficient to recover the entire amount of the recorded deferred tax asset.
The costs to implement this strategy are estimated at approximately $360,000
net of related income taxes. No reserve for these costs have been included in
the accompanying financial statements as management believes that it will not
be necessary to implement this strategy.
Net realizable deferred tax assets could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced
or if the estimated fair value of OMS is reduced. Also, future changes in
ownership of the Company could limit the Company's ability to realize these
assets.
NOTE 5 - STOCKHOLDERS' EQUITY
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
775,639 shares remaining in the option plans, which are available for grant in
future years. In addition, the Company has issued warrants to acquire 133,000
shares, exercisable at a weighted-average price of $2.20 and with a
weighted-average remaining contractual life of 2.5 years. The Company
recorded expenses of $55,000 related to the grant of 60,000 warrants during
1998.
Transactions involving the stock options are summarized as follows:
1999 1998
-------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
- ------------------------------------------------------------------------------
Outstanding at beginning of year 1,249,361 $ 2.22 918,636 $ 2.28
Granted 255,000 1.58 405,000 2.11
Exercised - - (25,000) 1.75
Forfeited (230,000) 2.18 (49,275) 2.50
-------------------------------------------
Outstanding at end of year 1,274,361 $ 2.10 1,249,361 $ 2.22
-------------------------------------------
Exercisable at end of year 1,078,529 $ 1.88 916,028 $ 2.27
-------------------------------------------
Weighted-average fair value per
option granted during the year $ 0.84 $ 0.92
------------ ------------
F-13
A further summary about fixed options outstanding June 30, 1999, is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.25 to $1.70 160,000 9.7 years $ 1.33 55,001 $ 1.33
$1.75 to $2.50 1,082,607 7.2 years 2.20 991,774 2.24
$2.85 to $2.90 31,754 7.3 years 2.90 31,754 2.65
--------- ------ --------- -------
1,274,361 $ 2.10 1,078,529 $ 2.21
========= ====== ========= =======
</TABLE>
The three option plans are substantially similar and call for the vesting
as approved by the Board of Directors, 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 plans. Had compensation cost for the stock-based
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 basic and diluted earnings (loss) per common share would have been
adjusted to the pro forma amounts shown below:
1999 1998
--------------- --------------
Net income (loss)
As reported $ (8,934,000) $ 354,000
Pro forma (9,037,000) 314,000
Basic and diluted earnings (loss) per
common share
As reported $ (1.02) $ 0.04
Pro forma (1.03) 0.04
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend rate for all years; price volatility of 55% in 1999,
and 35% in 1998; risk-free interest rates of approximately 5.5% in 1999 and
6.0% in 1998; and expected lives of five years.
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.
Employee Stock Purchase Plan
In July 1998, the Company adopted an Employee Stock Purchase Plan, under
which up to 200,000 shares of common stock may be issued to substantially all
full-time employees, if they choose to participate. Employees can choose each
year to have between 1% and 10% of their defined earnings withheld to purchase
the Company's common stock at a price that is 85% of the lower of the market
price at July 1 and January 1 of each year or the date on which the shares are
fully paid by the employee. The minimum purchase price under the plan is
$2.00 per share, unless the Company's Stock Purchase Plan Committee determines
a lower price is appropriate. During 1999, no shares were purchased under the
F-14
plan. As is permitted by generally accepted accounting principles, the
Company follows the provisions of APB Opinion No. 25 in accounting for the
plan and, accordingly, no compensation expense is recognized.
NOTE 6 - UNUSUAL CHARGES
On June 12, 1997, the Company completed the sale of certain assets of its
dental clinic management (DCM) subsidiary operation in California and recorded
the loss on this sale as discontinued operations. In connection with the sale
and in subsequent re-negotiations, the Company received a promissory note for
$850,000 and convertible preferred stock in California Dental Management
(CDM), the predecessor to DCM, totaling $900,000 plus warrants to acquire
additional common stock. CDM has continued to perform poorly and during the
fourth quarter of 1999, management determined that the receivable and the
preferred stock were worthless and accordingly, charged operations for
approximately $1,750,000. At June 30, 1999, no assets of the discontinued
operations remain on the balance sheet of the Company.
During the fourth quarter of 1999, management determined that the
intangible assets of Micro were impaired based on Micro's recent financial
performance. For 1999, Micro reported net losses of approximately $1.2
million prior to charges for interest, depreciation and amortization and
unusual charges. In addition, management determined that the estimated future
cash flows from this operation were not expected to be sufficient to recover
the recorded amount of all long-term assets. In connection with other
activities, management had engaged an investment banker to determine the value
of Micro. Management compared the value determined by the investment banker,
net of anticipated disposal costs, to the recorded value of Micro's assets.
As a result, management determined that intangible assets of Micro totaling
$6.6 million were impaired and wrote them down in the fourth quarter of 1999
by $4.8 million. This charge to operations is included in unusual charges in
the Company's consolidated statement of operations.
In addition, during the first quarter of 1999, management determined that
a consulting agreement and related non-compete agreement entered into during
the acquisition of OMS had no future value. Accordingly, management has
included in unusual charges the write off of these agreements totaling
approximately $314,000.
Also, during the first quarter of 1999, management amended the duties of
an executive officer under an existing employment contract entered into during
the acquisition of Micro. Management determined the value of the new position
is less than the previous position of the executive; however, the Company is
required to honor its obligation under the contract, which obligation expires
in 2000. As a result, management charged operations for approximately
$525,000, which represents the excess of the payments required under the
contract compared to the value established for the new position.
NOTE 7 - SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
There are four reportable segments: infection control products,
preventive dentistry products, medical/dental equipment, and electronic motion
controllers. The accounting policies applied to determine the segment
information are the same as those described in the summary of significant
accounting policies. Interest expense is allocated based upon the specific
identification of debt incurred by the individual segment. Corporate overhead
and the provision for income taxes are not allocated to the individual
reported segments. Intersegment sales and transfers are accounted for at
F-15
amounts that management believes provides the transferring segment with fair
compensation for the products transferred, considering their condition, market
demand, and, where appropriate, a reasonable profit that recognized which
segment will be responsible for marketing costs. Management evaluates the
performance of each segment based on income (loss) before income taxes.
