Document:

Exhibit 10.1

 

 

 

 

 

 

Exhibit 10.1

PRO-DEX,
INC.

LONG-TERM INCENTIVE PLAN

INTRODUCTION

The Pro-Dex, Inc.
Long-Term Incentive Plan (the "Plan") is a long-term incentive plan
for eligible employees of the Company. The Plan is intended to provide
equity-based incentive opportunities to executives and other key employees of
the Company. Plan payments, if any, will be conditioned on attainment of
certain Performance Goals for one or more fiscal years as approved by the
Committee and ratified by its Board of Directors.

 

I.  PURPOSE

The purpose of the
Plan is to allow the Company to attract, motivate and retain highly qualified
employees; to obtain from each employee the best possible performance;
to establish Performance Measures that support the Company's long-term business
strategies; and to provide consistency in and alignment with the
Company's approach to performance-based pay and overall executive compensation
strategy.

 

II. DEFINITIONS

For purposes of the Plan, the following
terms shall have the following meanings:

AWARD PARAMETERS DESCRIPTION. A document or compilation of documents
approved by the Committee and ratified by the Board of Directors, in writing, to set forth the parameters necessary for
determining a Long-Term Incentive Compensation Award, including the (i) Award
Period, (ii) the Performance
Measures, (iii) the Performance Goals and (iv) the amount of Long-Term
Incentive Compensation Award payable with respect to the achievement of
each Performance Goal. The award parameters described in the Award Parameters
Description need not be identical for all the Participants.

AWARD PERIOD.
Unless otherwise provided by the Committee and ratified by the Board of
Directors, the Award Period to which a Long-Term Incentive Compensation Award relates shall encompass three
(3) consecutive fiscal years.

 

BOARD OF DIRECTORS. The Board of Directors of Pro-Dex,
Inc.; provided that, with respect to any Long-Term Incentive Compensation
Awards of the Chief Executive Officer of Pro-Dex, Inc. , "Board of
Directors" shall mean only the members of the Board of Directors who
qualify as "outside directors" under Section 162(m) of the Code and
who meet the independence requirements of applicable law and the NASDAQ Listing
Rule 5605(a)(2) (or any such comparable provision of any other primary exchange
on which the company's shares are listed).

 

 

 

 

 

 

 

CAUSE. Cause has the
meaning given to such term in any employment agreement with the Company to
which the Participant is a party and in the absence of
such agreements (and not intended to modify or add to any such existing
agreement terms), it shall mean: (i) conviction for the commission of a felony
or a crime involving moral turpitude or the commission of any other act or
omission involving dishonesty, disloyalty or fraud; (ii) conduct that brings or
is reasonably likely to bring the Company into public disgrace or disrepute,
(iii) repeated failure to perform duties as reasonably directed by the Company;
(iv) gross negligence or willful misconduct with respect to the Company; and/or (v) habitual insobriety, or use of illicit
drugs or other controlled substances following one medically supervised course
of treatment for such drug or alcohol use or upon refusal to participate
in such course of treatment.

 

CHANGE IN CONTROL. "Change in the ownership or
effective control of the corporation" or "change in the ownership of
a substantial portion of the assets of the corporation", as such terms are
defined in Section 1.409A-3(i)(5) of the final regulations and other applicable
guidance promulgated under Section 409A of the Code.

 

CODE. The Internal
Revenue Code of 1986, as amended, and any regulations thereunder, and any
successors thereto.

 

COMMITTEE. The Compensation Committee of the Board
of Directors.

 

COMPANY. Pro-Dex Inc., its subsidiaries and any other entity which is
a "service recipient" (as such term is defined in Section 1.409A1(g)
of the final regulations and other applicable guidance promulgated under
Section 409A of the Code) with respect to persons performing services for the
Company.

 

DISABILITY. "Disability", as such term is
defined in Section 1.409A-3(i)(4) of the final regulations and other applicable
guidance promulgated under Section 409A of the Code.

