UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 27, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17885
BEI MEDICAL SYSTEMS COMPANY, INC.
formerly known as
BEI ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 71-0455756
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
83 Hobart Street
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Hackensack, New Jersey 07601
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(Address of principal executive offices) (Zip code)
(201) 488-4960
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 8, 1997 was $24,369,434 (A). As
of December 8, 1997, 7,556,534 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on December 8, 1997 as
reported on the NASDAQ National Market System. Excludes 1,557,904 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 8, 1997.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement with respect to its 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
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PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 21
Item 3. Legal Proceedings.............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................ 22
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................................... 23
Item 6. Selected Financial Data........................................................ 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 25
Item 8. Financial Statements and Supplementary Data.................................... 29
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure......................................... 50
PART III
Item 10. Directors and Executive Officers
of the Registrant.............................................................. 50
Item 11. Executive Compensation......................................................... 50
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................................... 50
Item 13. Certain Relationships and Related Transactions................................. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................................................ 51
Signatures ............................................................................... 57
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PART I
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. When
used herein, the words, "intend", "anticipate", "believe", "estimate" and
"expect" and similar expressions as they relate to the Company are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in Item 1, "Business" as well as Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 1. BUSINESS
Background
Prior to September 27, 1997, BEI Electronics, Inc. was a diversified technology
based manufacturing company which historically conducted its business in several
operating segments. On July 2, 1997, the Company announced a plan to form a new
company, BEI Technologies, Inc. ("Technologies"), consisting of all of the
non-medical business of BEI Electronics, Inc. and to distribute shares in the
new company pro rata to the existing shareholders of BEI Electronics, Inc. (the
"Distribution"). The Distribution took place on September 27, 1997, to
shareholders of record on September 24, 1997. The sole continuing business of
BEI Electronics, Inc. was thereafter that of its subsidiary, BEI Medical Systems
Company, Inc. BEI Medical Systems Company, Inc. was subsequently merged into BEI
Electronics, Inc. on November 4, 1997 and the name of the combined company was
changed to BEI Medical Systems Company, Inc. (hereafter, "Medical Systems", or
"the Company", or "BEI"). For more information, see Notes 2 and 10 to the
Consolidated Financial Statements.
The Company was originally incorporated in Delaware in 1974, as a successor to
Baldwin Electronics, Inc., and became a publicly-owned company in 1989. BEI's
principal executive offices are located at 83 Hobart Street, Hackensack, New
Jersey, 07601 and its telephone number at that location is (201) 488-4960.
Unless the context indicates otherwise, "Medical Systems", "BEI" and the
"Company" refer to BEI Medical Systems Company, Inc. and its consolidated
subsidiaries. BEI and its triangular design are a registered trademark of the
Company.
For more information on BEI Technologies, Inc., see its Form 10-K for the fiscal
year ended September 27, 1997 (File No. 0-22799).
Introduction
Medical Systems designs, manufactures, and/or sells electrosurgery units,
various endoscopes, surgical instruments and surgical-procedure-specific
intervention products and kits. It also assembles endoscopic illuminators, video
imaging systems and laparascopic and hysteroscopic insufflation systems. Prior
to the Distribution of September 27, 1997, the Company also produced non-medical
items such as sensors, engineered subsystems and associated components used for
the control of precision machinery and equipment in industrial, medical,
automotive, aerospace and military applications and rocket-propelled ordnance
subsystems for military use in fiscal 1997 (see Note 3 to the Consolidated
Financial Statements regarding the spin-off of the non-medical businesses of the
Company).
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BEI Electronics, Inc. conducted its fiscal 1997 operations through three
segments, BEI Medical Systems Company, Inc., BEI Sensors and Systems Company,
Inc. ("Sensors") and Defense Systems Company, Inc. ("Defense"). Sensors and
Defense are now shown in the Company's financial statements as discontinued
operations and were spun-off from the Company at year end. See Note 3 to the
Consolidated Financial Statements. The Company has continuing operations in
California and New Jersey. For a discussion of factors relating to the Company's
risks, see "Risk Factors" below.
Business Strategy
The Company intends to become a leading medical device manufacturer focused on
serving women's healthcare and the specific needs of the gynecologist. Its
special emphasis is on the diagnosis, manipulation and treatment of disorders
and conditions of the cervix, uterus and fallopian tubes. A particular goal is
to offer alternatives to hysterectomies for the physician and patient.
The key components of the Company's strategy are as follows:
Broaden its existing gynecological product line. The Company currently
markets over 500 medical products to its existing base of customers
worldwide. The Company intends to develop or acquire additional product
lines. The Company acquired Zinnanti Surgical Instruments, Inc. in
February 1993, and further broadened its product lines through the
acquisition of the product lines of OvaMed Corporation in February
1996.
Develop and commercialize innovative medical technologies. The Company
is currently directing product development efforts at commercialization
of its HydroThermAblator(R) (HTA(R)) system, now undergoing U.S. Food
and Drug Administration (FDA) Phase II clinical trials. The HTA is
intended to provide a minimally invasive alternative treatment to
hysterectomy for abnormal or excessive uterine bleeding.
Acquire complementary technologies. The Company intends to continue to
expand its product line through selective business acquisitions,
licensing, joint ventures, and internal development. In 1993, the
Company acquired exclusive rights to use the Goldrath patents that
cover endometrial ablation. In 1996, the Company acquired the
GyneSys(R) Dx System for cervical and fallopian tube diagnosis and
treatment. In 1997, the Company acquired exclusive rights to distribute
a specialized patented bipolar electrosurgery system for treatment of
abnormal cervical tissue and benign uterine fibroids.
Expand global sales and distribution. The Company also plans to
increase sales through the expansion of its marketing activities to the
over 33,000 gynecologists practicing in the United States. A key
component of this strategy is to increase the Company's complementary
direct sales through the use of manufacturers' representatives, the
internal sales team and a niche specialty direct catalogue to
gynecologists in the U.S. The sales effort has also been expanded to
select international areas through a network of distributors.
Expand key relationships with leading clinicians. The Company has
developed working relationships with key clinicians on the evaluation
and use of innovative products and procedures that address women's
healthcare disorders. To further enhance this activity, the Company has
formed a Scientific Advisory Committee to review and evaluate new
products and procedures for future development and commercialization.
This committee will be chaired by Stephen L. Corson, M.D., a Professor
of Obstetrics and Gynecology at Thomas Jefferson Medical University in
Philadelphia and the Director of the Philadelphia Fertility Institute.
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Existing Base Products
The Company currently sells a line of specialty instruments, procedure
kits, disposables and equipment for physicians and surgeons in the fields of
gynecology, female reproductive healthcare and gastroenterology.
The Company's products for the diagnosis and treatment of conditions of
the cervix include such equipment as Gyne-Tech(TM) colposcopes for magnified
visualization; PLUS II(TM) electrosurgical generators for removal of tissue and
coagulation of bleeding; and Gyne-Tech cryosurgery systems for destruction of
lesions. Disposable single patient use items include electrosurgical electrodes
and the LLETZ-Plus(TM) procedure-specific sterile kits. The Company's products
for the diagnosis and treatment of conditions of the uterus include such
equipment as laparoscopic and Corson(TM) hysteroscopic electronic insufflators
for the precise control of pressure within body cavities; endoscopic video
systems and light sources for looking inside body cavities; and electrosurgical
systems for the removal of tissue and coagulation of bleeding in the treatment
of fibroids, as well as disposable single patient use items such as ZUMI(TM)
uterine manipulators and ZUI(TM) uterine injectors, electrosurgical electrodes,
sterile tubing sets, and Z-Sampler(TM) endometrial biopsy devices.
The Company's products for procedures requiring the diagnosis and
treatment of female reproductive problems include such equipment as the
GyneSys(R) flexible hysteroscope and Corson Hysteroscopic System(TM) for seeing
inside the uterine cavity and video systems and light sources for display of the
hysteroscopic image. Disposable single patient use items include the GyneSys DX
Catheter System for diagnosis and therapy for tubal blockage. For procedures
requiring diagnosis and treatment of conditions of the digestive tract, the
Company's products include such equipment as the UGI-3000B(TM) electrosurgical
system that combines monopolar and bipolar output for the removal of tissue and
coagulation of bleeding; and the EndoLav(R) endoscopic lavage pump. Disposable
single patient use items include the bipolar BEST(TM) Probe.
For gynecological oncology procedures and pelvic reconstructive
surgery, the Company provides procedure-specific instrumentation for
laparoscopically assisted vaginal hysterectomy, including the Soderstrom LAVH
Manipulator(TM); Z-Clamps(TM) and Z-Scissors(TM) for pelvic reconstructive
procedures; and MIYA Hooks(TM) and the Nichols-Veronikis Ligature Carrier(TM)
for sacrospinous suspension of vaginal prolapse.
The Company also produces a variety of electrosurgical generators,
laparoscopic insufflators, endoscopic light sources, and associated disposable
products designed for use in various medical / surgical procedures and sold
under OEM labeling arrangements.
New Products and Technology
The Company has developed, licensed and acquired new technologies that it plans
to phase into future product offerings or has recently introduced to the market.
These include:
1. A rigid and flexible hysteroscopy system for viewing the internal
surface of the uterus.
2. The patented HydroThermAblator system for treatment of abnormal uterine
bleeding.
3. A specialized proprietary bipolar electrosurgery system for removal of
benign uterine fibroids and treatment of cervical disorders.
4. The patented GyneSys catheter system for access to and treatment of the
uterus and fallopian tubes.