Financial information with respect to the reportable segments follows (in
thousands):
<TABLE>
<CAPTION>
Infection Preventive Medical/ Electronic
Control Dentistry Dental Motion
1999 Products Products Equipment Controllers Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales from external customers $8,170 $1,365 $5,094 $3,713 $18,342
Intersegment sales - 811 925 - 1,736
Depreciation and amortization 73 100 726 473 1,372
Unusual charges - - 131 314 445
Interest expense 15 96 481 29 621
Segment profit (loss) (188) 183 (2,565) 352 (2,218)
Segment assets 3,273 1,657 7,260 2,787 14,977
Expenditure for segment assets 157 283 317 20 777
<CAPTION>
Infection Preventive Medical/ Electronic
Control Dentistry Dental Motion
1998 Products Products Equipment Controllers Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales from external customers $8,457 $ 867 $ 7,556 $5,768 $22,648
Intersegment sales - 886 838 - 1,724
Depreciation and amortization 42 123 732 598 1,495
Interest expense - 85 410 45 540
Segment profit (loss) 980 12 (98) 1,976 2,870
Segment assets 2,761 1,270 12,334 2,540 18,905
Expenditure for segment assets 73 96 273 80 522
</TABLE>
The following schedules are presented to reconcile amounts in the
foregoing segment information to the amounts reported in the Company's
consolidated financial statements (in thousands):
F-16
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------
Profit/(loss) Assets Profit/(loss) Assets
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total for reportable segments $ (2,218) $14,977 $2,870 $18,905
Intersegment / profit 10 - (105) --
Unallocated amounts:
Corporate (1,621) 2,721 (1,872) 3,934
Unusual charges (6,944) - - --
Other expense, net (452) - (388) -
--------- ------- ------- -------
Consolidated (11,225) 17,698 505 22,839
--------- ------- ------- -------
</TABLE>
Reconciliation of other significant items:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------
Reportable Reconciling Reportable Reconciling
Segments Items Consolidated Segments Items Consolidated
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization $1,372 $ 58(B) $1,430 $1,495 $ 21(B) $1,516
Unusual items 445 6,944(A) 7,389 - - --
Interest expense 621 411(B) 1,032 540 391(B) 931
Expenditures for segment assets 777 98(B) 875 522 288(B) 810
</TABLE>
(A) Includes write off of goodwill, write off of DCM receivable, and a
portion of the amendment of an executive's position, which is not allocated to
a reportable segment.
(B) Amounts allocated to corporate.
The Company had foreign sales in the amount of $1,745,000 in 1999 and
$1,140,000 in 1998, primarily in Canada and Japan. During 1999, three of the
Company's customers merged into one company. Sales to this consolidated
customer for 1999 and 1998 were $2,362,000 and $3,100,000, respectively. No
other single customer generated in excess of 10% of consolidated sales.
NOTE 8 - EARNINGS PER SHARE
The weighted-average number of common shares and common share equivalents
outstanding during the year used to compute basic and diluted earnings/(loss)
per common share is as follows:
1999 1998
--------------- --------------
Weighted-average common shares used in
computation of basic earnings (loss)
per share 8,787,300 8,712,660
Effect of dilutive securities:
Common stock options and warrants * 56,565
Convertible preferred stock * 39,065
--------------- --------------
Weighted-average common and common share
equivalents used in the computation of
diluted earnings (loss) per share 8,787,300 8,808,290
=============== ==============
F-17
*Common shares issuable upon exercise of the employee stock options and
common stock warrants (see Note 5) and upon the conversion of 78,129 shares of
preferred shares have not been included in the computation because their
inclusion would have been antidilutive.
NOTE 9 - MANAGEMENT PLANS
For the year ended June 30, 1999, the Company reported a loss from
operations of approximately $2.9 million prior to $7.4 million of unusual
charges discussed in Note 6. In addition, as of June 30, 1999, the Company
had negative working capital of approximately $4.0 million. As a result of
the poor operating performance in 1999, the Company's primary bank has
requested that the Company find alternative financing sources and has
requested repayment of its outstanding debt by December 31, 1999.
Management believes the 1999 results were negatively affected by several
factors. Biotrol reported a segment loss of $188,000 versus a profit for 1998
of $980,000. Management believes that this was primarily due to the
consolidation of three of its customers which resulted in a delay in orders
and by certain favorable pricing to foreign exporters. Management believes
that the effect of the consolidation of its larger customers has passed. In
addition, favorable pricing to exporters has ceased. Management has reduced
certain sales and marketing expenses and is currently investigating the
utilization of other cost saving measures. Accordingly, management believes
Biotrol will return to profitable operations in 2000.
Micro reported a segment loss for 1999 of $2.6 million compared to a
segment loss in 1998 of $98,000. The increased losses is primarily
attributable to a 33% decline in sales. Management has replaced the local
management team at Micro and has taken steps to improve engineering and
delivery times, quality control and pricing concerns. In addition, management
has introduced new products to the market as well as attempting to open new
markets for its existing products. With these changes in place, management
believes Micro will improve its financial results in 2000.
OMS reported a segment profit of $352,000 in 1999 versus a segment profit
of $2.0 million in 1998. Management attributes the decline in profitability
to a 35% decline in sales due to the slump in the Asian semiconductor
industry. Most of OMS's customers depend heavily on the Asian semiconductor
fabrication equipment market. Since March 1999, sales at OMS have indicated a
possible increase in the semiconductor fabrication industry. Future orders
since June 30, 1999 have increased as activity from customers is returning to
pre-slump levels; according, management believes OMS will return to its
previous profitability level.
Although no assurances can be given, considering all of the above factors
management has forecasted an increase in consolidated sales of 19% or $3.5
million and a pretax profit of approximately $1.6 million.
Management is currently investigating financing options which would
replace their current banking relationship and has engaged an outside
investment banker to assist them in locating and securing this financing.
These options include the issuance of additional preferred stock of between $2
to $4 million. It is believed that with such additional financing, the
Company could secure a traditional asset-based lending structure to replace
the remaining bank debt. Management is also investigating a possible
synergistic merger partner. Should the Company be unable to secure
replacement financing, the Board has authorized management to pursue the sale
of one of its operating subsidiaries in order to raise sufficient funds to
satisfy the current working capital needs of the Company as well as pay down
the bank debt as necessary. Management is currently evaluating this option.
F-18
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with 16(a) of the Securities Exchange Act of 1934
Officers and Directors
As of June 30, 1999, the officers and directors of the Company were as
follows:
NAME AGE POSITION
- ------------------------------------------------------------------------------
Kent E. Searl 58 Chairman of the Board, Director
Ronald G. Coss 62 Vice Chairman, Director
George J. Isaac 54 Vice President, Director
Richard N. Reinhardt 67 Director
Robert A. Hovee 57 Director
John B. Zaepfel 63 Director
Kent E. Searl is a co-founder of the Company and currently serves as
Chairman of the Board, Chief Executive Officer, and President. He has served
as a director of the Company and its predecessor, since its inception in 1978.
In addition to serving as Chairman of the Board, Mr. Searl is a member of the
Executive Committee of the Board of Directors. Since August 1969, he has also
served on 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 subsidiary until June 30, 1997, at which time Biotrol
began marketing those products. Mr. Searl was elected by the shareholders of
the Company to serve as a Class III Director until the year 2000 annual
shareholders' meeting, or the election and qualification of his successor.