 

LONG-TERM INCENTIVE COMPENSATION AWARD. Any award paid pursuant to the Plan. A
Long-Term Incentive Compensation Award shall be determined by the Committee and
ratified by the Board of Directors, in its sole and absolute discretion. Unless
otherwise specified by the Committee and
ratified by the Board of Directors, with respect to any Performance Measure:
(i) the Long-Term Incentive Compensation Award payable with respect to the maximum Performance Goal shall not exceed
one hundred and fifty percent (150%) of the Long-Term Incentive Compensation
Award payable with respect to the target Performance Goal; and (ii) the
Long-Term Incentive Compensation Award payable with respect to a minimum
Performance Goal shall not be less than fifty percent (50%) of the Long-Term
Incentive Compensation Award payable with respect to the target Performance Goal. The Long-Term Incentive
Compensation Award payable to any individual Participant with respect to any
particular Award Period shall not exceed $1,000,000. (one million
dollars).

 

PARTICIPANT. An executive or
other key employee of the Company, or a person who has agreed to commence
serving in any of such capacities, and
who is designated by the Committee to participate in the Plan. No person shall
be a Participant in the Plan prior to the execution by such person of the
Participation Agreement.

 

 

 

 

PARTICIPATION AGREEMENT. An agreement executed by the
Participant in substantially the form attached hereto as Exhibit A.
Executed Participation Agreements are
incorporated into the Plan by reference and made a part thereof to the same
extent and with the same force and effect as if fully set forth therein.

 

PERFORMANCE GOAL. Performance Goal means, with respect to
a Performance Measure, a measure of achievement of such Performance Measure,
approved by the Committee and ratified by the Board of Directors and set forth
in the Award Parameters Description. Unless otherwise provided by the Committee
and ratified by the Board of Directors, there shall be three (3)
Performance Goals with respect to each Performance Measure – (i) minimum
Performance Goal, (ii) target Performance Goal and (iii) maximum Performance
Goal. Performance Goals shall be deemed to be achieved only if achieved in the
course of the applicable Award Period.

 

PERFORMANCE MEASURES. Certain performance categories set
forth in Section V of the Plan. Performance Measures shall be set forth
by the Committee in the Award Parameters Description.

 

PRO-DEX, INC. Pro-Dex, Inc., a Colorado corporation.

 

SEPERATION FROM SERVICE. "Separation from service",
as such term is defined in Section 1.409A-1(h) of the final regulations and
other applicable guidance promulgated under Section 409A of the Code.

 

TSR. TSR (total
shareholder return) shall mean A minus B expressed as a percentage of B (A-B)/x100)], where A is the per-share price of a Company's common stock at the
end of the applicable Award Period and B is the average per-share price of the
Company's common stock at the beginning of the applicable Award Period. For
purposes of calculations of TSR, cash dividends paid on a share of common stock
shall be deemed to be reinvested in the Company's common stock on the day they
are paid at the average of the high and the low per-share price of that
Company's common stock on that day, as quoted on the primary exchange on which
the Company's shares are listed. The value at the end of the applicable Award
Period of such common stock deemed purchased with cash dividends shall be added
to A (above) for purposes of calculation of TSR. If in the course of the Award
Period the outstanding shares of common stock of the Company are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of any recapitalization,
reclassification, reorganization, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock of the Company or other increase or decrease in such shares
effected without receipt of consideration by
the Company, an appropriate and proportionate adjustment approved by the
Committee shall be made to the calculation of TSR set forth above. For purposes of determining TSR, the stock price
at the beginning date and end date of an Award Period shall be the average of
the closing stock prices for the ninety (90) days immediately preceding
such dates as quoted on the primary exchange on which the company's
shares are listed.

 

III. EFFECTIVE DATE

The Plan is effective as of July 1, 2010.

 

 

 

 

 

 

IV. DETERMINATION OF AMOUNTS OF AND
ELIGIBILITY FOR LONG-TERM INCENTIVE COMPENSATION AWARDS

 

Unless otherwise provided in the Plan, if
the Performance Goals are achieved in the course of the applicable Award Period
and such achievements are certified by the Committee based upon the audited
financial statements for the last fiscal year of the Award Period contained in
the Company's annual report filed with the
Securities and Exchange Commission, then Long-Term Incentive Compensation
Awards will be paid in amounts determined by the Committee and ratified
by the Board of Directors pursuant to the Plan and the Award Parameters Description.
Unless otherwise set forth in the Award Parameters Description with respect to any Participant: (i) the amount of
the Long-Term Incentive Compensation Award payable in connection with achieving
any Performance Goal of TSR shall not exceed fifty percent (50%) of the
maximum Long-Term Incentive Compensation Award that can be made under the Plan
in connection with the applicable Award
Period; and (ii) the amount of the Long-Term Incentive Compensation Award
payable in connection with achieving any Performance Goal(s) other than TSR shall not exceed fifty percent
(50%) of the maximum Long-Term Incentive Compensation Award that can be made
under the Plan in connection with the applicable Award Period.