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These new products and their potential are more fully discussed below:
1. Hysteroscopy Systems
The need to provide a definitive diagnosis of uterine abnormalities led
to the development of diagnostic and operative hysteroscopy. A gynecologist may
look inside the uterus with a hysteroscope, a thin telescope-equipped device
that is inserted through the cervix. The hysteroscope is attached to a light
source and camera allowing the gynecologist to view the endometrial lining on a
video monitor, identify various pathology, make directed biopsies and perform
minimally invasive therapeutic procedures.
The Company has developed a rigid hysteroscopy system offering an
integrated system of telescope, sheaths, accessory instruments, hysteroscopic
insufflator, and combination video camera/light source and monitor/VCR. This
system offers the physician the flexibility of gas or continuous flow for
distention of the uterus.
The Company acquired its flexible HysteroSys(TM) hysteroscopy system
from OvaMed Corporation. The flexible systems offer a reusable 1.3mm fiberoptic
image guide and handle with a reposable 3.7 mm steerable sheath with 110(degree)
tip deflection for panoramic viewing and accessory control. The system allows
1mm endoscopic instruments to be utilized under direct visual control.
The Company believes that its hysteroscopy systems offer the following
advantages:
o choice between rigid and flexible systems.
o flexibility of CO2 or continuous flow for distention of the
uterus.
o modular design that reduces initial investment and provides
for future expansion of system capability.
o availability of a line of diagnostic and therapeutic sheaths.
o availability of a line of instrumentation to biopsy, grasp and
cut.
2. The HydroThermAblator System
Approximately 2.5 million women each year in the United States seek
medical treatment from a gynecologist for abnormal uterine bleeding. Also, many
of the nearly 2 million women who receive hormonal therapy or dilation and
curettage (D&C) fail to have satisfactory resolution of their menstrual bleeding
problem.
Hysterectomy, the surgical removal of the uterus with accompanying
risks of post surgical complications, has historically been the ultimate
solution offered for long term relief to women who continue to bleed despite
hormonal therapy or D&C. Of the approximately 600,000 hysterectomies performed
annually in the United States, it has been estimated that more than 150,000 are
performed for the relief of heavy bleeding from benign causes.
The Company has developed the patented HydroThermAblator ("HTA")
technology as an alternative to hysterectomy, to other traditional treatments
for abnormal menstrual bleeding and to other proposed ablation treatments
currently under development or evaluation. Other companies currently have
endometrial ablation products under development and in various stages of FDA
clinical trials. One such product developed by Gynecare, a subsidiary of Johnson
and Johnson, recently received FDA clearance for marketing.
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The Company believes that its HTA offers the following distinct
advantages compared to existing and emerging ablation technologies for the
treatment of abnormal menstrual bleeding:
o Should not require extensive training prior to use.
o Clinical outcome is not dependent on user experience or
variation in technique.
o Freely circulating heated saline allows even and complete
treatment of the entire endometrium.
o Variation in uterine size and shape is easily accommodated by
freely circulating heated saline.
o Integral hysteroscope provides confirmation of uterine anatomy
and instrument position, as well as continuous observation
during treatment.
The HydroThermAblator has been designed to offer the gynecologist a
minimally-invasive, nonsurgical method to treat abnormal menstrual bleeding in
an outpatient setting. The HTA consists of a mobile treatment unit incorporating
microprocessor control of fluid circulation, closed-loop volume of the
circulating saline, and fluid temperature regulation. The mobile unit provides a
drawer for procedure supplies, and a shelf to house the Company's Integrated
Video System(TM) for display of the hysteroscopic image on a video monitor.
Precisely-heated saline is circulated within the patient's uterus, under the
direct visual control of the gynecologist, for sufficient time to cause ablation
of the entire endometrial lining. The digital displays of the HTA control unit
guide the user through the steps of the HTA procedure, providing step-by-step
prompts designed for ease of use and consistent results. During the procedure an
automated microprocessor system controls the ablating temperature and monitors
fluid volume to measure and reduce possibilities of fluid absorption or loss. At
any time, the gynecologist can interrupt the treatment and, if desired, the
circulation of room temperature saline will rapidly cool the fluid circulation
system and the patient's uterus. As a result of the ablation of the endometrial
lining of the uterus, in most cases the regeneration of the endometrium and
resulting periodic menstrual bleeding are either significantly reduced or
eliminated.
The Company completed FDA-required Phase I clinical trials with 20
patients in April 1996. The Company began Phase II clinical trials with 20
patients in late 1996. The HTA may not be marketed in the United States until
the Company has completed Phase III clinical trials and filed for and received a
Pre-Marketing Authorization (PMA) from the FDA. There can be no assurance that
the FDA will permit the Company to proceed to Phase III clinical trials.
Moreover, there can be no assurance that any data obtained from such trials, if
they are permitted, will support the safety and effectiveness of the HTA.
Failure on the part of the Company to proceed to Phase III clinical trials or
failure of the data to support the safety and effectiveness of the HTA would
have a material adverse effect on the Company's business, financial condition
and results of operations. Certain international markets will require similar
approvals. International sales of the HTA system to date have been limited. In
February 1997, the Company selectively initiated delivery of units in some of
those countries where regulatory authorities permit sales. In addition, certain
clinical sites in international markets have received units for use in the
accumulation of additional clinical data.
3. Bipolar Therapy System
The newly licensed proprietary bipolar electrosurgical therapy systems
will be utilized by gynecologists for the treatment of the cervix as well as for
treating benign uterine fibroids of the uterus. The bipolar LLETZ system
consists of a bipolar generator and accessories for removing tissue from the
cervix and the coagulation of any bleeding vessels. The bipolar fibroid removal
system consists of a generator and accessories for laparoscopic removal of
fibroids as well as removal through a cervical approach.
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4. The GyneSys Catheter System
The Company has developed a catheter system for use by a physician
attempting to diagnose whether female infertility is caused by a blockage of the
fallopian tubes. The current diagnostic procedure of choice is
hysterosalpingography ("HSG"), a hospital-based procedure that involves the
injection of an x-ray contrast media (or dye) transcervically into the uterus to
allow the physician to observe and evaluate the flow of dye through the
fallopian tubes under fluoroscopy (imaging x-ray). This procedure is reported to
be highly inaccurate, with false-positive results in as many as 40% of
HSG-diagnosed cases of proximal tubal occlusion ("PTO").
The Company believes that its GyneSys Dx System of catheters overcomes
the limitations of conventional HSG and may obviate the need and inherent risk
of exploratory laparoscopy in the diagnosis of PTO. The Company believes that
the use of its GyneSys Dx catheter system, rather than the traditional HSG
catheter, can improve the diagnostic accuracy of HSG procedures by adding the
ability to direct fluid flow to the opening of each fallopian tube (selective
salpingography), or even direct a guidewire and catheter into the proximal
fallopian tube (proximal tubal cannulation) to dislodge a blockage. While
fluoroscopy is the prevalent imaging modality for HSG, the Company believes that
the proliferation of ultrasound equipment in gynecologists' offices, combined
with nationwide pressure from third party reimbursement agencies to move
procedures out of the hospital environment into outpatient and office practice,
and the ease of use of the GyneSys Dx system will create a significant market
opportunity for the GyneSys Dx system as the first step in the diagnosis of
tubal occlusion in the work-up of female infertility patients.
The American Society for Reproductive Medicine recommends that
selective salpingography be performed, following positive HSG indication of
proximal tubal occlusion, before use of more invasive techniques. It is
estimated that, of the approximately 1 million potential HSG procedures, 30% of
all patients will require selective salpingography, and that 10% will require
proximal tubal cannulation.
BEI's Cervical Access Catheter(TM) (CAC(TM)) with its non-allergenic
balloon technology and patented locking mechanism provides safety and ease of
use for inserting additional catheters and devices. The Cervical Access Catheter
is designed for the routine introduction of contrast media or dye into the
uterine cavity for hysterosalpingography, sonohysterosalpingography and
chromopertubation. Well suited to visualization using fluoroscopy or ultrasound,
the larger center lumen is designed for the introduction of other catheters or
instruments.
The high false positive rates associated with conventional HSG for
fallopian tube obstruction under both fluoroscopy and ultrasound, can be
significantly reduced with selective salpingography using the BEI Uterine Ostial
Access Catheter(TM) (UOAC(TM)). With direct examination of the tubal ostia, the
physician can easily distinguish tubocornual spasm from true mechanical
obstruction. The pre-formed atraumatic distal tip of the UOAC advances through
the CAC in the direction of the tactile indicator to provide access to the
uterine ostia.
If obstruction of the proximal fallopian tube is observed, the GyneSys
System also accommodates the Uterine Cornual Access Catheter (UCAC) and
guidewire, with which the physician may dislodge mucous or cellular debris,
thereby opening the fallopian tube without the need for laparoscopic surgery.
Significant Customers and Markets
Medical Systems' products are sold to a variety of customers primarily
for the gynecology market. Other markets served include gastroenterology and
general surgery. In the U.S., Medical Systems utilizes
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a system of independent manufacturers' representative organizations, inside
sales personnel and regional managers to market its products directly to end
users, hospitals, surgical centers and doctors' offices. Products are also sold
through a network of domestic and international distributors. In fiscal 1997 and
1996, international sales were 14% of Medical Systems' sales, compared to 10% in
fiscal 1995. The Company's international sales are dependent on the marketing
efforts of, and sales by, distributors. The Company may also rely on
distributors to assist it in obtaining reimbursement approvals from both
government and private insurers in certain international markets. The Company
does not currently have distributors in a number of significant international
markets that it has targeted and will need to establish additional international
distribution relationships in order to sell to those markets. Additionally, a
variety of products are manufactured by Medical Systems for sale by third
parties under various OEM agreements. In fiscal 1997, OEM sales were 17% of
Medical Systems' sales, compared to 15% in fiscal 1996 and 21% in fiscal 1995.