Ronald G. Coss founded Micro Motors, Inc. in 1971 and served as its
Chairman since its organization. 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 Compensation Committee of the Board of Directors. He also acts
as Chief Technology Officer to the Company. Mr. Coss has been the primary
engineer in the 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 was elected by the shareholders of the Company to
serve as a Class III Director until the year 2000 annual shareholders' meeting
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 and Compensation Committees of the Board of Directors, and is Vice
President, Secretary/Treasurer, and Chief Financial Officer of the Company.
Mr. Isaac is a certified public accountant and was a principal in the
Certified Public Accounting firm of Joseph B. Cohan and Associates, Worcester,
Massachusetts. Mr. Isaac is a former director of Professional Sales
Associates, Inc. ("PSA"). Mr. Isaac received a B.S. degree 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 the 2001 annual shareholders' meeting, 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 Compensation Committee of the
Board of Directors. Mr. Reinhardt has served as President and a 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. He attended Cornell
College and received a B.A. degree in Business Administration from
Northwestern University. Mr. Reinhardt was elected by the shareholders of the
Company to serve as a Class II director until the 1999 annual shareholders'
meeting, 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 and Compensation
Committees. 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. degree in Business Administration and a
B.A. degree in International Business from the University of Washington in
Seattle, Washington, as well as a Masters Degree in International Management
from the American Graduate School of International Management (Thunderbird)
where he was the Barton Kyle Yount Scholar, 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 1999 annual shareholders' meeting or the election
and qualification of his successor.
John B. Zaepfel has served as director of the Company from August 27,
1996 until his resignation effective June 15, 1999. He served on the
Company's Audit Committee and on the Advisory Committee advising the Board of
Directors of Micro Motors, Inc. prior to its merger into Micro in July 1995.
Mr. Zaepfel spent fifteen years as a CEO, most recently as Chief Executive
Officer of CPG International, Inc., which he founded in 1985 in a leveraged
buy-out of a division of four subsidiaries 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. Mr. Zaepfel has previously served as a director of other
public companies. Mr. Zaepfel is a graduate of the University of Washington,
and holds a Master in Business Administration degree from the University of
Southern California. Mr. Zaepfel served as a Class II Director. The Board is
currently seeking a suitable candidate to succeed Mr. Zaepfel.
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 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 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.
Gary G. Garleb has served as Vice President and General Manager of Oregon
Micro Systems, Inc., since its acquisition by the Company in July 1995. Prior
to that time, he served as Vice President for Operations and Manufacturing of
Micro Motors, Inc. from 1974 to 1995.
George M. Saiz has served as Vice President and General Manager of Micro
Motors, Inc. since January 1998. Mr. Saiz has significant experience in the
medical device manufacturing arena, having served as General Manager of Shutt
Medical Technologies, part of the Bristol-Myers Squibb Companies since 1991.
Compliance With Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who own 10% or more of the Company's
outstanding common stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and owners of 10% or more of the Company's outstanding common stock
are required by SEC regulations to furnish the Company with a copy of all
Section 16(a) forms they file.
Based solely upon a review of the Forms 3 and 4 and any amendments
thereto furnished to the Company during the Company's fiscal year ended June
30, 1999, and Forms 5 and amendments thereto furnished to the Company with
respect to such fiscal year, or written representations that no Forms 5 were
required to be filed by such persons, the Company is not aware of any failure
of any officer, director or beneficial owner of 10% or more of the Company's
outstanding common stock during the fiscal year ended to make timely filings
in accordance with the requirement of Section 16(a).
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.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation Awards
- --------------------------------------------------------------------------------------------------------------------
Other Re- Securities All
Annual stricted Underlying LTIP Other
Name and Compen- Stock Options/ Pay- Compen-
Principal Position Year Salary Bonus Sation Awards SAR(#) outs Ation(4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kent E. Searl 1999 $162,528 - - - None - -
Chairman/CEO/ 1998 174,858 - - - None - -
President 1997 160,000 - - - None - -
Ronald G. Coss(1) 1999 $359,062 - $39,619 - 100,000(2) - $1,593
Vice Chairman 1998 325,163 - $35,406 - None - $1,671
Chief Technical Officer 1997 364,320 - - - N/A - -
George J. Isaac(3) 1999 $195,436 - - - None - $1,466
Vice President, Chief Financial 1998 189,269 - - - None - -
Officer, Secretary-Treasurer, 1997 180,000 - - - None - -
Director
Charles L. Bull 1999 $100,000 $39,089 - - None - $1,739
General Manager 1998 100,000 28,563 - - None - 1,633
Challenge Products, Inc. 1997 100,000 13,276 - - None - -
Gary G. Garleb 1999 $124,271 - $ 9,986 - None - $1,467
General Manager 1998 118,563 - $15,539 - None - $1,350
Oregon Micro Systems, Inc. 1997 111,435 - - - None - -
</TABLE>
(1) 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, Inc. with and into the Company's Micro
Acquisition subsidiary. In addition, the Company assumed two notes of Micro
Motors, Inc. payable to Mr. Coss in the aggregate amount of $938,450, relating
to termination of Mr. Coss's long term employment agreement with Micro Motors,
Inc. and prior unpaid earned compensation
(2) On April 8, 1999, Mr. Coss was granted an option to purchase 100,000
shares of the Company's common stock under the 1994 Stock Option Plan in
consideration for his agreement to restructure his employment agreement
effectively relieving the Company of the obligation to pay any bonus
contemplated by his previous agreement.
(3) Mr. Isaac was granted an option to purchase 50,000 shares under the
1994 Stock Option Plan in connection with his acceptance of employment by the
Company.
(4) Employer contributions to the Pro-Dex, Inc. 401(k) Plan.
Employment Agreements, Termination of Employment, and Change of Control
Arrangements
The Compensation Committee of the Board of Directors has renewed
employment agreements with certain executive officers of the Company entered
into on July 26, 1995, which expired on June 30, 1998. During the 1999 fiscal
year, the Company also renegotiated its agreement with Mr. Coss previously
scheduled to expire on June 30, 2000. Effective April 1, 1999, Mssrs. Searl,
Isaac and Coss agreed to salary reductions of 10% due to the financial
condition of the Company, which reductions shall remain effective until such
time as the Company's financial condition improves. The remaining employment
agreement with Mr. Bull expires December 31, 2001. The Company accrued
salaries in an aggregate amount of $717,026 to its executive officers for the
year ended June 30, 1999.
Kent E. Searl serves as the Chairman, Chief Executive Officer and
President of the Company. He is the co-founder of the Company, and has served
as a director of the Company since its organization. For the year ending June
30, 1999, Mr. Searl was paid a salary of $162,528. Pursuant to his three year
employment agreement, effective July 1, 1998, Mr. Searl is entitled to an
annual salary of $180,000. Mr. Searl is also entitled to reimbursement of
reasonable expenses and to such other benefits as the Company's Board of
Directors approved for executive management. Mr. Searl is located in the
Company's Boulder, Colorado executive offices and travels frequently to all
the Company's subsidiaries.