 

V. PERFORMANCE MEASURES

A. Generally. Unless otherwise
provided in the Plan, payment of Long-Term Incentive Compensation Awards is
conditioned on the attainment in the course
of the Award Period of Performance Goals set with respect to Performance
Measures. The Performance Goals and Performance Measures need not be
identical with respect to all the Participants. Performance Goals may be
established based upon the Company's performance in isolation or by
judging the Company's performance relative to one or more comparator companies
or upon the performance of one or more of the Company's subsidiaries
or divisions. Performance Goals and the amount of Long-Term Incentive
Compensation Award payable with respect to the achievement of any Performance
Goal for any Long-Term Incentive Award that
is intended to qualify as "performance-based compensation" under Section 162(m) of the Code must be
established in writing no later than September 13 (i.e. 75 days) following the
beginning of the applicable Award Period and may be based on one or more
of the following objective criteria (the "Performance Measures"):

 

(1)       TSR, including its components of stock
price appreciation, dividends and/or dividend yield;

(2)       Return on assets,
equity, invested capital, cash flow, investment, or sales;

(3)       Sales, including
gross margin;

(4)       Pre-tax or after-tax
profit levels, including: earnings per share; earnings before interest and
taxes; earnings before interest, taxes, depreciation and amortization; net
operating profits after tax, and net income;

(5)       Cash flow and cash
flow return on investment;

(6)       Economic profit
and/or cost of capital;

(7)       Turnover of assets,
capital, or inventory;

(8)       Levels of operating
expense or other expense items as reported on the income statement, including
operating and maintenance expense;

(9)       Measures of customer
satisfaction and customer service, including the relative improvement therein;
and

(10)     Market share, including by product line
or geographic market or submarkets.

 

 

Performance Goals
may be determined by reference to levels of and/or growth in a Performance
Measure. Performance Goals with respect to Performance Measures shall be objectively measurable
and established for a period coinciding with or ending within the Award Period.

 

B.Certain
Factors and Events Excluded.
In establishing Performance Goals and Performance Measures for Participants and
in certifying the achievement of Performance Goals as the end of an Award
Period, the Committee may include or exclude the impact of specified objective
events, including any of the following:
expenses as a result of restructuring or productivity initiatives,
non-operating items; acquisition expenses; and any other items of gain, loss or
expense that are determined to be extraordinary or unusual in nature or
infrequent in occurrence or related to the disposal of a segment of a business
or to a change of accounting principles.

 

C.Default Performance Measures. Unless otherwise specified by the
Committee and ratified by the Board of Directors, the Performance Measures
shall consist of: (i) TSR relative to a group of comparator companies; and (ii)
one or more Performance Goals other than TSR.

 

VI.    
PAYMENT OF LONG-TERM
INCENTIVE COMPENSATION AWARDS

 

Unless otherwise provided in the Plan, the payment of a
Long-Term Incentive Compensation Award shall be made on the first day following
the approval of such award by the Committee and the filing of the fiscal year
end Form 10-K for the final
year of the Award Period to which it relates; provided that, subject to Section
VII, the Participant is actively employed with the Company on such date. Unless
otherwise provided in the Plan, Long-Term Incentive Compensation Awards shall
be paid in shares of Company stock valued at the closing price of the Company’s
shares on the day preceding such payment.  For the purposes of this Section VI,
payment within 75 days following a specified payment date shall be deemed to
constitute payment on the specified payment date.

 

VII.  TERMINATION OF SERVICE, SPIN-OFFS AND
SIMILAR TRANSACTIONS DURING THE AWARD PERIOD

 

A.Involuntary
Separation from Service, Death or Disability. Subject to Section VII. C., if before the end of an Award
Period a Participant experiences a Separation from Service with the Company by
virtue of termination of the Participant's service by the Company,
other than for Cause, or if a Participant experiences Separation from Service with
the Company due to death or Disability, the Participant's Long-Term Incentive
Compensation Awards for any Award Period in effect at the time of such
Separation from Service will be prorated on the basis of the ratio of the
number of days of Participant's service during such Award Period prior to such
Separation from Service to the total number of days in such Award Period. The
determination of such prorated Long-Term Compensation Awards will be based on
the attainment of the Performance Goals with respect to the applicable
Performance Measure(s) and will be paid on the date the Participant would have received payments with respect to such
Long-Term Compensation Awards had the Participant not experienced a Separation
from Service with the Company.