Backlog
Backlog is not currently a significant factor for Medical Systems. The
Company typically ships instruments within one to two weeks of receipt of an
order and electronic products within 30 days after receipt of an order.
Disposable products are normally shipped within one day of receipt of order.
Products of OEM customers that require special development, design, packaging
and testing are generally shipped within four to six months after an order is
received.
Competition
The Company operates in a highly competitive industry. Many of the
Company's existing competitors have significantly greater financial resources
and manufacturing capabilities, are more established, have larger marketing and
sales organizations and larger technical staffs.
The Company believes that its products compete primarily on basis of
price, design, performance, reliability, delivery service and support.
The Company's principal competitors include Imagyn Medical
Technologies, Inc.; Gynecare, a subsidiary of Ethicon/Johnson & Johnson, Inc.;
Conceptus, Inc.; Karl Storz; Richard Wolf; Olympus; Circon Corp.-Cabot; FemRx,
Inc.; Utah Medical Products, Inc.; Leisegang; Wallach; CooperSurgical, Inc.;
Valleylab, a subsidiary of Pfizer Inc.; and Microvasive, a subsidiary of Boston
Scientific. Other large healthcare companies may enter the market for minimally
invasive diagnostic and surgical gynecological products in the future. Competing
companies may succeed in developing technologies and products that are
efficacious or more cost effective than those currently offered or that may be
developed by the Company.
The Company believes that its ability to compete effectively depends on
its ability to continue to develop proprietary products that fulfill unmet
gynecological market needs and to anticipate changing marketplace demands, to
continue to attract and retain highly qualified personnel, to obtain the
required regulatory approvals, and to continue to manufacture and successfully
market high quality products. See "Risk Factors - Competition; Uncertainty of
Technology Change".
Manufacturing
Medical Systems' manufacturing operations consist primarily of the
manufacture and assembly of equipment such as electrosurgery units, endoscopic
illuminators, endoscopes and electronic insufflators.
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Some component fabrication and assembly of various non-electrical products, both
disposable and reusable, is performed by the manufacturing group. During fiscal
1996, Medical Systems' manufacturing facilities received ISO 9001 certification
from Lloyds Register Quality Assurance (LRQA). LRQA conducts semiannual audits
in Hackensack, New Jersey and annual audits in Chatsworth, California. The most
recent audit for both facilities was in September 1997 and the audit report did
not include any negative observations or identify any areas of noncompliance.
Additionally, the Company's facilities and documentation procedures for the
manufacture of medical devices are required to conform to the Quality System
Regulations ("QSR") which are issued and enforced by the FDA through its
facilities inspection program. The Company's manufacturing facilities in
Chatsworth, California were most recently inspected by the FDA in November 1997
for compliance with the QSR and the facility in Hackensack, New Jersey was most
recently inspected by the FDA in January 1996 for compliance with GMP (Good
Manufacturing Practices). The GMP regulation was replaced by the QSR regulation
effective October, 1996. Future inspections by the FDA of the Hackensack
facility will be based on determining compliance with the QSR. Upon completion
of the inspections, the FDA did not issue a Notice of Adverse Findings at either
facility. Withdrawal of QSR compliance status would have a material adverse
effect on the Company's business, financial condition and results of operations.
In order to commercialize the HTA successfully, the Company must
manufacture or assemble the HTA itself or through third parties in accordance
with FDA requirements, in commercial quantities, at high quality levels and at
reasonable costs. The Company has not yet produced the HTA in substantial
quantities, but expects that its manufacturing experience with other medical
electronic systems and consumable medical products will be transferrable to the
HTA. Failure of the Company to produce the HTA in commercial quantities at high
quality levels and at commercially reasonable prices would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Research and Development
The Company's principal development effort has focused on proprietary
devices for minimally invasive procedures in gynecology. The Company's
internally funded research and development expenditures were $1.9 million, $1.3
million and $1.0 million for the fiscal years 1997, 1996 and 1995, respectively.
Products that have been under development include the HydroThermAblator intended
to be an alternative to existing treatment for abnormal menstrual bleeding, the
GyneSys DX Diagnostic Catheter System for the diagnosis and treatment of
fallopian tube obstruction, and the flexible HysteroSys Diagnostic Hysteroscope
as a cost effective solution suitable for the physician's office. Although the
HydroThermAblator technology has not yet received FDA approval in the United
States, it has been approved for use and sold in several foreign countries. This
international distribution is based on continued compliance with ISO-9001
standards, as certified by the Company's notified body, LRQA. Domestic
distribution of developed products is contingent upon compliance with the QSR,
most specifically Section 820.30-Design Controls. Additionally, the Company
continues development efforts to improve and enhance its disposable and
instrument product lines for both outpatient and office applications. Through
strategic alliances, the Company also continues to develop new applications
related to fibroid resection for its bipolar electrosurgical generators. The
Company also works with several OEM customers for the adaptation of its
proprietary technology to various private label requirements.
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Employees
As of September 27, 1997, the Company had 94 employees, including 13 in
research, development and engineering, 29 in marketing and sales, 39 in
operations and 13 in administration.
Patents and Licenses
The Company primarily relies upon trade secrets and know-how to develop
and maintain its competitive position. The Company holds 19 U.S. patents and 6
foreign patents with expiration dates ranging from April 2001 to October 2014.
Because many of these patents relate to technology that is important to certain
of the Company's products, the Company considers these patents to be significant
to its business. There can be no assurance, however, that any patent will
provide adequate protection for the technology or product it covers.
Risk Factors
Limited Operating History; History of Losses and Possible Future Losses
The Company has a limited medical device operating history upon which
an evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by entrants
into the medical device industry which is characterized by an increasing number
of participants, intense competition and a high failure rate. Historically, the
Company has incurred significant losses in its medical device business and
expects losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in funding
clinical trials in support of regulatory and reimbursement approvals, expansion
of marketing and sales activities and research and development. The Company's
future revenues will depend upon, among other factors, the Company's ability to
cost-effectively commercialize the HydroThermAblator and any other of the
Company's new products. There can be no assurance that the HTA or such other new
products will be successfully commercialized or that the Company will achieve
significant revenues from either international or domestic sales of such
products. In addition, there can be no assurance that the Company will achieve
or sustain profitability in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Products."
FDA Approval of HTA
The Company is conducting clinical trials of the HTA pursuant to an
investigational device exemption ("IDE") which has been deemed approved by the
Food and Drug Administration. The Company has completed a Phase I safety
feasibility study of the HTA and is currently conducting a Phase II study. The
Phase II study is an efficacy feasibility study limited to twenty patients. If
data from the Phase II study supports the effectiveness of the HTA, the Company
will be required to conduct a full-scale Phase III efficacy study to obtain data
necessary to support the submission of a PMA application. There can be no
assurance that the FDA will permit the Company to proceed to a full-scale Phase
III efficacy study. Moreover, there can be no assurance that any data obtained
from such studies, if they are permitted, will support the safety and
effectiveness of the HTA. Failure on the part of the Company to proceed to Phase
III clinical studies or failure of the data to support the safety and
effectiveness of the HTA would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Risk
Factors - Government Regulation."
11
<PAGE>
Uncertainty of Market Acceptance
The Company's success is dependent upon acceptance by the medical
community of the HTA and, to a lesser extent, other new products introduced by
the Company as reliable, safe and cost-effective treatments for the medical
conditions they are intended to treat. There can be no assurance that the HTA or
such other products will gain any significant degree of market acceptance among
physicians, patients and healthcare payers, even if the necessary international
and United States regulatory approvals are obtained. The Company believes that
recommendations and endorsements by physicians will be essential for market
acceptance of the HTA and such other products, and there can be no assurance
that any such recommendations or endorsements will be obtained. The Company
believes that physicians will not use the HTA unless they determine, based on
clinical data and other factors, that the HTA is an attractive treatment
alternative for excessive and abnormal menstrual bleeding and offers clinical
utility in a cost-effective manner. Although the Company believes that the HTA
will not require extensive physician training prior to use, acceptance among
physicians will depend upon the Company's ability to train potential users of
the HTA in interventional techniques, and the willingness of such users to learn
these new techniques. Failure of the Company to achieve significant market
acceptance of the HTA and other new products introduced by the Company would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products".
Fluctuations in Operating Results
The Company expects that its operating results will fluctuate
significantly from quarter to quarter in the future and will depend on a number
of factors, many of which are outside the Company's control. These factors
include actions relating to regulatory and reimbursement matters, the extent to
which the Company's products gain market acceptance, the timing and size of
international and domestic distributor purchases and the timing of product
approvals. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Scale-up Risk
In order to commercialize the HTA successfully, the Company must
manufacture or assemble by itself or through third parties, the HTA it is
developing in accordance with FDA requirements in commercial quantities, at high
quality levels and at commercially reasonable costs. The Company has no
experience in manufacturing and assembling the HTA in commercial quantities. The
Company has not yet produced the HTA in commercial quantities at commercially
reasonable costs, and there can be no assurance that it will be able to do so.
Failure of the Company to produce the HTA in commercial quantities at high
quality levels and at commercially reasonable prices would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Limited Direct Sales Experience
The Company has only limited experience in direct field sales and
marketing of the HTA and other products both domestically and internationally.
The Company intends to establish a direct field sales force of independent
manufacturers' representatives to market and sell the HTA (if approved by the
FDA)and other products. Achieving market acceptance for the HTA will require the
Company to establish marketing and direct sales capability sufficient to support
sales in commercial quantities. Establishing such capability will require
significant resources and there can be no assurance that the Company will be
able to recruit and retain additional qualified marketing personnel or direct
sales personnel or that future sales efforts of the Company will be successful.