George J. Isaac has served as the Company's Vice President and Chief
Financial Officer since July 26, 1995. On November 5, 1998, he was re-elected
the Company's Secretary-Treasurer by the Board of Directors. Mr. Isaac's
three year employment agreement effective July 1, 1998 provides that he
receive an annual salary of $195,000 during the term of the agreement as well
as reimbursement of reasonable expenses and to such other benefits as the
Company's Board of Directors approved for executive management.
Ronald G. Coss currently serves as Vice Chairman and Chief Technology
Officer of the Company. Mr. Coss had, prior to the merger, been compensated
by Micro Motors, Inc. at a salary of $560,000 for the fiscal year ended March
31, 1995 and $456,000 for the fiscal year ended March 31, 1994. Under his
current Agreement, annual base compensation to Mr. Coss was $360,000,
adjustable upward for inflation each July 1. The agreement accords Mr. Coss
six weeks annual leave which he may elect to take in cash in lieu of leave,
provides that he receive use of a Company vehicle for business purposes, and
certain other perquisites comparable to with those received prior to the
merger.
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. Upon the merger, the Company also assumed two notes payable
by Micro Motors, Inc. to Mr. Coss relating to termination of Mr. Coss's long
term employment agreement with Micro Motors, Inc. and prior unpaid earned
compensation. See "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS."
On August 1, 1993, the Company entered into an employment agreement with
Mr. Charles L. Bull, former President of Challenge Products. An agreement was
recently reached to extend that contract on the same terms and conditions
through December 31, 2001.
Compensation Committee Report on Executive Compensation
The Compensation Committee develops and recommends to the Board of
Directors the compensation policies of the Company. It also recommends the
compensation to be paid to the executive officers of the Company. The
Compensation Committee consists of three directors, two of whom are not
current or former employees of the Company and one of whom is a non-voting
member and the Company's Chief Financial Officer. The basic compensation
philosophy of the Board of Directors has been to provide competitive salaries
and competitive incentives to achieve financial goals.
Compensation to Directors
Directors who are employees of the Company do not receive additional
compensation for services as directors, except for reimbursement of reasonable
meeting attendance expenses. Non- employee directors each receive a $3,000
quarterly fee, $1,000 for each meeting attended and $500 for each board of
directors committee meeting attended on a date other than a regular meeting of
the Board. Non-employee directors unanimously elected to waive their fee for
the quarter ended June 30, 1999. The Company accrued an aggregate of $53,000
as non- employee director compensation, of which $38,000 has been paid, for
the year ended June 30, 1999.
The Company has a shareholder approved Director's Stock Option Plan (the
"Directors' Plan") pursuant to which non-employee directors may be granted
options to purchase shares of the Company's common stock. In accordance with
the Directors' Plan's provisions, the Board of Directors previously adopted a
policy to grant each outside director an option to purchase 20,000 shares of
common stock on the date of his commencement of service as a director and an
option to purchase 15,000 shares annually, exercisable at the average closing
price on NASDAQ for the month of November of the year of grant, on the
anniversary date of such service. The maximum term of each option is ten
years. During the fiscal year ended June 30, 1999, the Company's three
outside directors, Messrs. Reinhardt, Hovee and Zaepfel, each were granted
options to purchase 15,000 shares of common stock exercisable at $2.00, $2.00,
and $2.50 respectively.
Option Grants and Exercises in the Last Fiscal Year
The following tables set forth information regarding stock options
granted to and exercised by the named executive officers during the fiscal
year ended June 30, 1999:
INDIVIDUAL OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date
- ------------------------------------------------------------------------------
Kent E. Searl None - - -
Ronald G. Coss(1) 100,000 46% $ 1.25 04/07/09
George J. Isaac None - - -
(1) On April 8, 1999, Mr. Coss was granted an option to purchase 100,000
shares of the Company's common stock under the 1994 Stock Option Plan in
consideration for his agreement to restructure his employment agreement
effectively relieving the Company of the obligation to pay any bonus
contemplated by his previous agreement.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES(1)
Value of
Number of Securities Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End(1)
-------------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------
Kent E. Searl 202,051 -0- -0- -0-
Ronald G. Coss(2) 50,000 50,000 $4,500 $4,500
George J. Isaac 250,000 -0- -0- -0-
(1) The indicated value of the unexercised In-the-Money Options was
determined by multiplying the number of unexercised options (that were
In-the-Money on June 30, 1999) by the closing sales of the Company's common
stock on June 30, 1999 (as reported on NASDAQ) and from that total,
subtracting the total exercise price.
(2) On April 8, 1999, Mr. Coss was granted an option to purchase 100,000
shares of the Company's common stock under the 1994 Stock Option Plan in
consideration for his agreement to restructure his employment agreement
effectively relieving the Company of the obligation to pay any bonus
contemplated by his previous agreement.
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, 1999. At June 30, 1999, 50,000 shares
were available for grant and no options to purchase were outstanding under
this Plan.
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. Under the plan, 1.5 million shares have been
reserved. 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, 1999 there were outstanding options under the 1994 Stock Option Plan to
acquire 1,138,505 shares of the Company's common stock.
Directors' Stock Option Plan
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. Under the plan, 500,000 shares have been reserved. As of June 30,
1999, there were outstanding options under the Directors' Stock Option Plan to
acquire 135,856 shares of the Company's common stock. A disinterested
majority of the Board has voted, in furtherance of the Board's decision
respecting the remuneration of non-employee directors, in favor of the
additional automatic grant each year during the term of service to purchase
15,000 shares of the Company's common stock, which grants are reflected in the
foregoing total of outstanding options.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Set forth in the following table is information as of June 30, 1999, 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
Name and Address Number of Shares Percent of Class (1)
- ------------------------------------------------------------------------------
Kent E. Searl
1401 Walnut St., Suite 540
Boulder, CO 80302 950,680(2)(3)(4) 10.81%
Ronald G. Coss
1401 Walnut St., Suite 540
Boulder, CO 80302 2,511,104(5) 28.57%
Richard N. Reinhardt
1401 Walnut St., Suite 540
Boulder, CO 80302 560,884(2)(3)(4)(6)(7)(8) 6.38%
George J. Isaac
1401 Walnut St., Suite 540
Boulder, CO 80302 255,500(3) 2.90%
Robert A. Hovee
1401 Walnut St., Suite 540
Boulder, CO 80302 65,000(6)(7)(8) 0.74%
John B. Zaepfel
1401 Walnut St., Suite 540
Boulder, CO 80302 50,000(6) 0.56%
All officers and directors
as a group (6 persons) 4,056,639(2)(3)(4)(5)(6)(7)(8) 50.00%
(1) Calculated pursuant to Rule 13d-3 under Securities Exchange Act of
1934.