       B.  Termination
by the Company for Cause, Voluntary Separation from Service. In the event a
Participant experiences a Separation from Service with the Company by virtue of
termination of the Participant's service by the Company for Cause,
or by virtue of voluntary termination of
service by the Participant, the Participant shall have no rights whatsoever to
any unpaid Long-Term Compensation Awards and no payments with respect to
any unpaid Long-Term Compensation Awards shall be made to the Participant.

 

 

 

 

 

 

C. Termination
Close In Time To the Change in Control of Pro-Dex, Inc. In the event the Participant experiences
a Separation from Service with the Company (not including separation caused by
death or Disability) by virtue of termination of the Participant's service by the
Company less than six (6) months following a Change in Control of Pro-Dex,
Inc., and such Separation from Service occurs prior to the end of the Award
Period, then upon the Participant's Separation from Service, all Performance Goals with respect to Performance
Measures shall be deemed to have been met with respect to such Participant and
any applicable Long-Term Incentive Compensation Awards shall be paid to
such Participant on the date of Separation from Service. This Section VII. C.
shall not apply if the Participant's service with the Company is
terminated by the Company for Cause. Additionally, this Section VII. C. shall
not apply unless at the time of Change in Control of Pro-Dex, Inc., the entity
for whom the Participant is performing services is Pro-Dex, Inc. or Pro-Dex,
Inc. is the "majority shareholder" (as such term is
defined in Section 1.409A-3(i)(5)(ii)(3) of the final regulations promulgated
under Section 409A of the Internal Revenue Code) of such entity.

 

D.  Spin-Offs and Similar Transactions. In the event an entity ("Departed
Entity") that is a part of the Company ceases to be a part of the Company
(the "Departure"), a Participant who at the time of the Departure is performing services
for the Departed Entity, shall be considered, for purposes of Section VII. A..,
to have experienced a Separation from
Service with the Company by virtue of termination of the Participant's
service by the Company without Cause; provided that such Participant
does not perform any services for the Company immediately after the Departure.
Such Separation from Service with the Company will be deemed to have occurred
at the time of the Departure.

 

E. Specified Employees. Notwithstanding anything in the Plan to
the contrary, if as of the date of Participant's Separation from
Service, Participant is a "specified employee", as defined
under Section 409A of the Internal Revenue Code of 1986, as amended
("Section 409A") or any regulations or Treasury guidance
promulgated thereunder ("Section 409A Guidance"),
Participant shall not be entitled to any payments paid upon such Separation
from Service until the earlier of (i) the date which is six months after his
Separation from Service for any reason other than death or (ii) the date of his
death. The provisions of this Section VII. E. shall apply solely to payments
made pursuant to a plan that provides for deferral of compensation. Whether a
plan provides for deferral of compensation shall be determined pursuant to
Section 409A or Section 409A Guidance. Any payments that would have been paid
to Participant prior to the earlier of (i) the date which is six months after
his separation from service for any reason other than death or (ii) the date of
his death, were it not for this Section VII. E., shall be accumulated and paid
to Participant on the first day of the 7th month following Participant's
Separation from Service. Notwithstanding the foregoing, the provisions of this
Section VII. E. shall not 

apply to payments
made under the circumstances described in Section 1.409A-3(j)(4)(ii) (domestic
relations order), 1.409A-3 (j)(4)(iii) (conflicts of interest) or 1.409A-3 (j)(4)(vi) (payment of
employment taxes) of the final Treasury Department regulations issued pursuant
to Section 409A.

 

F. Timing of Payments. For the purposes of
this Section VII, payment within 75 days following a specified payment date
shall be deemed to constitute
payment on the specified payment date.