Additionally, the Company intends to establish partnership relationships with
12
<PAGE>
international distributors to market the HTA. There can be no assurance that the
Company will be successful in establishing such partnership relationships on
commercially reasonable terms, if at all. The failure to establish and maintain
an effective distribution channel for the HTA and other products or to establish
and retain qualified and effective sales personnel to support commercial sales
of the Company's HTA and other products, would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Reliance on Patents and Protection of Proprietary Technology
The Company's ability to compete effectively will depend substantially
on its ability to develop and maintain the proprietary aspects of its
technology. There can be no assurance that any of the Company's issued patents,
or any future patents that may be issued, will offer any degree of protection to
the Company's products against competitive products. There can be no assurance
that any patents that may be issued or licensed to the Company or any of the
Company's patent applications will not be challenged, invalidated or
circumvented in the future. In addition, there can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property disputes, and some
companies in the industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference or other proceedings in the United States Patent and Trademark
Office ("USPTO"). The defense and prosecution of intellectual property suits,
USPTO proceedings and related legal and administrative proceedings are both
costly and time consuming. Litigation may be necessary to enforce patents issued
or licensed to the Company, to protect the Company's trade secrets or know-how
or to determine the enforceability, scope and validity of the proprietary rights
of others.
Any litigation or USPTO proceedings involving the Company will result
in substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or USPTO proceedings to which the Company may become a party could
subject the Company to significant liabilities to third parties or require the
Company to seek licenses from third parties. Although some patent and
intellectual property disputes in the medical device area have been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include substantial ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
Legislation is pending in Congress that, if enacted in its present
form, would limit the ability of medical device manufacturers in the future to
obtain patents on surgical and medical procedures that are not performed by, or
as a part of, devices or compositions which are themselves patentable. While the
Company cannot predict whether the legislation will be enacted, or precisely
what limitations will result from the law if enacted, any limitation or
reduction in the patentability of medical and surgical methods and procedures
13
<PAGE>
could have a material adverse effect on the Company's ability to protect its
proprietary methods and procedures.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
an individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties
or utilized by the individual, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to the Company shall be the exclusive property of
the Company. There can be no assurance that the Company's proprietary
information will not be misused or confidentiality agreements with employees,
consultants and others will not be breached, that the Company will become aware
of such breach, have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors. See "Business -- Research and Development" and "-- Patents and
Licenses."
Uncertainty Relating to Third-Party Reimbursement
In the United States, hospitals, physicians and other healthcare
providers that purchase medical devices generally rely on third-party payers,
such as private health insurance plans, to reimburse all or part of the cost
associated with the treatment of patients. Although reimbursement for
therapeutic and diagnostic procedures to treat uterine disorders such as
excessive menstrual bleeding have generally been available in the United States,
reimbursement for diagnostic and therapeutic procedures for infertility have
generally not been available. Even though certain procedures have generally been
reimbursable there is no assurance that it will continue to be the case.
Furthermore, there can be no assurance, even if the Company's products are
cleared by the FDA for new clinical applications, that full reimbursement will
be available for such procedures. The Company could also be adversely affected
by changes in reimbursement policies of government or private healthcare payers,
particularly to the extent that any such changes affect reimbursement for
therapeutic or diagnostic catheterization procedures in which the Company's
products are used. Failure by physicians, hospitals and other users of the
Company's products to obtain sufficient reimbursement from healthcare payers for
procedures in which the Company's products are used, or adverse changes in
government and private third-party payers' policies toward reimbursement for
such procedures, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Market acceptance of the Company's products in international markets
may be dependent in part upon the availability of reimbursement within
prevailing healthcare payment systems. Reimbursement and healthcare payment
systems in international markets vary significantly by country, and include both
government sponsored and private healthcare insurance. While users of the
Company's products for falloposcopy in Australia have obtained reimbursement
both to the physician and to the hospital, there can be no assurance that other
countries in which the Company seeks to market its technology for falloposcopy
will approve reimbursement for the Company's falloposcopy products. Although the
Company will seek additional international reimbursement approvals, obtaining
such approvals can require 12 to 18 months or longer and there can be no
assurance that any such approvals will be obtained in a timely manner, if at
all. Failure to receive additional international reimbursement approvals could
have a material adverse effect on market acceptance of the Company's products in
the international markets in which the Company is seeking approvals and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
14
<PAGE>
Risks Associated with International Sales
The Company markets and sells its products internationally through a
network of distributors. The Company's international sales are dependent upon
the marketing efforts of, and sales by, these distributors. The Company may also
rely on these distributors to assist it in obtaining reimbursement approvals
from both government and private insurers in certain international markets. In
general, the Company has chosen to operate through small distribution firms
because of its belief that these firms will devote greater attention to the
Company's products. The use of small distributors increases the risks associated
with financial instability of distributors, which includes the risk that
distributors will cease operations or will be unable to satisfy financial
obligations to the Company. If a distributor were to fail to invest adequate
capital promoting the Company's products or were to cease operation, the Company
would likely be unable to achieve significant sales in the territory. In
addition, because the Company has only recently commenced international sales,
it has only limited sell-through experience with many of its distributors. The
Company also does not currently have distributors in a number of significant
international markets that it has targeted and will need to establish additional
international distribution relationships. There can be no assurance that the
Company will engage qualified distributors in a timely manner. The failure to
engage such distributors or the failure of such distributors to arrange
significant sales of the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.
A number of other risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in managing
international operations and fluctuations in foreign currency exchange rates.
There can be no assurance that the Company will be able to successfully
commercialize any of its existing or future products in any international
market. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Competition; Uncertainty of Technology Change
The medical device industry is highly competitive and characterized by
innovation and technological change. There are many large companies with
significantly greater financial, manufacturing, marketing, distribution, and
technical resources and clinical experience than the Company. Such companies are
developing and marketing devices for surgical treatment or removal of the
uterus, uterine fibroids, the endometrial lining of the uterus and other uterine
tissue or non-surgical methods such as drug therapy. Additionally, there are
smaller companies developing alternative methods of uterine tissue ablation that
compete with the Company. There can be no assurance that these companies will
not succeed in developing technologies and products that are more effective than
any which have been or are being developed by the Company or that would render
the Company's technologies or products obsolete or not competitive. The Company
also competes with such other companies for clinical sites to conduct trials.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company expects competition
for devices and services to treat excessive menstrual bleeding to increase.
See "Business -- Competition."
Possible Future Capital Requirements
The Company's capital requirements depend on numerous factors,
including the progress of the Company's clinical research and product
development programs, the receipt of and the time required to obtain regulatory
clearances and approvals and the resources the Company devotes to developing,
15
<PAGE>
manufacturing and marketing its products. The Company's capital requirements
also depend on the resources required to hire and develop a direct sales force
in the United States, the resources to expand manufacturing capacity and
facilities requirements, the extent to which the Company's products generate
market acceptance and demand, and other factors. The timing and amount of such
capital requirements cannot accurately be predicted. The Company believes that
its current cash, together with operating revenues, will provide adequate
funding for its capital requirements for the next twenty-four months. There can
be no assurance, however, that the Company will not require additional funding
or that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Product Liability Risk; Limited Insurance Coverage
The medical device industry has historically been litigious, and the
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury. Although the Company has not experienced any claims to date, the Company
plans to market new technology and there can be no assurance that the Company
will not experience losses due to product liability claims in the future. The
Company currently maintains liability insurance with coverage limits of
$1,000,000 per occurrence and $2,000,000 in the aggregate. There can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. Any claims against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Government Regulation
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and, in some instances, by foreign
and state governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, as
amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, sale, distribution, and
promotion of medical devices. Before a new device can be introduced into the
market, the manufacturer must obtain market clearance through either the 510(k)
premarket notification process or the lengthier PMA application process.
Noncompliance with applicable requirements, including QSR, can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of product, failure of the government to
grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, and criminal prosecution. The FDA has the authority to
request repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
The Company manufactures and markets a number of general surgical,
obstetric and gynecological devices for which 510(k) clearances have been
obtained. Included among the products that the Company currently markets are
electrosurgical systems, endosurgical systems, irrigation and lavage systems,
integrated video systems, laparoscopic insufflation systems, intra-uterine
manipulators and injectors, endometrial sampling systems, hysterectomy clamps
and scissors and various biopsy instruments. Any modifications to the Company's
currently marketed devices that could significantly affect their safety or
efficacy or that constitute a major change to the intended use require new
510(k) submissions. There can be no assurance that the Company has submitted
510(k) notices for all such modifications and that the FDA would not
16
<PAGE>
require the Company to cease distribution of the modified products pending the
submission and review of a 510(k) notice for such products.
In addition, the Company manufactures and markets products, including
ZSI gynecological products, Meditron medical devices and OvaMed products, the
rights to which it obtained through the acquisition of other medical device
companies. There can be no assurance that the acquired companies were in
compliance with applicable FDA regulations at the time they were acquired and
that any noncompliance on the part of the acquired companies would not have
regulatory consequences for the Company. As a result, noncompliance on the part
of the acquired companies could have a material adverse effect on the Company's
business, financial condition and results of operations.
Developments such as the enactment of the Safe Medical Devices Act of
1990 and increased enforcement actions reflect a trend toward more stringent
product regulation by the FDA. One result is an increase in the typical time
elapsed between the filing of an application and the receipt of FDA clearance or
approval of commercial release of a medical device. In addition, the FDA often
requires clinical data with such applications, which can increase the cost of
obtaining such clearance to market. Furthermore, rigorous regulatory action may
be taken in response to deficiencies noted in inspections or to any product
performance problems.