(2) Includes 250,000 shares of common stock; 58,229 shares of preferred
stock convertible share-for-share into common stock at any time; and Warrants
to acquire 13,000 shares of common stock owned of record by Professional Sales
Associates, Inc. ("PSA"). Messrs. Searl and Reinhardt are officers and
directors of PSA and may be deemed to beneficially own PSA's shares. Mr.
Searl, individually, owns of record 407,200 shares of common stock and 19,900
shares of preferred stock. Mr. Reinhardt, individually, owns of record 41,850
shares. In addition, Mr. Reinhardt's spouse, individually, owns 29,000
shares, which are attributed to him in this chart.
(3) Includes options held by Messrs. Searl, Reinhardt, and Isaac to
purchase 50,000 shares each shares of the Company's common stock at $2.50 per
share. Also includes options held by Messrs. Searl and Reinhardt to purchase
50,000 shares each at $1.75 per share. Also includes options held by Messrs.
Searl and Isaac to purchase 100,000 and 200,000, respectively, of the
Company's common stock at $2.13 per share. These shares have been added to
outstanding shares in calculating applicable 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
applicable individual percentage of beneficial ownership.
(5) Includes 547,953 shares of the Company's common stock distributed
from the Micro Motors Employee Stock Ownership Plan during the year, and
options held by Mr. Coss to purchase 100,000 shares of the Company's common
stock at $1.25 per share.
(6) Includes automatic grant options to outside directors Messrs.
Reinhardt, Hovee, and Zaepfel to purchase 20,000 shares each of the Company's
common stock at $2.44 per share and 15,000 shares at $2.90 per share.
(7) Includes automatic grant of options of outside directors Messrs.
Reinhardt and Hovee to acquire 15,000 shares each of the Company's common
stock at $2.50 per share and 15,000 shares a $2.00 per share.
(8) The officers and directors as a group had in the aggregate, as of
June 30, 1999, together with their affiliates, voting power with respect to
3,144,654 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.
Set forth in the following table is information as of June 30, 1998 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
Name and Address Number of Shares Percent of Class (1)
- ------------------------------------------------------------------------------
Kent E. Searl
1401 Walnut Street, Suite 540
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
Pursuant to the merger of Micro with the Company's subsidiary, 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 a base salary of $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. During the first quarter
of 1999, management amended his duties under that employment contract.
Management determined the value of the new position is less than the previous
position of the executive; however, the Company is required to honor its
obligation under the contract. As a result, management charged operations for
approximately $525,000, which represents the excess of the payments required
under the contract compared to the value established for the new position.
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 $2,198, 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 $29,147. 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 April 25, 1997, the Company unwound the acquisition of Pnu- Light Tool
Works, Inc. ("Pnu-Light"). The Company acquired the assets of Pnu-Light, a
developer of patented pneumatic lighting mechanisms for hand tools in May
1996, in exchange for 368,483 shares of the Company's common stock. The
Company anticipated that Pnu-Light's patented lighting apparatus would
complement the pneumatic motors used in dental handpieces manufactured by
Micro. The anticipated synergy between Pnu-Light and Micro did not meet the
Company's expectations. Accordingly, and pursuant to the procedures contained
in the Pnu-Light Asset Purchase Agreement, all of the shares of its common
stock issued in the transaction for the Pnu-Light assets were returned to the
Company. In exchange for the reconveyance of its shares, the Company assigned
the patent covering the pneumatic lighting apparatus to Pnu-Light's successor
entity, while retaining a nonexclusive, fully paid, worldwide license to the
technology.
On June 12, 1997, the Company completed the sale of certain assets of its
dental clinic management (DCM) subsidiary operation in California and recorded
the loss on this sale as discontinued operations. In connection with the sale
and in subsequent re-negotiations, the Company received a promissory note for
$850,000 and convertible preferred stock in California Dental Management
(CDM), the predecessor to DCM, totaling $900,000 plus warrants to acquire
additional common stock. CDM has continued to perform poorly and during the
fourth quarter of 1999, management determined that the receivable and the
preferred stock were worthless and accordingly, charged operations for
approximately $1,750,000. At June 30, 1999, no assets of the discontinued
operations remain on the balance sheet of the Company.
On March 8, 1999, the Company distributed shares of Pro-Dex, Inc. common
stock owned by the Micro Motors Employee Ownership Plan (the "Plan"). The
Company previously made application for and received a favorable determination
from the Internal Revenue Service with respect to the termination of the Plan
and distribution of its shares. The shares, acquired by the Plan in
conjunction with the 1995 merger of Micro Motors, Inc. into a wholly owned
subsidiary of the Registrant, were issued without restriction to non-affiliate
participants. Of the 1,042,195 shares transferred to participants, 481,513
are held by affiliates of the Registrant.
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Document Pages
- ------------------------------------------------------------------------------
3.1 Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to Pro-Dex, Inc.
Registration Statement No. 33-74397).
3.2 Bylaws (incorporated herein by reference to Exhibit
3.2 to Pro-Dex, Inc. Registration Statement No.
33-74397).
7.1 Pro-Dex, Inc. Form 8-K dated July 26, 1995
(incorporated herein by reference to the Company's
Form 8-K dated July 26, 1995) and Financial
Supplement to Form 8-K dated July 26, 1995
(incorporated herein by reference to the Company's
Form 10-KSB, dated June 30, 1995, and Supplement to
Form 8-K, contained therein).
7.2 Merger Agreement between Pro-Dex, Inc., Micro Systems
Acquisition Corporation, and Micro Motors, Inc.,
dated July 26, 1995 (incorporated herein by reference
to Exhibit 7.1 to the Company's Form 8-K dated July
26, 1996).
7.3 Acquisition Agreement between Pro-Dex, Inc., Oregon
Micro Systems, Inc. and L. Wayne Hunter dated July 26,
1996 (incorporated herein by reference to Exhibit 7.2
to the Company's Form 8-K dated July 26, 1996).
7.4 Pro-Dex, Inc. Form 8-K dated May 11, 1996
(incorporated herein by reference to the Company's
Form 8-K dated May 11, 1996).
10.1 Form of Turnkey Management Agreement between Pro-Dex,
Inc. and its Contracting Dentists (incorporated herein
by reference to Exhibit 10.1 to Pro-Dex, Inc.
Registration Statement No. 33-35790).
10.2 Lease Agreement dated December 1, 1984 between Sears
Roebuck and Co. and Pro-Dex, Inc. (Sun Valley) and
amendment thereto dated as of November 9, 1987
(incorporated herein by reference to Exhibits 10.8 and
10.29 to Pro-Dex, Inc. Registration Statement No.
33-35790).
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.