 

VIII.
RETURN OF OR REDUCTION IN THE LONG-TERM INCENTIVE COMPENSATION AWARD

 

 

In the
event that following the end of the Award Period, it is determined by the
Committee and ratified by the Board of Directors that a Long-Term Incentive Compensation Award was, in whole or in
part, based on incorrect data (including financial results which pursuant to
applicable laws, roles, regulations or applicable accounting principles
are required to be restated), the Participant shall return to the Company the
Overpayment Amount, where the Overpayment Amount shall be equal to the
Long-Term Incentive Compensation Award distributed to the Participant, reduced
by the Long-Term Incentive Compensation Award
the Participant would have received had the correct data been used in the
calculation of the Long-Term Incentive Compensation Award, as determined by
the Committee in good faith. The determinations made by the Committee and
ratified by the Board of Directors pursuant to this Section shall be conclusive
and binding on the Participant unless reached in an arbitrary and capricious
manner.

 

IX.
SPECIAL AWARDS AND OTHER PLANS

 

Nothing
contained in the Plan shall prohibit the Company or any of its subsidiaries
from granting special performance or recognition awards, under such conditions and in such form and manner as it sees
fit, to employees (including Participants) for meritorious service of any nature.
In addition, nothing contained in the Plan shall prohibit the Company or
any of its subsidiaries from establishing other incentive compensation plans
providing for the payment of incentive compensation to employees (including
Participants).

 

X.
ADMINISTRATION, AMENDMENT AND INTERPRETATION OF THE PLAN

 

A.  Amendment and Termination. 
The Board of Directors shall have the right to amend the Plan from time to time
or to repeal it entirely or to direct the discontinuance of Long-Term Incentive
Compensation Awards either temporarily or permanently; provided, however, that
no amendment of the Plan shall operate to annul a Long-Term Incentive
Compensation Award with respect to an Award Period in effect at the time of the
amendment. Notwithstanding the foregoing, and
subject to Section VII. C., in the event this Plan is terminated before the
last day of an Award Period, Long-Term Incentive Compensation Awards
payable for such Award Period will be prorated on the basis of the ratio of the
number of weeks in such Award Period prior to such termination to the aggregate
number of weeks in such Award Period and will be based on the attainment of
Performance Goals with respect to the applicable Performance Measures and paid only after the end of such Award Period in accordance
with Section VI above which will be deemed to continue until the expiration
thereof as if this Plan had not been terminated. .

 

 B.  Administration. The Committee
shall determine the parameters necessary to grant Long-Term Incentive
Compensation Awards, including Award Periods,
Performance Measures, Performance Goals and the amounts of Long-Term Incentive
Compensation Awards with respect to each Performance Goal. The Committee
shall have full authority to administer the Plan, including authority to interpret
and construe any provision of the Plan and the terms of any Long-Term Incentive
Compensation Awards issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties and all decisions, determinations,
selections and other actions permitted or required to be taken or made by the
Committee with respect to the Plan shall be subject to the absolute discretion
of the Committee.

 

C. Delegation to Officers or Employees. 
The Board of Directors and the Committee, as applicable, may designate officers
or employees of the Company to assist the Committee in the administration of
the Plan.

 

 

 

 

M. MISCELLANEOUS

 

A.Expenses. All expenses and costs in connection
with the operation of the Plan shall be borne by the Company (including any
employment taxes which applicable law requires the Company to pay).

 

B.Taxes. All Long-Term Incentive Compensation Awards under the Plan
are subject to withholding, where applicable, for federal, state and local
taxes.

 

C. Unsecured Obligation. Unless otherwise determined by the
Committee, all Long-Term Incentive Compensation Awards will be paid from the
Company's general assets, and nothing contained in this Plan will
require the Company to set aside or hold in trust any funds for the benefit of
any Participant, who will have the status of a general unsecured creditor of
the Company.

 

D. No Right to Employment. This Plan will not confer upon any
Participant any right with respect to continuance of employment or other
service with the Company or any subsidiary,
nor will it interfere in any way with any right the Company or any subsidiary
would otherwise have to terminate or modify the terms of such
Participant's employment or other service at any time.

 

E. No Assignment,
Alienation. Except as otherwise provided in this Plan, no right or benefit
under this Plan will be subject to anticipation, alienation, sale, assignment,
pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge such right or benefit will be void. No such
right or benefit will in any manner be liable for or subject to the debts,
liabilities, or torts of a Participant.