Medical device laws are also in effect in many countries outside the
U.S. in which Medical Systems does business. These range from comprehensive
device approval requirements to requests for product data or certifications. The
number and scope of these requirements are increasing. This trend toward
increasing product regulation is evident in the European Union, where efforts
are under way to harmonize the regulatory systems. Such regulatory systems
include ISO 9000, IEC 601 and CE marks.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery and payment systems. Legislative debate
is expected to continue in the future, and the Company cannot predict what
impact the adoption of any federal or state health care reform measure or future
private sector reform may have on its business.
Dependence on Key Employees
The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees would have a
material adverse effect on the Company. The Company's ability to manage its
transition to commercial-scale operations, and hence its success, will depend on
the efforts of these individuals. The Company's success will also depend on its
ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, and there can be no assurance that the Company will be able to
attract and retain such personnel. The Company does not currently have key
person insurance on the life of any employee.
Anti-Takeover Effects of Delaware Law and Certain Charter Provisions;
Stockholder Rights Plan
The Company's Board of Directors has the authority to issue up to
2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the
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future. While the Company has no present intention to issue shares of Preferred
Stock, such issuance, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law (the "Delaware Law"), and the Company's Certificate of Incorporation
contains a fair price provision, the combined effect of which prohibits the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
and the fair price provision could have the effect of delaying or preventing a
change of control of the Company. The Company's Certificate of Incorporation
provides for staggered terms for the members of the Board of Directors. The
staggered Board of Directors and certain other provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock. Furthermore,
the Board of Directors of the Company has adopted a Stockholder Rights Plan that
has certain anti-takeover effects. Rights issued under the plan will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors.
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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their ages as of
December 1, 1997 are as follows:
Name Age Position
- --------------------------------------------------------------------------------
Charles Crocker (2) 58 Chairman of the Board of Directors
Richard W. Turner 51 President and Chief Executive Officer
Thomas W. Fry 53 Vice President, Finance and Administration,
Secretary and Treasurer
Gary D. Wrench (1) 64 Director
Dr. Ralph M. Richart (1) 63 Director
Dr. Lawrence A. Wan (2) 59 Director
- --------------------------------------------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Crocker, a founder of the Company, has served as Chairman of the Board of
Directors of the Company since October 1974. Mr. Crocker assumed the positions
of President and Chief Executive Officer, effective October 1, 1995. Mr. Crocker
served as President of Crocker Capital Corporation (a Small Business Investment
Company), from 1970 to 1985, and as General Partner of Crocker Associates, a
venture capital investment partnership, from 1970 to 1990. He currently serves
as a director of BEI Technologies, Inc., Fiduciary Trust Company International,
Pope & Talbot, Inc. and KeraVision. Mr. Crocker holds a B.S. from Stanford
University and an M.B.A. from the University of California, Berkeley.
Mr. Turner began Medical in 1991 as a subsidiary of what is now BEI Medical
Systems Company, Inc. Previously President of the Healthcare Group for the
Cooper Companies, Mr. Turner has held executive leadership positions in the
medical industry for over 20 years, including President and Director of Cooper-
LaserSonics, Inc., President of CooperVision Inc., President and Chief Executive
Officer/Director for Pancretec, Inc. and President of Kay Laboratories. Mr.
Turner holds a B.S. from Old Dominion University and an M.B.A. from Pepperdine
University.
Mr. Fry served as Vice President, Finance and Administration of Medical from
October 1992 until the merger of Medical into the Company in November 1997.
Prior to that time, Mr. Fry was employed by GTE from 1970 to 1979 in various
accounting and financial roles including three years as the Controller of GTE
Sylvania in Caracas, Venezuela. Mr. Fry was employed by Cheeseborough-Ponds
International as Manager of Profit Planning and Manufacturing Controller from
1979 to 1986, by Cavitron, Inc./CUSA, a medical device, engineering and
manufacturing company, as Controller/CFO from 1986 to 1989, and by Disctronics
Ltd. as Corporate Controller from 1989 to 1992. Mr. Fry holds a B.S. from
Southeast Missouri State University and an M.B.A. with academic honors from Pace
University.
Mr. Wrench served as Senior Vice President and Chief Financial Officer of the
Company from July 1993 to September 1997, and as a Director of the Company since
February 1986. From April 1985 to July 1993, he served as Vice President of the
Company and President and Chief Executive Officer of Motion Systems Company,
Inc., then a wholly owned subsidiary of the Company that is now a part of BEI
Technologies, Inc. Previous experience includes twenty years with Hughes
Aircraft Company including an assignment as President of Spectrolab, Inc., a
Hughes subsidiary. He currently serves as a director of BEI Technologies, Inc.
Mr. Wrench holds a B.A. from Pomona College and an M.B.A. from the University of
California, Los Angeles.
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Dr. Richart is Professor of Pathology and Obstetrics and Gynecology at the
Columbia University College of Physicians and Surgeons and Director of
Gynecological Pathology and Cytology at the Sloane Hospital for Women in New
York City. He served as a Career Research Development Awardee at the Medical
College of Virginia before moving to Columbia-Presbyterian Medical Center in
1963. His professional interests have centered around obstetrical and
gynecological pathology and cytology with particular emphasis on the study of
cervical neoplasia and, more recently, the relationship of the human
papillomavirus to lower genital tract neoplasia. He is the past President of the
International Gynecologic Cancer Society. He received his medical training at
the University of Rochester School of Medicine and Dentistry, and completed his
pathology residency in the Harvard Hospitals system.
Dr. Wan served as Vice President and Chief Technical Officer of BEI Electronics,
Inc. from July 1990 to September 1997, and is currently Vice President and Chief
Technical Officer of BEI Technologies, Inc., and President of SiTek, Inc., a BEI
Technologies' subsidiary. From 1984 until 1990, he served as Vice President,
Engineering, of Systron Donner Corporation, and also held various other
technical and general management positions with that company between 1979 and
1984. From 1968 through 1979, he was founder and Chief Executive Officer of
Sycom, Inc., a commercial electronics company. Prior to that, he worked for
Hughes Aircraft Company where he headed the Radar Systems Section of the Hughes
Ground Systems Group. In 1962, Dr. Wan and two other professors established an
Engineering School at the University of California, Santa Barbara, where he also
taught Engineering. Dr. Wan holds B.S., M.S. and Ph.D. degrees in Engineering
and Applied Sciences from Yale University.
The Company has a classified Board of Directors, which may have the effect of
deterring hostile takeovers or delaying changes in control or management of the
Company. For purposes of determining their term of office, directors are divided
into three classes, with the term of office of the first class to expire at the
1998 annual meeting of stockholders, and the term of office of the second class
to expire at the 1999 annual meeting of stockholders and the term of office of
the third class to expire at the 2000 annual meeting of stockholders.
Class I consists of Mr. Turner; Class II consists of Mr. Crocker and Dr.
Richart; and Class III consists of Mr. Wrench and Dr. Wan. Directors elected to
succeed those directors whose term expires will be elected for a three year term
of office. All directors hold office until the next annual meeting of
stockholders, at which their term expires, and until their successors have been
duly elected and qualified. Executive officers serve at the discretion of the
Board. There are no family relationships among any of the officers and
directors.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased office space in
Hackensack, New Jersey, under a lease which expires in 1998. The Company
operates two other facilities that relate to Medical Systems and maintains
office space in various locations throughout the United States for sales and
technical support. The Company's principal facilities are as follows:
Location Description of Facility
- --------------------------------------------------------------------------------
Hackensack, New Jersey Leased 10,100 square foot manufacturing,
engineering, and administrative facility.
Chatsworth, California Leased 6,400 square foot manufacturing and
administrative facilities.
Chatsworth, California Leased 4,300 square foot administrative and
marketing facility.
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ITEM 3. LEGAL PROCEEDINGS
CooperSurgical, Inc. vs. BEI Medical Systems Company, Inc. et al.
In October 1993, CooperSurgical, Inc., a subsidiary of The Cooper Companies,
filed a claim for unspecified damages alleging unfair competition due to actions
by Medical Systems and its president Richard Turner, a former employee of The
Cooper Companies, and others. On January 31, 1996, the Court issued a ruling
which affirmed the legal basis for Medical Systems to assert a counterclaim for
damages against CooperSurgical regarding the parties' electrosurgical generator
contract.
CooperSurgical's original damage claims were for approximately $11 million. In
June 1996, more than one year after expert discovery closed in May 1995,
CooperSurgical's counsel sent to the Company's counsel a letter purporting to
supplement CooperSurgical's previous responses to interrogatories. The June 1996
letter indicated that CooperSurgical's damages for one particular aspect of the
claim were between $24 and $50 million with respect to a claim for which
CooperSurgical's experts had previously estimated damages of $3.4 million. The
Company will vigorously oppose any CooperSurgical attempt whatsoever to
introduce at trial any evidence of a damage claim based upon its June 1996
purported supplement.
Management has vigorously defended its rights in this action and believes after
discussion with legal counsel that the CooperSurgical claims are exaggerated. In
1995, expert witnesses for the Company prepared a formal response to the damage
computations CooperSurgical previously submitted. The Company's experts stated
that if CooperSurgical were entitled to damages, those damages would total less
than $100,000, and would be more than offset by Medical Systems' counterclaims
against CooperSurgical, if Medical Systems were successful in its counterclaims.
The trial started in October 1997, and is currently ongoing in the Superior
Court of New Jersey for Bergen County, Chancery Division. While the outcome of
this matter cannot be determined at this time, management believes, taking known
factors into account and after consultation with legal counsel, that this matter
will not result in a material adverse impact on the financial position of the
Company. However, any settlement of this case on a basis that results in an
unfavorable outcome for the Company could have a material adverse effect on the
results of operations of any quarterly or annual reporting period.