10.25 Employee Stock Purchase Plan
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: June 30, 1999 /s/ Kent E. Searl
___________________________________
Kent E. Searl, Chairman
Date: June 30, 1999 /s/ George J. Isaac
___________________________________
George J. Isaac, Chief Financial Officer
PRO-DEX, INC. AND SUBSIDIARIES
EMPLOYEE STOCK PURCHASE PLAN
1401 Walnut Street, Suite 540
Boulder, CO 80302
(303) 443-6136
200,000 SHARES/NO PAR VALUE
ARTICLE ONE - PURPOSE AND DEFINITIONS
Section 1.1 Purpose. The purpose of this Employee Stock Purchase Plan is to
encourage eligible employees of Pro-Dex, Inc. and its Subsidiaries to acquire
ownership of Pro-Dex, Inc. Common Stock thereby affording them the opportunity
to share in the economic growth and success of the Company by the purchase the
Company's Common Stock through payroll deductions.
Section 1.2 Definitions. Whenever used in the Plan, unless the context
clearly indicates otherwise, the following terms shall have the following
meanings:
a. "Beneficiary", with respect to a Participant, means the beneficiary
designated by the Participant under the health, dental, and life insurance
plan maintained by the Company or such other beneficiary as may be designated
by a Participant for purposes of this Plan.
b. " Board of Directors" means the Board of Directors of Pro-Dex, Inc.
c. "Code" means the Internal Revenue Code of 1986, as amended, and
references thereto shall include the valid Treasury regulations issued
thereunder.
d. "Committee" means the Company Stock Purchase Plan Committee
appointed by the Board of Directors of Pro-Dex, Inc. and charged with the
administration of the Plan.
e. "Common Stock" means shares of the no par value Common Stock of the
Company and any other stock or securities resulting from the adjustment
thereof or substitution therefor as described in Section 3.4.
f. "Company" means Pro-Dex, Inc., or any successor by merger, purchase
or otherwise .
g. "Compensation" means the all cash compensation received by an
employee for services.
h. "Effective Date" means 1 July 1998.
i. "Employee" means any person who receives regular compensation from
the Company or a Subsidiary thereof for services rendered as an employee and
does not include any person who is receiving compensation from the Company or
a Subsidiary thereof in the form of any type of a pension, severance,
retainer, or fee under contract.
j. "Exercise Date" means the date on which the employee completes the
payment requirement and is entitled to delivery of the shares so purchased.
k. "Fair Market Value", with respect to a share of Common Stock, means
the last reported sale price for the Common Stock on NASDAQ, or the closing
price for the Common Stock if the same is listed on any other national
securities exchange on the applicable date during an Offering Period or, if
there are no sales on said date, then on the next preceding date on which
there were sales of the Company's Common Stock
l. "Offering" means the offering of shares of Common Stock to
Participants pursuant to this Plan.
m. "Offering Date" means the 1st day of July and January of each year
commencing with 1 July 1998; provided, however, that in the discretion of the
Committee, an additional or substitute offering date may be selected, which
may result in no offering date in any particular year. If any such date shall
fall other than on a business day, the Offering Date shall be the next
succeeding business day.
n. "Offering Period" means the period from an Offering Date until the
immediately succeeding Offering Date, unless otherwise determined by the
Committee.
o. "Option" means the right of an employee to purchase Common Stock
under the Plan.
p. "Participant" means an Employee (other than excluded persons
pursuant to Section 2.2) who has elected to participate in the Plan.
q. "Plan" means the Pro-Dex, Inc. Employee Stock Purchase Plan, an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Code, together with any and all amendments thereto.
r. "Stock Purchase Account", with respect to a Participant, means the
account established on the books and records of the Company or a Subsidiary
thereof for such Participant representing the payroll deductions credited to
such account in accordance with the provisions of the Plan.
s. "Subsidiary" means any corporation, fifty (50%) or more of the total
combined voting power of all classes of stock of which is beneficially owned,
directly or indirectly, by the Company.
ARTICLE TWO - PARTICIPATION
Section 2.1 Participation Requirements.
a. Commencement of Participation. Subject to Section 2.2 and Section
3.2(b), each person who is an Employee on the Effective Date may elect,
pursuant to Article Four, to become a Participant in the Plan on such date.
Each person who becomes an Employee after the Effective Date may become a
Participant in the Plan on the Offering Date coinciding with or next following
the date on which such person becomes an eligible Employee, subject to the
exclusions in Section 2.2 below.
b. Eligibility of Former Participants. If a person terminates
employment with the Company after becoming a Participant and subsequently
resumes employment with the Company, such person will again become eligible to
participate on the Offering Date coinciding with or next following such
resumption of employment with the Company.
c. Leave of Absence. For purposes of participation in the Plan, unless
otherwise determined by the Committee, a person on leave of absence shall be
deemed to be an Employee for the first 90 days of such leave of absence and
such Employee's employment shall be deemed to have terminated at the close of
business on the 90th day of such leave of absence unless such Employee shall
have returned to regular full-time or part-time employment (as the case may
be) prior to the close of business on such 90th day. Termination by the
Company of any Employee's leave of absence, other than termination of such
leave of absence on return to full-time or part-time employment, shall
terminate an Employee's employment for all purposes of the Plan and shall
terminate such Employee's participation in the Plan and right to exercise any
option.
Section 2.2 Exclusions. Notwithstanding any provision of the Plan to the
contrary, in no event shall the following persons be eligible to participate
in the Plan:
a. Any Employee who has been employed for less than six (6) months;
b. Any Employee whose customary employment is twenty (20) hours or less
per week;
c. Any Employee whose customary employment is for not more than five
(5) months in any calendar year;
d. Any Employee who, as of the last day of an Offering Period, owns
stock possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or a subsidiary; provided,
however, that stock owned directly, indirectly, or through attribution of
stock ownership from brothers, sisters, spouses, ancestors, and lineal
descendants pursuant to Code Section 424(d) or any successor thereto shall be
considered for purposes of this determination; or
e. Certain highly compensated employees as designated by the Committee
prior to each Offering Date.
ARTICLE THREE - OFFERING OF COMMON STOCK
Section 3.1 Reservation of Common Stock. The Board of Directors has reserved
200,000 shares of Common Stock for the Plan, subject to adjustment in
accordance with Section 3.4.
Section 3.2 Offering of Common Stock.
a. General. Subject to Section 3.2(b), each Participant in the Plan on
an Offering Date shall be entitled to purchase shares of Common Stock on the
last day of the Offering Period beginning with such Offering Date. Such
purchase shall be made by having the purchase price for such shares deducted
from Participant's compensation during such Offering Period pursuant to
Article Four. The purchase price for such shares of Common Stock shall be
determined under Section 3.3 of this Plan.
b. Limitations. (1) Prior to each Offering Date, the Committee shall
determine the total number of shares for which options may be granted during
the Offering Period, not to exceed the total number of share reserved pursuant
to Section 3.1, less shares issued or issuable upon exercise of outstanding
options, (2) the Committee may, in its discretion, provide that the amount of
stock that may be purchased by any employee shall bear a uniform relationship
to total compensation, and (3) notwithstanding Section 3.2(a), the maximum
number of shares of Common Stock a Participant may purchase within the same
calendar year, under all "employee stock purchase plans" within the meaning of
Section 423(b) of the Code sponsored by the Company or an Subsidiary thereof,
shall be limited to that number of shares having a total fair market value
(determined as of the date of each Offering) that does not exceed Twenty Five
Thousand ($25,000.00) Dollars for any one calendar year during which the Plan
is in effect.