 

F. Separate
Provisions. If any provision in this Plan is held to be invalid or
unenforceable, no other provision of this Plan will be affected thereby.

 

G. Applicable Law. This Plan will be governed by and
construed in accordance with applicable United States Federal law and, to the
extent not preempted by such Federal law, in accordance with the laws of the
State of California, without giving effect to the principles of conflict of
laws thereof.

 

H.Liability for the
Long-Term Incentive Compensation Awards. Only the entity for which the Participant performs services
at the commencement of the Award Period shall be liable with respect to the
Long-Term Incentive Compensation Award which relates to an Award Period.

 

 

EXHIBIT A [to LTIP]

 

Participation
Agreement for ____________________ for the award dated ____________

 

A.      Total Shareholder Return (TSR):  (50% of
Award)

 

The TSR will be measured against the
comparator companies as set forth in the Long-Term Incentive Plan.

 

TSR Award will be based as follows:

 

	
  Minimum

  	
  Company TSR
  must be at the 40th percentile of comparator companies

  	
  12.5% of
  Annual Base Pay at the end of fiscal year

  
	
  Target

  	
  Company TSR
  must be at the 60th percentile of comparator companies

  	
  25.0% of
  Annual Base Pay at the end of fiscal year

  
	
  Maximum

  	
  Company TSR
  must be at the 75th percentile of comparator companies.

  	
  37.5% of
  Annual Base Pay at the end of the fiscal year

  

If the minimum Performance Goal
of 40th percentile is not met, the amount payable is $0.00.  If the
maximum Performance Goal is exceeded, the amount payable will not exceed the
amount set forth above.  For performance between minimum and target Performance
Goals and between target and maximum Performance goals, the amount payable will
be determined based upon straight-line interpolation.

 

 

B.     Strategic Objectives (note – the objectives
reflected below are only examples and are not intended to be indicative of
objectives for each participant):  

 

1.    (Example) Turn around our Program into a
profitable business by achieving $3.0M Operating Income by end of fiscal 2013.

 

	
   

  	
  2010

  	
  2013

  
	
  Operating Income

  	
  $1.2M

  	
  $3.0M

  
	
  Net Sales

  	
  $18.4M

  	
  $25.0M

  

 

 

2.    (Example) Achieve customer satisfaction
rating of 95% based on a third party survey.

 

 

3.    (Example) Achieve Net Sales of $30M by
the end of 2013.  Currently it is $18M.  This is an increase of 66% from 2010
year end results.

 

Award for strategic
goals will be based on the following: (50% of Award)

 

 

 

 

	
  Minimum

  	
  Must meet at least 80%
  of established goals

  	
  12.5% of
  Annual Base Pay at the end of fiscal year

  
	
  Target & Maximum

  	
  Based on 100%
  achievement of established goals

  	
  25.0% of Annual
  Base Pay at the end of fiscal year

  
	
  Maximum

  	
  Based on 150%
  achievement of established goals

  	
  37.5% of
  Annual Base Pay at the end of the fiscal year

  

If the minimum Performance Goal
of 80% is not met, the amount payable is $0.00.  If the maximum Performance
Goal is exceeded, the amount payable will not exceed the amount set forth
above.  For performance between minimum and target Performance
Goals and between target and maximum Performance goals, the amount payable will
be determined based upon straight-line interpolation.

 

Any amount payable as a
Long-Term Incentive Compensation Award pursuant to this Participation Agreement
will be determined and paid pursuant to, and subject to, the terms and
conditions set forth herein and in the Plan.  All terms and provisions of the
Plan are incorporated herein and made part hereof as if stated herein.  If any
provision hereof and of the Plan shall be in conflict, the terms of the Plan
shall govern.  All capitalized terms used herein and not defined shall have the
meanings assigned to them in the Plan.

 

 

 

	
   

  I
  agree and understand these long term performance objectives.  

   

   

   

   

   

   

  Signature
  (Key Executive)

   

  
	
   

  Date:Exhibit 10.2

 

 

 

Exhibit 10.2

Pro-Dex Inc.