Other
The Company has pending various legal actions arising in the normal course of
business. Management believes that none of these legal actions will have a
material effect on the Company's operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
BEI's common stock was initially offered to the public in July 1989 and traded
on the NASDAQ national market system under the NASDAQ symbol "BEII" from August
1, 1989 through the fiscal year end of September 27, 1997. During the period
from October 3 to October 7, 1997, the stock traded under the NASDAQ symbol
"BEIIV". After October 7, 1997, the Company's common stock began trading under
the NASDAQ symbol "BMED." Set forth below are the high and low closing sale
prices on the National Market System for the periods indicated. Such quotations
do not reflect retail markups, markdowns or commissions.
1997 Fiscal Year Cash Dividend
(ended 9/27/97) High Low Declared
- --------------------------------------------------------------------------------
Fourth Quarter $ 14.50 $ 10.38 $ 0.02
Third Quarter $ 11.00 $ 8.00 $ 0.02
Second Quarter $ 12.38 $ 10.38 $ 0.02
First Quarter $ 11.25 $ 9.25 $ 0.02
- --------------------------------------------------------------------------------
1996 Fiscal Year
(ended 9/28/96)
- --------------------------------------------------------------------------------
Fourth Quarter $ 11.00 $ 8.50 $ 0.02
Third Quarter $ 13.50 $ 8.55 $ 0.02
Second Quarter $ 9.00 $ 6.75 $ 0.02
First Quarter $ 7.63 $ 6.25 $ 0.02
- --------------------------------------------------------------------------------
On September 27, 1997, having transferred all of its non-medical device
businesses to Technologies in exchange for all of Technologies' outstanding
common stock, Electronics distributed that stock to its stockholders in a
tax-free spin-off of Technologies. As a result of the spin-off of Technologies,
whose business represented the majority of Electronic's assets and revenues, the
market price of the Company's stock adjusted to account for the Distribution. On
November 4, 1997, BEI Electronics, Inc. merged with its subsidiary, BEI Medical
Systems Company, Inc., and changed its name to BEI Medical Systems Company, Inc.
The closing price of BEI Medical Systems common stock was $4.0625 on December 8,
1997. For further information see "Business - Background" and Note 1 to the
Consolidated Financial Statements.
As of December 8, 1997, there were approximately 1,300 holders of record of the
Company's common stock. The Board of Directors has declared and the Company has
paid quarterly cash dividends of $.02 per share of common stock in each quarter
of fiscal 1996 and 1997. There are no restrictions on the Company's ability to
pay dividends; however, it is currently the intention of the Board of Directors
to retain any and all earnings for use in the Company's business and the Company
does not anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of dividends will depend, among other factors,
upon the earnings, capital requirements, operating results and financial
condition of the Company.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five fiscal years presented below is derived
from the audited Consolidated Financial Statements of the Company. The data
should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.
The data and the accompanying analysis in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" cover periods in which the
Company's operations include business segments which are now operated by
Technologies and include the results of those business statements as
discontinued operations by the Company. Continuing operations of the Company are
comprised of the medical device business carried on by the Company's
majority-owned subsidiary BEI Medical Systems Company, Inc. prior to the
Distribution, which subsequent to the Distribution comprised all of the
Company's operations. For further information see Note 1 to the Consolidated
Financial Statements, Technologies' Form 10 General Form for Registration of
Securities, as amended (File No. 0-22799) and the Technologies Form 10-K for the
fiscal year ended September 27, 1997 (File No. 0-22799).
<TABLE>
(in thousands, except per share amounts)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
-----------------------------------------------------------------------------------
September 27 September 28 September 30 October 1 October 2
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 10,005 $ 9,357 $ 8,847 $ 8,678 $ 7,204
Loss from continuing operations (4,348) (2,682) (2,350) (2,458) (1,150)
Income (loss) from discontinued
operations 4,583 4,571 (2,041) 714 4,928
Net income (loss) 235 1,889 (4,391) (1,744) 3,778
Loss from continuing operations per
common and common equivalent
share $ (0.60) $ (0.38) $ (0.35) $ (0.37) $ (0.17)
Earnings (loss) from discontinued
operations per common and
common equivalent share 0.64 0.64 (0.30) 0.11 0.73
Earnings (loss) per common and
common equivalent share 0.03 0.27 (0.65) (0.26) 0.56
Cash dividends per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.08
Weighted average shares
outstanding 7,203 7,108 6,759 6,657 6,783
Balance Sheet Data:
Working capital $ 11,085 $ 38,102 $ 35,923 $ 40,189 $ 35,667
Total assets 22,584 115,011 113,738 112,432 108,528
Long-term debt (excluding current
portion) 22 212 392 560 1,231
Stockholders' equity 17,660 55,972 53,319 57,829 59,606
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section and in "Business".
<TABLE>
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by certain items in the Company's Consolidated
Statements of Operations.
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.7 61.9 59.7
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 40.3 38.1 40.3
Operating expenses:
Selling, general and administrative expenses 78.8 69.6 68.9
Research, development and related expenses 18.6 14.2 11.3
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (57.1) (45.7) (39.9)
Other income 1.3 3.5 2.0
Interest expense 0.7 1.2 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (56.5) (43.4) (39.6)
Income taxes (benefit) (13.0) (14.8) (13.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (43.5) (28.6) (26.5)
Income (loss) from discontinued operations 45.8 48.8 (23.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2.3% 20.2% (49.6)%
====================================================================================================================================
</TABLE>
Net Sales
Fiscal years 1997, 1996, 1995
In fiscal 1997, the Company's net sales from continuing operations increased
6.9% to $10.0 million from $9.4 million in fiscal 1996. The increase was
primarily due to increased sales of existing gynecology instruments and to a
lesser extent increased sales of OEM products and initial sales of the HTA in
international markets.
The Company's sales increased 5.8% to $9.4 million in fiscal 1996 from $8.8
million in fiscal 1995. The increase was primarily due to sales of existing
gynecology instruments.
The Company's sales to international customers were approximately 14.3%, 13.8%
and 10.1% of the Company's net sales for fiscal 1997, 1996 and 1995,
respectively. International sales can vary significantly as a percentage of
sales depending on the timing of shipments and size of orders.
Cost of Sales and Gross Profit
Cost of sales as a percentage of net sales was 59.7%, 61.9% and 59.7% in fiscal
1997, 1996 and 1995, respectively.
25
<PAGE>
The decrease in cost of sales as a percentage of net sales in fiscal 1997 from
fiscal 1996 resulted primarily from improved overhead absorption resulting from
higher sales volume.
The increase in the cost of sales as a percentage of net sales in fiscal 1996
from fiscal 1995 was primarily due to increased costs for regulatory compliance.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales were
78.8%, 69.6% and 68.9% in fiscal 1997, 1996 and 1995, respectively.
Fiscal 1997 selling, general and administrative expenses increased $1.4 million
from $6.5 million in fiscal 1996 to $7.9 million resulting from expansion of the
domestic sales force, and higher marketing and promotional expenses. Fiscal 1997
expenses also included higher administrative and legal costs primarily
associated with the Distribution of the common stock of BEI Technologies to the
shareholders of Electronics.
Fiscal 1996 selling, general and administrative expenses increased $0.4 million
from $6.1 million in fiscal 1995 to $6.5 million due to higher amortization
expenses and increased support for new products.
Research, Development and Related Expenses
The Company's internally funded research, development and related expenses as a
percentage of net sales were 18.6%, 14.2% and 11.3% for fiscal 1997, 1996 and
1995, respectively.
Research and development expenses in fiscal 1997 increased from fiscal 1996
primarily because of increased spending for the development of the HTA and other
new products and clinical trials of the HTA.
Research and development expenses in fiscal 1996 increased from fiscal 1995
primarily as a result of new product development and clinical trials.
The Company believes that the continued timely development of new products and
enhancements to its existing products is essential to maintaining its
competitive position. Accordingly, the Company anticipates that such expenses
will increase in absolute amount, but may fluctuate as a percentage of sales.
Interest Expense and Other Income
Interest expense as a percentage of net sales in fiscal 1995, 1996 and 1997
decreased slightly from 1.7% to 1.2% and from 1.2% to 0.7%, respectively, as
existing debt was paid down and no new debt incurred.
Other income in fiscal 1997, 1996, and 1995 was comprised of interest income
earned on highly liquid investments. Other income in fiscal 1997 as a percentage
of sales decreased from 3.5% in fiscal 1996 to 1.3% in fiscal 1997. Total other
income in fiscal 1996 increased slightly from prior year due to increased
interest on a higher level of cash balances held during the year.
Income Tax Provision
The Company's effective tax rate from operations was (23.0%), (34.0%), and
(33.1%), for fiscal 1997, 1996 and 1995, respectively. The effective tax rate
reflects the statutory federal tax rate and the weighted average tax rate of the
states in which the Company conducts business. The fiscal 1997 tax rate varies
from the
26
<PAGE>
statutory federal income tax rate as a result of an increase in the valuation
allowance due to substantial uncertainties regarding realizability of certain
deferred tax assets.
Deferred Income Taxes
At September 27, 1997, the Company had net deferred tax liabilities of $58,000
composed of deferred tax assets of $1,951,000 net of the valuation allowance of
$1,784,000, and deferred tax liabilities of $225,000.
The valuation allowance was established to reflect uncertainties regarding
realizability of deferred tax assets related to certain intangibles and state
net operating loss carryovers. Management intends to evaluate the realizability
of deferred tax assets on a quarterly basis by assessing the need for any
additional valuation allowance.