Section 3.3 Option Provisions.
a. Determination of Purchase Price of Offered Common Stock. The
purchase price per share of the shares of Common Stock offered to Participants
pursuant to an Offering shall be the lower of eighty-five (85%) of the Fair
Market Value of a share of Common Stock as of the first day of the Offering
Period for such Offering or, eighty-five (85%) of the Fair Market Value of a
share of Common Stock on the Exercise Date, however, in no event shall the
purchase price be less than $2.00 per share, unless the Committee in its
discretion so determines.
b. Option Term. Options granted under the Plan cannot be exercised
after the expiration of the Offering Period.
Section 3.4 Effect of Certain Transactions. The number of shares of Common
Stock reserved for the Plan pursuant to Section 3.1, the maximum number of
shares of Common Stock offered pursuant to Section 3.2b, and the determination
under Section 3.3 of the purchase price per share of the shares of Common
Stock offered to Participants pursuant to an Offering shall be appropriately
adjusted to reflect any increase or decrease in the number of issued shares of
Common Stock resulting from a stock split, a consolidation of shares, the
payment of a stock dividend, or any other capital adjustment affecting the
number of issued shares of Common Stock. In the event that the outstanding
shares of Common Stock shall be changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or
another corporation, whether through reorganization, recapitalization, merger,
consolidation, or otherwise, then there shall be substituted for each share of
Common Stock reserved for issuance under the Plan but not yet purchased by
Participants, the number and kind of shares of stock or other securities into
which each outstanding share of Common Stock shall be so changed or for which
each such share shall be exchanged.
ARTICLE FOUR - PAYROLL DEDUCTIONS
Section 4.1 Payroll Deduction Elections. Any Employee eligible to
participate in the Plan may elect to have the Company deduct from the
Compensation payable to such Employee during each Offering Period any amount
between one percent (1%) and ten percent (10%) of such Participant's
Compensation, in whole multiples of one percent (1%). Such election shall be
made by delivering to the Company during the thirty day period preceding such
Offering Period a written direction to make such deductions. Such election
shall become effective as of the first date of such Participant's first pay
period that begins on or after the first day of such Offering Period and shall
remain effective for each successive pay period and for each subsequent
Offering until changed or terminated pursuant to this Article Four. The
percentage deduction specified by the Participation will be deducted from each
payment of Compensation made to the Participant.
Section 4.2 Election to Increase or Decrease Payroll Deductions. Subject to
Section 4.4, a Participant who has a payroll deduction election in effect
under Section 4.1 may prospectively increase or decrease during an Offering
Period the percentage amount of the deductions being made by the Company from
such Participant's Compensation (including a decrease to zero) by delivering
to the Company written direction to make such change. Such change shall
become effective as soon as practicable after the Company's receipt of such
written direction and shall remain in effect until changed or terminated
pursuant to this Article Four. A Participant shall be permitted to increase
or decrease the percentage amount of the deductions being made from such
Participant's Compensation only once during an Offering Period; provided,
however, a Participant may terminate the deductions being made from such
Participant's Compensation at any time during an Offering Period
notwithstanding any prior change in the amount of such Participant's
Compensation deductions during an Offering Period. If a Participant
terminates deductions, such Participant cannot resume deductions during that
Offering Period.
Section 4.3 Elections During Leave of Absence. If a Participant goes on
leave of absence, such Participant shall have the right to elect:
a. to withdraw the balance in his or her account pursuant to Section
5.3,
b. to discontinue contributions to the Plan but remain a participant in
the Plan,
c. to remain a Participant in the Plan during such leave of absence,
authorizing deductions to be made from payments by the Company to the
Participant during such leave of absence and undertaking to make cash payments
to the Plan, in care of the Company, at the end of each payroll period to the
extent that amounts payable by the Company to such Participant are
insufficient to meet such Participant's authorized Plan deductions, or
d. to remain a Participant in the Plan during such leave of absence,
undertaking to make cash payments to the Plan, in care of the Company, to
exercise such Participant's options.
Section 4.4 Termination of Election Upon Termination of Employment. The
termination of employment of a Participant for any reason shall automatically
terminate the election of such Participant to have amounts deducted from such
Participant's Compensation pursuant to this Article Four that is then in
effect. Such termination shall be effective immediately following the pay
period during which such termination of employment occurs, but shall not
affect the deduction from Compensation for the pay period.
Section 4.5 Form of Elections. Any written direction by any Participant with
respect to any deductions from Compensation pursuant to this Article Four
shall be on a form furnished by the Company for such purpose and shall be made
by having such Participant complete, sign, and file such form with the Company
in the manner prescribed from time to time by the Company.
ARTICLE FIVE - STOCK PURCHASE ACCOUNTS AND PURCHASE OF COMMON STOCK
Section 5.1 Stock Purchase Accounts. A Stock Purchase Account shall be
established and maintained on the books and records of the Company for each
Participant. Amounts deducted from a Participant's Compensation pursuant to
Article Four shall be credited to such Participant's Stock Purchase Account.
No interest or other increment shall accrue or be payable to any Participant
with respect to any amounts credited to such Stock Purchase Accounts. All
amounts credited to such Stock Purchase Accounts shall be withdrawn, paid, or
applied toward the purchase of Common Stock pursuant to the provisions of this
Article Five.
Section 5.2 Purchase of Common Stock.
a. General. As of the last day of each Offering Period, the amount to
the credit of a Participant in such Participant's Stock Purchase Account shall
be used to purchase from the Company on such Participant's behalf the largest
number of whole shares of Common Stock that can be purchased at the price
determined under Section 3.3 with the amount then credited to such
Participant's Stock Purchase Account, subject to the limitations set forth in
Article Three on the maximum number of shares of Common Stock such Participant
may purchase. As of such date, such Participant's Stock Purchase Account
shall be charged with the aggregate purchase price of the shares of Common
Stock purchased on such Participant's behalf. No brokerage or other fees are
to be charged upon a purchase. Stock transfer taxes, if any, shall be paid by
the Company. The remaining balance, if any, credited to such Participant's
Stock Purchase Account shall be carried forward and used to purchase shares of
Common Stock in the next succeeding Offering Period.