                Annual
Incentive Plan for the Senior Management Team

(Last
updated: 05/19/2010)

 

The
goal of this Incentive Compensation Plan is to directly align the focus and
remuneration of divisional and corporate management with that of the
shareholders.  This means that long term growth in the value of the business,
in addition to short term profit increases, will be key considerations in
awarding bonuses.  Individuals receiving bonuses should have the criteria used
in determining and measuring those bonuses fall within events which they can
control and/or influence.  Individuals, and individual business units, should
be rewarded for their performance and should not be penalized for the failure
of another unit or department, yet at the same time, at another level, it is
important to recognize that we are all in this together.  Incentive
Compensation should be adequately high to motivate the best managers, yet not
become an obstacle in the minds of shareholders that management is receiving a disproportionate
award.  Each of these considerations is addressed and included in this plan.

 

The
objective of this Annual Incentive Compensation Plan for the Senior Management
Team (the “AIP") is to recognize the achievement of above average results
in the current fiscal year. These goals are consistent with
the guidelines and objectives of the incentive compensation program as
established by the Board of Directors. 

 

Participation

 

Participants
in the plan shall include the Chief Executive Officer and such other officers
and key employees whose performance will have a significant impact upon the
Company’s success and whom the Chief Executive Officer and the Compensation
Committee approve for participation.

 

Annual
Cash Bonus

 

The
targeted bonus award for each participant, assuming 100% achievement of the
aggregate AIP performance goals, is not more than 50% of base salary.  The
maximum award for any individual participant is 200% of the target bonus, i.e.,
100% of base salary.

 

Bonuses
are to be paid in cash annually following the conclusion of the fiscal year end
audit and the certification and filing of the Company’s annual Form 10-K with
the SEC.  Determination of each participant’s eligibility, target bonus amount
as a percentage of salary, and Performance Objectives and their respective
weighting will be determined and agreed to by the participant, CEO and the
Compensation Committee at the beginning of the fiscal year. 

 

 

 

Performance
Objectives

The
individual performance objectives to be used in calculating the amount of the
AIP award may vary from one participant to another so long as each objective is
associated with a measurable outcome and is tied to the achievement of the
overall Company objectives and strategy.  Each participant may have from three
to six Performance Objectives with the weighting of each Performance Objective
based upon its perceived impact upon the Company’s success and the individual
participant’s ability to influence each Performance Objective.  All such
Performance Objectives must be approved by the Compensation Committee in
writing not later than the 75th day of each fiscal year, i.e.,
September 13th.  

 

Performance
Objectives may include such measurable targets as (but not limited to) revenue,
operating income, EBITDA or net income growth, market share gains, return on
equity, cash flow,  budgeted financial or operating goals, expense management,
productivity improvements, new product development or qualification, cost
reduction, and customer and/or employee satisfaction.  Individual Strategic
Objectives may include very specific projects for which an individual has
significant control over, such as, for example, the completion of a specific
project by a specific date, implementation of a new IT system, relocation of a
facility or product line, development and qualification of a specific new
product, etc.  Each Objective, either performance or strategic, must be
developed and defined adequately to permit a clear evaluation of accomplishment
against the objective at the end of the measurement period.

 

With
regard to the award for the CEO for the initial year (FYE 6/30/2011) of the
AIP, the following performance objectives apply:  (note – these should be negotiated with the CEO as he prepares
his business plan for 2011 – the objectives reflected below are illustrative
only at this point)

 

	

Performance
Objective    

			 Weighting
	

Achieve budget pre-tax income     

			30%
	

Achieve strategic objectives       

			15%
	

Achieve budgeted free cash flow      

			10%
	

Increase revenues 6%   

			10%
	

Increase Operating income >10%     

			30%
	

Achieve Return on Investment >10%    

			      5%
	

Total      

			100%

 

Budget
operating income (30%) is the amount of pre-tax profit reflected in the final
budget approved by the CEO and the Board.

 

 

 

 

Budget
objectives (15%) are the not more than three strategic or operating objectives
that the individual, department, or the Company as a whole must achieve in
order to move the Company forward towards the implementation of its strategy
and the accomplishment of its goals.  Each objective is worth 5 points of the
total 15 for this criteria.

 

Budgeted
free cash flow (10%) is the amount of cash flow forecasted for the year in the
final budget as approved by the CEO.  Cash flow will be measured using the
statement of cash flow as prepared by the Company’s auditors as part of the
year end financial statements.  Free cash flow is defined as the net cash
provided by operations less capital expenditures and required payments of long
term debt principal.