Discontinued Operations
Income (loss) for business segments now operated by Technologies was $4.6
million, $4.6 million and ($2.0) million in fiscal 1997, 1996 and 1995,
respectively. The net loss in fiscal 1995 as compared to the net income of
fiscal 1996 and 1997 is primarily related to a royalty expense incurred in
fiscal 1995 of $3.5 million before taxes and, to a lesser extent, lower gross
profit from sales in fiscal 1995.
Liquidity and Capital Resources
The Company's capital requirements depend on numerous factors, including the
progress of the Company's clinical research and product development programs,
the timing and receipt of regulatory clearances and approvals, and the resources
the Company devotes to developing, manufacturing and marketing its products. The
Company's capital requirements also depend on the resources required to hire and
develop a direct sales force in the United States and to expand the Company's
manufacturing capacity, and the extent to which the Company's products gain
market acceptance and sales. The timing and amount of such capital requirements
cannot be predicted accurately. Consequently, although the Company believes its
existing cash balances together with operating revenues will provide adequate
funding to meet its capital requirements for the next twenty-four months, the
Company may need to raise additional funds through public or private financing
or other arrangements. There can be no assurance that the Company will not
require additional funding or that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants.
During fiscal 1997, operating activities of continuing operations used $4.1
million in cash, excluding cash provided by discontinued operations of $5.7
million. The loss from operations of $4.3 million, plus inventory purchases of
$0.9 million and increases in accounts receivables, other current assets and
deferred taxes of $0.3 million, $0.1 million and $0.3 million, respectively,
were partially offset by non-cash charges for depreciation and amortization of
$0.3 million and $1.4 million respectively, and a net increase in accrued
expenses, accounts payable and other liabilities of $0.2 million.
Investing activities, which used approximately $0.4 million in cash, consisted
primarily of purchases of $0.3 million in capital equipment and $0.2 million in
patents and licenses.
27
<PAGE>
Cash used in financing activities of $1.7 million included proceeds from the
issuance of common stock of $0.9 million offset by principal payments on
long-term debt of $0.7 million, stock repurchases of $1.3 million and dividend
payments of $0.6 million.
The Company had no material capital or other commitments at September 27, 1997
except as discussed in Note 13 to the Consolidated Financial Statements,
"Contingencies and Litigation."
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
September 27, September 28,
dollars in thousands except share amounts 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 9,271 $ 9,128
Trade receivables, less allowance for doubtful accounts
(1997--$112; 1996--$236) 1,958 1,713
Inventories--Note 4 2,939 2,085
Refundable income taxes 10 --
Other current assets 286 144
Deferred income taxes--Note 8 0 406
Current assets of discontinued operations--Note 3 -- 55,549
- --------------------------------------------------------------------------------
Total current assets 14,464 69,025
Plant and equipment
Equipment 1,461 1,209
Leasehold improvements 130 126
- --------------------------------------------------------------------------------
1,591 1,335
Less allowances for depreciation and amortization 780 518
- --------------------------------------------------------------------------------
811 817
Other assets
Tradenames, patents and related assets, less amortization
(1997--$4,142; 1996--$3,776) 3,708 4,638
Goodwill, less amortization (1997--$ 1,251; 1996--$975) 3,595 3,835
Non-current assets of discontinued operations--Note 3 -- 36,672
Other 6 24
- --------------------------------------------------------------------------------
7,309 45,169
- --------------------------------------------------------------------------------
$ 22,584 $115,011
================================================================================
See notes to consolidated financial statements.
29
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
<CAPTION>
September 27, September 28,
dollars in thousands except share amounts 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 346 $ 683
Accrued expenses and other liabilities--Note 6 2,785 2,332
Current portion of long-term debt--Note 7 190 184
Deferred income taxes 58 --
Current liabilities of discontinued operations -- Note 3 -- 27,724
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,379 30,923
Long-term debt, less current portion--Note 7 22 212
Deferred income taxes--Note 8 -- 725
Other liabilities -- 561
Non-current liabilities of discontinued operations -- 25,100
Commitments and contingencies--Notes 12 and 13
Minority interest in consolidated subsidiary--Note 2 1,523 1,518
Stockholders' equity--Notes 2, 9, and 10
Preferred stock
($.001 par value; authorized 2,000,000 shares; none issued) -- --
Common stock
($.001 par value; authorized 20,000,000 shares; issued
and outstanding; 1997--7,114,513 shares; 1996--9,469,008 shares) 10 9
Additional paid-in capital 14,204 25,773
Retained earnings 3,446 43,055
- ------------------------------------------------------------------------------------------------------------------------------------
17,660 68,837
Less: Treasury stock, at cost (1997--none; 1996--2,455,372 shares) -- (11,947)
Unearned restricted stock--Note 10 -- (918)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,660 55,972
- ------------------------------------------------------------------------------------------------------------------------------------
$ 22,584 $ 115,011
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Medical Systems Company, Inc. and Subsidiaries
<CAPTION>
Year Ended
---------------------------------------------------
September 27, September 28, September 30,
dollars in thousands except per share amounts 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales -- Note 2 $ 10,005 $ 9,357 $ 8,847
Cost of sales -- Note 2 5,972 5,792 5,282
---------------------------------------------------
Gross profit 4,033 3,565 3,565
---------------------------------------------------
Selling, general and administrative expenses 7,883 6,517 6,100
Research, development and related expenses 1,864 1,328 999
---------------------------------------------------
9,747 7,845 7,099
---------------------------------------------------
Loss from operations (5,714) (4,280) (3,534)
3Other income 136 324 177
Interest expense (70) (110) (154)
---------------------------------------------------
Loss before income taxes (5,648) (4,066) (3,511)
Income taxes (benefit) -- Note 8 (1,300) (1,384) (1,161)
---------------------------------------------------
Loss from continuing operations (4,348) (2,682) (2,350)
Income (loss) from discontinued operations, net of taxes
of $1,788, $1,412, and ($600) for 1997, 1996 and
1995, respectively 4,583 4,571 (2,041)
---------------------------------------------------
Net income (loss) $ 235 $ 1,889 $ (4,391)
===================================================
Loss from continuing operations per common and
common equivalent share $ (0.60) $ (0.38) $ (0.35)
Earnings (loss) from discontinued operations per common
and common equivalent share 0.64 0.64 $ (0.30)
---------------------------------------------------
Earnings (loss) per common and common equivalent
share -- Note 2 $ 0.03 $ 0.27 $ (0.65)
===================================================
Weighted average shares outstanding -- Note 2 7,203,448 7,107,818 6,758,745
===================================================
Dividends per common share -- Note 2 $ 0.08 $ 0.08 $ 0.08
===================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Medical Systems Company, Inc. and Subsidiaries Year Ended
<CAPTION>
------------------------------------------------
September 27, September 28, September 30,
dollars in thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $(4,348) $(2,682) $(2,350)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 269 217 154
Amortization 1,356 1,530 1,273
Provision for losses on trade receivables 57 39 26
Loss on sale of assets -- -- 7
Deferred income taxes (261) (26) 92
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Trade receivables (302) (187) 204
Inventories (854) (267) (35)
Other current assets (142) 192 (145)
Trade accounts payable, accrued expenses and other liabilities 164 (3,955) 3,134
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities of
continuing operations (4,061) (5,139) 2,360
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (263) (316) (387)
Purchases of patents and licenses (186) (136) --
Other 18 (297) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities of continuing operations (431) (749) (387)
Cash flows from financing activities:
Borrowings on short-term debt -- -- 6,000
Payments on short-term debt -- -- (6,000)
Proceeds from sale of minority interest -- 1,488 --
Principal payments on long-term debt and other liabilities (715) (678) (1,391)
Proceeds from issuance of common stock, net 872 1,067 319
Repurchase of stock (1,303) (154) (133)
Payment of cash dividends (563) (555) (541)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities of continuing
operations (1,709) 1,168 (1,746)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations--Note 3 6,344 4,825 7,693
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 143 105 7,920
Cash and cash equivalents at beginning of year 9,128 9,023 1,103
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,271 $ 9,128 $ 9,023
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Medical Systems Company, Inc. and Subsidiaries
<CAPTION>
Additional Unearned
Common paid-in Retained Treasury restricted
dollars in thousands stock capital earnings stock stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1994 $ 9 $ 23,533 $ 46,653 $(11,660) $ (706) $ 57,829
Net loss for 1995 (4,391) (4,391)
Stock options exercised 65 65
Employee Stock Purchase Plan
offering--Note 11 254 254
Restricted Stock Plan--Note 10 260 (24) 236
Purchase of treasury stock-
(19,500 shares at $6.80 average
per share) (133) (133)
Cash dividends (541) (541)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1995 9 24,112 41,721 (11,793) (730) 53,319
Net income for 1996 1,889 1,889
Stock options exercised 842 842
Employee Stock Purchase Plan
offering--Note 11 225 225
Restricted Stock Plan--Note 10 594 (188) 406
Purchase of treasury stock-
(15,000 shares at $10.27
average per share) (154) (154)
Cash dividends (555) (555)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 28, 1996 9 25,773 43,055 (11,947) (918) 55,972
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 1997 235 235
Stock options exercised 1 866 867
Restricted Stock Plan--Note 10 815 (475) 340
Purchase of treasury stock-
(135,000 shares at $9.67
average per share) (1,303) (1,303)
Cash dividends (563)
Retirement of treasury stock (13,250) (563) 13,250 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997
before Distribution 10 14,204 42,727 -- (1,393) 55,548
Distribution (39,281) 1,393 (37,888)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997 $ 10 $ 14,204 $ 3,446 $ -- $ -- $ 17,660
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements
BEI Medical Systems Company, Inc. and Subsidiaries
September 27, 1997
Note 1 -- Basis of Presentation
On September 27, 1997, BEI Electronics, Inc. ("Electronics") distributed to
holders of Electronics common stock one share of common stock of BEI
Technologies, Inc. ("Technologies"), a newly formed subsidiary, for each share
of Electronics common stock held ("the Distribution"). On November 4, 1997,
Electronics merged with its subsidiary, BEI Medical Systems Company, Inc.
