Exhibit 10.3













 




EXHIBIT 10.3


ROYALTY AGREEMENT


THIS ROYALTY AGREEMENT ("Agreement") is entered into by
and between Pro-Dex, Inc., a Colorado corporation ("Pro-Dex"), and
IntraVantage, Inc., a Delaware corporation ("IntraVantage"), on and as
of October 31, 2005 ("Effective Date"). Each of the parties hereto is
sometimes referred to herein as a "Party," and collectively as the "Parties."


WHEREAS, the Parties are concurrently herewith entering into the
Asset Purchase Agreement (as defined below), pursuant to which Pro-Dex shall
purchase, among other assets, IntraVantage's right, title and interest in and
to the Purchased Intellectual Property (as that term is defined in the Asset
Purchase Agreement), and


WHEREAS, the Parties desire to evidence in writing certain
royalty payments to be paid by Pro-Dex to IntraVantage in further consideration
for the Purchased Intellectual Property.


NOW THEREFORE, in consideration of the Asset Purchase Agreement
and the foregoing recitals and the following covenants and promises, the
Parties hereby agree as follows:


1.                 
Definitions.


1.1             
"Asset Purchase Agreement" shall mean the Asset Purchase
Agreement between Pro-Dex and IntraVantage dated as of the Effective Date, a
copy of which is attached hereto as Exhibit B and incorporated herein by
reference.


1.2             
"Combined Products" shall mean those products that incorporate
any one or more Patented Products.


1.3             
"Derivative Products" shall mean those products that are a
modification of or substantially derived from the Patents.


1.4             
"Patented Products" shall mean those products that fall within
the scope of one or more of the patent claims of the Patents and are not
Combined Products.  


1.5             
"Patents" shall mean any registered patent included in the
Purchased Intellectual Property and set forth on Exhibit A attached
hereto and incorporated by reference.


1.6             
"Purchased Intellectual Property" shall have the meaning set
forth in the Asset Purchase Agreement.


1.7               
Other Terms.  Other capitalized terms used but not defined herein
shall have the meaning ascribed to them in the Asset Purchase Agreement.


2.                 
Term.


	
   	

   	

   


































 




This Agreement and the royalty payments required hereunder shall
commence on the Effective Date and shall continue until the latest date on
which any of the Patents expire, unless earlier terminated in writing and
signed by both Parties (the "Term").



3.                 
Royalty Payment.   



3.1             
Pursuant to the terms and conditions of this Agreement, Pro-Dex shall
pay IntraVantage a royalty payment on Net Sales (as defined below) of Patented
Products and Combined Products in accordance with the schedule set forth
below.  "Net Sales" shall be calculated as follows: (i) for Patented Products,
Net Sales shall equal the aggregate gross sales revenue to Pro-Dex generated by
sales of Patented Products, less returns and (ii) for Combined Products, Net
Sales shall equal the aggregate of the then current stand alone price(s) of the
Patented Products included within each Combined Product multiplied by the
number of Combined Products sold, less returns of Combined Products.  For
purposes of example only, with respect to the calculation of Net Sales for
Combined Products, and assuming no returns, if (i) each Combined Product A
incorporated one of Patented Product Y (with a stand alone price of $10) and
two of Patented Product Z (with a stand alone price of $20 each), and (ii)
Pro-Dex sold 10 units of Combined Product A at a price per unit of $10,000,
then (iii) the Net Sales would equal $500 (based on the following calculation
(($10 Patented Product Y stand alone price + [2 multiplied by $20 Patented
Product Z stand alone price]) multiplied by 10 units = $500).:








	
  One-Year Period
  Following 

  Effective Date

  	
  No Royalty Paid 

  on Net Sales Volume Up To:

  	
  10% Royalty Paid on
  Net Sales Volume Between:

  	
  12.5% Royalty Paid
  on Net Sales Volume Between:

  	
  15% Royalty Paid 

  on Net Sales Volume in Excess of:

  
	
  1st

  	
   $       527,000.00

  	
  $527,000.01 to $658,750.00

  	
  $658,750.01 to $795,000.00

  	
   $     795,000.00

  
	
  2nd

  	
   $    1,756,000.00

  	
  $1,756,000.01 to $2,195,000.00

  	
  $2,195,000.01 to $2,634,000.00

  	
   $    2,634,000.00

  
	
  3rd

  	
   $    4,555,000.00

  	
  $4,555,000.01 to $5,693,750.00

  	
  $5,693,750.01 to $6,832,500.00

  	
   $    6,832,500.00

  
	
  4th

  	
   $    7,125,000.00

  	
  $7,125,000.01 to $8,902,250.00

  	
  $8,902,250.01 to $10,687,500.00

  	
   $  10,687,500.00

  
	
  5th

  	
   $  11,042,000.00

  	
  $11,042,000.01 to $13,802,500.00

  	
  $13,802,500.01 to $16,563,000.00

  	
   $  16,563,000.00

  






For the period after the fifth anniversary of the Effective Date
until the last to expire of the Patents, a ten percent (10%) royalty payment
shall be paid on all Net Sales volume of Patented Products and Combined
Products.  Notwithstanding any provision to the contrary in this Agreement, no
royalty payments shall be due on (i) Patented Products that fall within the
scope of the patent claim of a Patent that has expired or is otherwise
determined to be invalid or (ii) Patented Products that are incorporated into a
Combined Product, which Patented Products fall within the scope of the patent
claim of a Patent that has expired or is otherwise determined to be invalid.

 

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3.2             
In addition to the royalty payments pursuant to Section 3.1,
Pro-Dex shall pay a ten percent (10%) royalty on gross revenues (less returns)
generated by any Derivative Products, after the offset of any and all expenses
incurred by Pro-Dex resulting from, or related to, the future development or
enhancement of the Patented Products and/or the Derivative Products.  No
royalty payment shall be due on Derivative Products that are a modification of
or substantially derived from the Patents that have expired.  For purposes of
clarity, Derivative Products shall only be subject to royalty payments pursuant
to this Section 3.2 and not Section 3.1. Similarly, Patented
Products shall only be subject to royalty payments pursuant to Section 3.1
and not this Section 3.2.   


3.3             
The royalty payments payable by Pro-Dex to IntraVantage pursuant to Sections 3.1
and 3.2 shall be calculated by Pro-Dex each calendar quarter and shall be
paid by Pro-Dex within forty-five (45) days after the then ended quarter.


3.4             
Pro-Dex shall keep detailed, true and accurate books of account with
respect to the sale of Patented Products and Derivative Products.  IntraVantage's
appointed representatives may, upon ten (10) days written notice to Pro-Dex,
inspect and copy Pro-Dex's books and records as may be reasonably necessary to
verify the accuracy of the books of account relating to the Patented Products
and Derivative Products and royalty payments due to IntraVantage in conjunction
therewith.  IntraVantage shall pay all fees and costs, including any cost
incurred by Pro-Dex, in conjunction with any such verification; provided,
however, that if the verification reveals an underpayment of five percent (5%)
or more, Pro-Dex shall make a correcting payment covering the reasonable
expenses incurred by IntraVantage in conjunction with such verification within
thirty (30) days of receipt of written notification of such expenses.


4.                 
Offset.  Any and all royalty payments
otherwise due to IntraVantage hereunder shall be subject to Pro-Dex's right to
offset pursuant to Section 7.4 of the Asset Purchase Agreement.


5.                 
General.


5.1             Governing Law and Venue. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California, without
reference to the choice of law principles thereof.  All disputes concerning the
validity, interpretation, or performance of this Agreement and any of its terms
or provisions, or of any rights or obligations of the Parties, shall be
resolved in and with exclusive venue in the Superior Courts of Orange County,
California, and the Parties hereby agree to submit to the exclusive venue of
such court.  