b. Issuance of Common Stock. The shares of Common Stock purchased for
a Participant on the last day of an Offering Period shall be deemed to have
been issued by the Company for all purposes as of the close of business on
such date. Prior to such date, none of the rights and privileges of a
shareholder of the Company shall exist with respect to such shares of Common
Stock. As soon as practicable after the end of an Offering Period the Company
shall issue and deliver, or shall cause its stock transfer agent to issue and
deliver, a certificate for the number of shares of Common Stock purchased for
a Participant, which certificate shall be issued in the Participant's name or,
if so specified by the Participant, in the name of the Participant and such
other person as the Participant shall designate as joint tenants with the
right of survivorship. In lieu of issuing a certificate, the Company may
elect to deliver to the Participant a statement which shall indicate the
number of shares of Common Stock purchased for such Participant on the last
day of such Offering Period and the aggregate number of shares of Common Stock
held on behalf of such Participant under the Plan.
c. Insufficient Common Stock Available. If, as of the last day of any
Offering Period, the aggregate Stock Purchase Accounts available for the
purchase of shares of Common Stock pursuant to Section 5.2a would purchase a
number of shares of Common Stock in excess of the number of shares of Common
Stock then available for purchase under the Plan, then (1) the number of
shares of Common Stock that would otherwise be purchased for each Participant
on such date shall be reduced proportionately to the extent necessary to
eliminate such excess, (2) the remaining balance to the credit of each
Participant in each such Participant's Stock Purchase Account shall be
distributed to each Participant, and (3) the Plan shall terminate
automatically upon the distribution of the remaining balance in such Stock
Purchase Accounts.
Section 5.3 Withdrawal From Plan Prior to Purchase of Common Stock. In the
event (a) a Participant elects in writing for any reason to withdraw from the
Plan during an Offering Period, (b) a Participant's employment with the
Company or a Subsidiary thereof terminates due to death, retirement, or
disability prior to the end of an Offering Period, or (c) a Participant's
employment with the Company terminates for any reason other than death,
retirement, or disability prior to the end of such an Offering Period, then
the entire amount to the credit of such Participant in such Participant's
Stock Purchase Account shall be distributed to such Participant (or, if such
Participant is deceased, to such Participant's Beneficiary) as soon as
administratively practicable after such termination of employment or
withdrawal (as the case may be).
ARTICLE SIX - COMMITTEE
Section 6.1 Powers of the Committee. The Committee shall administer the
Plan. The Committee shall have all powers necessary to enable it to carry out
its duties under the Plan properly. Not in limitation of the foregoing, the
Committee shall have the authority and complete discretion to construe and
interpret the Plan and to determine all questions that shall arise thereunder.
The decision of the Committee upon all matters within the scope of its
authority shall be final and conclusive on all persons.
Section 6.2 Indemnification of the Committee. The Company agrees to
indemnify and hold harmless the members of the Committee against any
liabilities, loss, costs, or damage that they may incur in acting as such
members and to assume the defense of any and all allocations, suits, or
proceedings against the members of the Committee, to the extent permitted by
applicable law.
ARTICLE SEVEN - AMENDMENT AND TERMINATION
Section 7.1 Amendment of Plan. The Company expressly reserves the right, at
any time and from time to time, to amend in whole or in part any of the terms
and provisions of the Plan; provided, however, no amendment may, without the
approval of the shareholders of the Company, (a) increase the number of shares
of Common Stock reserved under the Plan, (b) change the method of determining
the purchase price for shares of Common Stock, (c) materially increase the
benefits accruing to Participants, or (d) materially change the eligibility
requirement for participation in the Plan.
Section 7.2 Termination/Suspension of the Plan. The Company expressly
reserves the right, at any time and for whatever reason it may deem
appropriate, to terminate or suspend the Plan. If not sooner terminated (a)
pursuant to the preceding sentence, or (b) pursuant to Section 5.2c, the Plan
shall continue in effect through 30 June 2002. Upon any termination of the
Plan, the entire amount credited to the Stock Purchase Account of each
Participant shall be distributed to each such Participant.
Section 7.3 Procedure for Amendment, Termination or Suspension. Any
amendment to the Plan or termination/suspension of the Plan may be retroactive
to the extent not prohibited by applicable law. Any amendment to the Plan or
termination/suspension of the Plan shall be made by the Company by resolution
of the Committee or the Board of Directors (subject to Section 7.1) and shall
not require the approval or consent of any Participant or Beneficiary in order
to be effective.
ARTICLE EIGHT - MISCELLANEOUS
Section 8.1 Adoption by a Subsidiary. A Subsidiary may, with the approval of
the Board of Directors and the board of directors of such Subsidiary, elect to
adopt the Plan as of a date mutually agreeable to the Board of Directors and
the board of directors of such Subsidiary. Any such adoption of the Plan by a
Subsidiary shall be evidenced by an appropriate instrument of adoption
executed by such Subsidiary.
Section 8.2 Authorization and Delegation to the Board of Directors. Each
Subsidiary which is or hereafter adopts the Plan authorizes and empowers the
Board of Directors (a) to amend or terminate/suspend the Plan without further
action by said Subsidiary as provided in Article Seven and (b) to perform such
other acts and to do such other things as the Board of Directors is expressly
directed, authorized, or permitted to perform or do as provided herein.
Section 8.3 Transferability of Rights. Rights under the Plan are not
transferable by a Participant other than by will or the laws of descent and
distribution and are exercisable during a Participant's lifetime only by the
Participant.
Section 8.4 No Employment Rights. Participation in the Plan shall not give
any employee of the Company or any Subsidiary any right to remain employed or,
upon termination of employment, any right or interest in the Plan, except as
expressly provided herein.
Section 8.5 Compliance with Law. No shares of Common Stock shall be issued
under the Plan prior to compliance by the Company to the satisfaction of its
special securities counsel with any applicable law.
Section 8.6 Effectiveness and Approval of Plan. This Plan shall become
effective on 1 July 1998, provided it is approved and ratified by the
shareholders of the Company. In the event that the Plan is not so approved,
all amounts deducted from the Compensation of Participants and credited to
each Participant's Stock Purchase Account shall be refunded to each such
Participant without interest as soon as administratively practicable.
Section 8.7 Construction. Article, Section and paragraph headings have been
inserted in the Plan for convenience of reference only and are to be ignored
in any construction of the provisions hereof. If any provisions of the Plan
shall be invalid or unenforceable, the remaining provisions shall nevertheless
be valid, enforceable, and fully effective. It is the intent that the Plan
shall at all times constitute an "employee stock purchase plan" within the
meaning of Section 423(b) of the Code, and the Plan shall be construed,
administered, regulated, and governed by the laws of the United States to the
extent applicable, and to the extent such laws are not applicable, by the laws
of the State of Colorado.
Section 8.8 Administration. The Secretary of the Company shall maintain a
copy of the Plan, and any amendments thereto.
By:_______________________________ By:____________________________
Kent E. Searl, Acting PresidentGeorge J. Isaac, Secretary
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