 

Revenue
growth in excess of the 6% target (10%) will be measured based upon the audited
year end financial statement compared to that of the previous year.

 

Return
on investment in excess of a 10% target (5%) is calculated based upon the
Company’s prior year end equity balance and the current year’s audited net
income.

 

Operating
income growth in excess of the10% target (30%) will be measure based upon the
audited year end financial statement compared to that of the previous year.

 

Productivity
growth in excess of the 6% target (5%) is measured based upon revenues per
employee for the current and prior years.  Revenue per employee equals total
revenue divided by the month end average number of employees for each of the
twelve months included in the fiscal year.

 

Adjustments
to any of the above criteria may be made by the Compensation Committee in order
to recognize one-off events or items that might penalize or reward individuals
who had no participation or control in the event.  That said, such adjustments
will be very rarely made and then only in extreme situations.  Management is
expected to anticipate events that will occur in the immediate fiscal year as
part of the budgeting process.  In making any such adjustments to either
reported or budgeted results, the Compensation Committee may, at its sole
discretion, recognize the impact of non-recurring or unusual items, including
but not limited to the following:

 

a.   Extraordinary gains and
losses as defined by generally accepted accounting principles,

 

b.   Write-downs of goodwill,

 

c.   Gains or losses on the sale
of a business or product line,

 

d.   Losses due to a force
majeure,

 

 

 

 

 

 

 

e.   Change in accounting
method due to a change in GAAP during its first year of application, 

 

f.    Gains
or losses on lawsuits unrelated to the operations of the business (including
but not limited to the Orange County Water District case costs and settlement),
and

 

g.   Any other negative
impact on the actual results of the Company (lost revenue or incurred expense)
which the Board of Directors, in its sole discretion, determines was beyond the
participant’s control or influence.

 

Each
individual criteria for the AIP will stand on its own merit and no bonus will
be paid for the performance against any criteria that is less than 80% of the
target, i.e., a bonus criteria that is achieved at less than 80% will be
counted as a zero in the points earned column.  In the event that a “hurdle”
rate, such as budgeted plan targets, ROI, growth, etc are exceeded, then the
relative points awarded under that criteria may exceed the amount shown above
by the ratio of the actual over the target but not more than 300% of the
target points.  As a result, based upon the AIP’s measurable criteria, the
bonus paid out could be more than 100% of the target bonus, however, the
total bonus paid under the AIP will be limited to 200% of target for any
individual participant.

 

 

An
example of how a bonus could exceed 100% of the target bonus is set forth
below:

 

	

Performance Objective
	Actually	Plan points	Bonus points
	

 

			Achieved	@ Target 	Earned
	

Budgeted operating income
	120% 	30%	36.0%
	

Strategic objectives 
	100%	15% 	15.0%
	

Budgeted cash flow    
	90%	10% 	9.0%
	

Increase revenues 6%   
	8%	10%	13.3%
	

Operating income growth >10% 
	13%	30%	39.0%
	

Return
on investment >10%
	       7%	5%	  
0.0%
	

Total    
	100%	100% 	112.3%

 

Under
the above scenario, the actual bonus to be paid would be 112.3% of the
respective target bonus.  

 

Achievement
of criteria and calculation of the amount of the bonus pool will take place in
local currency without regard to conversion of amounts into US dollars.

 

 

 

 

In
the event of termination of employment without cause, death, or disability, a bonus
will be considered “earned” if the employee worked for the Company for more
than six-months of the fiscal year and will be paid based upon the pro-rated
number of months the participant was employed during the measurement period. 
Actual payment of any bonus earned under such circumstances would take place
following the completion of the fiscal year and at the same time as other
participants in the plan received any bonus payments earned for the year.  In
the event of termination of employment for “cause” during the fiscal year, no
bonus will be paid.

 

Awards
will not be assignable or transferable other than by will or the laws of
descent and distribution.

 

Return
of or Reduction in the Award

 

If
following the end of the performance period, the Compensation Committee
determines that an award was, in whole or in part, based on incorrect data
(including financial results that, pursuant to applicable laws, rules,
regulations or applicable accounting principles, are required to be restate),
then the participant must return to the Company the overpayment amount.

 

This Annual Incentive Plan for the Senior Management Team is
intended to comply with Section 409A of the Internal Revenue Code.

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