5.2             
Notice. All notices, including notices of address change,
required to be sent hereunder shall be in writing and shall be deemed to have
been given (i) 48 hours after being sent certified or registered mail, postage
prepaid, or (ii) 24 hours after being sent via a reputable overnight courier,
to:

 

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                        If to IntraVantage:



IntraVantage, Inc.

2950 Xenium Lane North, Suite 148

Plymouth, Minnesota, 55441-2623

Attn:_______________

Phone:  _____________

Fax:      _____________



If to Pro-Dex:



Pro-Dex, Inc.

151 East Columbine Avenue

Santa Ana, California 92707

Attn:     Patrick Johnson

Phone:  _____________

Fax:      _____________



With a copy to:



(which shall not constitute notice to Pro-Dex):



Rutan & Tucker, LLP

611 Anton Blvd., Fourteenth Floor

Costa Mesa, California 92626

Attn: Thomas J. Crane, Esq.

Phone: (714) 641-5100

Facsimile: (714) 546-9035


5.3           
Headings. The headings appearing in this Agreement are inserted
for convenience only, and will not be used to define, limit or enlarge the
scope of this Agreement or any of the obligations herein.


5.4           
Counterparts. This Agreement may be executed in counterparts,
each of which will be an original, and such counterparts together will
constitute one and the same instrument. Execution may be effected by delivery
of facsimiles of signature pages (and the Parties will follow such delivery by
prompt delivery of originals of such pages).


5.5             Compliance with Law. Each Party agrees to comply with all
federal, state and local laws and regulations applicable to this Agreement.


5.6           
Successors and Assigns. Pro-Dex may assign its rights and obligations
under this Agreement to any third party that acquires the right, title and
interest in and to the Patents. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.


5.7             Waiver.  No waiver by either Party of any breach shall be deemed
as a waiver of any prior or subsequent breach of the same or any other
provision of this Agreement.

 

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5.8            
Integration. This Agreement, along with the Asset Purchase
Agreement and the agreements referenced therein, represents the entire
understanding of the Parties with respect to the subject matter hereof and
supersedes all previous representations, understandings or agreements, oral or
written.  Any modification to this Agreement must be in writing signed by
the Party against whom such modification is to be enforced.


5.9            
Authority. Each Party represents and warrants that the person signing
this Agreement on its behalf has full right, power and authority to bind such
Party and such execution of this Agreement has been duly authorized.


5.10          
Attorneys' Fees. If any action, at law or in equity, is necessary to
enforce or interpret this Agreement, the prevailing Party shall be entitled to
recover reasonable attorneys' and experts' fees, costs and necessary
disbursements from the non-successful Party in addition to any other relief to
which it may be entitled.


[SIGNATURES CONTAINED ON THE FOLLOWING PAGE]

 

 

 

 

 

 

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INTENDING TO BE LEGALLY BOUND, the parties have executed this
Agreement on and as of the Effective Date set forth above.




PRO-DEX, INC.                                                        INTRAVANTAGE,
INC.





By:  /s/ Patrick Johnson                                                 By:

 /s/ Daniel W. Larkin                      
 



        Its:
 President and C.E.O.                                             Its:
  President
and C.O.O.           
 

 

 

 

 

 

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EXHIBIT A


TO


ROYALTY AGREEMENT


Patents


Patents



1.         United States

Patent No. 5,927,976

Issued



2.         United States

Patent No. 6,626,887

Issued


Patent
Applications



3.         United States

Cont. Appl. No. 10/662,744

Pending



4.         Canada

Appl. No. 2253897

Pending



5.         Europe

Appl. No. 97933174.1

Pending



6.         Japan

Appl. No. 10546927

Pending

































 




EXHIBIT B


TO


ROYALTY AGREEMENT


Asset Purchase Agreement


[Attached]