("Medical"), and became one company with Electronics as the surviving
corporation (the "Merger"). After the Merger, Electronics changed its name to
BEI Medical Systems Company, Inc. (the "Company").
In connection with the Distribution, Electronics transferred to Technologies all
of the assets, liabilities and operations of its BEI Sensors & Systems Company,
Inc. ("Sensors") and Defense Systems Company, Inc. ("Defense") business
segments. Accordingly, the results of operations of the segments have been
presented as discontinued operations for all periods presented and the related
assets and liabilities have been segregated in the consolidated balance sheets.
See Note 3 -- Discontinued Operations for a description of the Distribution.
Note 2 -- Summary of Significant Accounting Policies
Operations: The Company is a manufacturer of diagnostic and therapeutic products
focused on gynecology and women's health issues. In the U.S., the Company
utilizes independent manufacturers' representative organizations, direct sales
representatives, telemarketers and domestic distributors to market its products
directly to end users, hospitals, surgical centers and doctors' offices.
Products are also sold through a network of international distributors.
Medical's operations consist of Zinnanti Surgical Instruments in Chatsworth,
California and Xylog Corporation, Meditron Devices, Inc., and BEI Medical
Systems International, Inc. in Hackensack, New Jersey.
The Company believes its existing cash balances together with operating revenues
will produce adequate funding to meet its capital requirements for the next
twenty-four months. The Company may need to raise additional funds through
public or private financing or other arrangements. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms attractive to the Company, or at
all. Any additional equity financing may be dilutive to stockholders, and debt
financing if available, may involve restrictive covenants.
Acquisitions: On February 2, 1996, Medical acquired all outstanding stock of
OvaMed Corporation ("OvaMed"), for the purpose of acquiring OvaMed's product
line and merging it into Zinnanti Surgical Instruments' operations. The total
purchase price of OvaMed was $375,000 and 6,336 shares of Medical stock. Product
and patent related intangible assets acquired amounted to $1.4 million and are
being amortized over ten years for trade names and over their respective lives
for patents.
Minority Interest: Concurrent with the closing of the OvaMed transaction,
Johnson & Johnson Development Corporation ("J&J") purchased 50,016 shares of
Series B Preferred Stock of Medical for $1,500,000. Also concurrent with the
OvaMed transaction and the sale of Series B Preferred Stock, Medical entered
into an agreement with J&J whereby J&J was granted a right of first negotiation
for the exclusive right to
34
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
manufacture and distribute certain products intended for use in the gynecology
field for endometrial ablation, that were acquired or developed by Medical. In
the event the Company and J&J are unable to agree on the terms of a
manufacturing or distribution arrangement, the Company has the right to
manufacture or distribute any such products itself or to arrange for a third
party to manufacture or distribute such products provided that any such third
party arrangement is not materially less favorable to the Company than the terms
offered by J&J.
<TABLE>
At September 27, 1997 Medical had authorized 2,000,000 shares of $.001 par value
Common Stock and 959,000 shares of $.001 par value Preferred Stock (859,000
shares of series A and 100,000 shares of Series B) at September 27, 1997. The
table below shows the ownership of Medical for the two years prior to the
Distribution and Merger.
<CAPTION>
Medical Shares Outstanding
----------------------------------------------------------------------------------------
September 27, 1997 September 28, 1996
----------------------------------------------------------------------------------------
Series A Series B Common Series A Series B Common
Preferred Preferred Stock Preferred Preferred Stock
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BEI Electronics, Inc. 859,000 33,344 397,471 859,000 33,344 100
Johnson & Johnson -- 50,016 2,115 -- 50,016 --
Management -- -- 12,650 -- -- 15,150
Others -- -- 15,721 -- -- 10,003
----------------------------------------------------------------------------------------
Total 859,000 83,360 427,957 859,000 83,360 25,253
========================================================================================
</TABLE>
After year end and prior to the merger, the Series A and Series B Preferred
stock were converted to Medical common stock on a share-for-share basis.
As a result of the Merger effective November 4, 1997, Medical was merged into
Electronics, and Medical ceased to exist as a separate entity. Each outstanding
share of common stock of Medical at that date (other than shares held by
Electronics) was automatically converted into the right to receive 5.51615
shares of Electronics common stock. Certificates for Electronics common stock
will be issued, rounded down to the nearest whole number of shares. Fractional
shares of Electronics common stock that would have otherwise been issued in
connection with the Merger have been redeemed by Electronics pro rata based on
the last reported sale price of Electronics common stock on the last trading day
preceding the merger.
35
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the conversion of the 6% minority interest in Medical
common stock to Electronics common stock at a conversion rate of 5.51615 shares
of Electronics common stock for every one share of Medical Common stock held.
Shares
----------------------------------------
Pre-Merger Post-Merger
Medical Electronics
Common Stock Common Stock
----------------------------------------
Johnson & Johnson 52,131 287,561
Management 12,650 69,778
Others 15,721 86,716
----------------------------------------
80,502 444,055
========================================
Fiscal Year: The Company's fiscal year ends on the Saturday nearest September
30. Fiscal years 1997, 1996 and 1995 each contained 52 weeks.
Consolidation: The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk: The Company's products are sold to commercial
customers throughout the United States and in various foreign countries. The
Company performs ongoing credit evaluations of its commercial customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses. Historically, such losses have been within the
expectations of management.
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 amounts reported in the financial statements and
the accompanying notes. Actual results could differ from these estimates.
Revenue Recognition: Revenue is recognized as units are shipped.
Inventories: Inventories are carried principally at the lower of cost (first-in,
first-out method) or market.
Depreciation and Amortization: Plant and equipment are recorded at cost.
Depreciation and amortization are provided in amounts sufficient to amortize the
cost of such assets over their estimated useful lives, which range from three to
thirty years, using the straight-line method for structures and leasehold
improvements and by accelerated or straight-line methods for equipment.
36
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets: The Company accounts for any impairment of its long-lived
assets using Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 121 ("FAS No. 121") "Accounting for the Impairment of
Long-Lived Assets to be Disposed of." This category consists of plant and
equipment; patents, and trade names, related non-competition agreements and
goodwill acquired in purchase acquisitions. Patents and non-competition
agreements are being amortized over their terms. Trade names are amortized over
ten to twenty years. Goodwill consists of the excess of cost over fair value of
net tangible assets acquired in purchase acquisitions. Goodwill is amortized by
the straight-line method over twenty years. The carrying value of long-lived
assets will be reviewed if the facts and circumstances suggest that they may be
impaired. Impairment is determined based on undiscounted future cash flows over
the amortization period. Generally, if impairment is indicated, the carrying
value of long-lived assets would be reduced by the estimated short-fall based on
discounted future cash flows.
Earnings (loss) Per Share: Earnings (loss) per share are computed based on the
weighted average number of shares of common stock (less treasury stock)
outstanding during the year, adjusted for the effect of common stock equivalents
attributable to dilutive stock options (using the treasury stock method).
Research and Development Costs: Company-sponsored product development costs are
charged to expense when incurred.
Advertising Costs: Advertising costs are charged to expenses when incurred and
were approximately $412,000, $423,000 and $326,000 in fiscal years 1997, 1996
and 1995, respectively.
Recent Accounting Pronouncements: Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," established a
fair-value based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies who elect not to adopt the
new method of accounting. The Company has adopted the disclosure-only
alternative as described in FAS 123 in fiscal year 1997. The Company accounts
for employee stock awards using the intrinsic value method in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and accordingly
recognizes no expense upon the granting of options.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share", which
is required to be adopted for the quarter ending December 27, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate earnings (loss) per share for all
prior periods. Had the Statement been implemented for fiscal years 1997 and
1996, the impact on the calculation of earnings (loss) per share would not have
been material.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income," ("FAS 130"), and Statement No. 131 "Disclosure
about Segments of an Enterprise and Related Information" ("FAS 131"). The
Company is required to adopt these statements in fiscal year 1999. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. Adoption of these Statements is expected to have no impact on
the Company's consolidated financial position, results of operations or cash
flows.
37
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications: Certain reclassifications have been made to the fiscal 1996
and 1995 financial statements to conform to the fiscal 1997 presentation.
Note 3 -- Discontinued Operations
Technologies was incorporated on June 30, 1997 in the State of Delaware, as a
wholly owned subsidiary of Electronics. On September 27, 1997, Electronics
distributed to holders of Electronics common stock one share of common stock of
Technologies for each share of Electronics common stock held on September 24,
1997. In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its Sensors and
Defense business segments. Accordingly, the financial position and results of
operations of Sensors and Defense are shown as discontinued operations for all
periods presented.
Note 4 -- Inventories
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Finished products $1,843 $1,268
Work in process 230 182
Materials 866 635
- --------------------------------------------------------------------------------
Inventories $2,939 $2,085
================================================================================
Note 5 -- Bank Credit Agreements
At September 18, 1997 and September 28, 1996, the Company had a $15 million
unsecured credit line with a bank. There were no borrowings under the line at
these dates. On September 19, 1997, the credit line agreement was amended to
allow borrowings only by Sensors, then a subsidiary of the Company. Prior to
year-end, Sensors was spun-off and the obligations under the amended credit
agreement transferred with it. The Company had no bank credit agreement at
September 27, 1997.
Note 6 -- Accrued Expenses and Other Liabilities
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Insurance reimbursement $ 946 $ --
Noncompetition contract 562 531
Professional fees 205 344
Employee compensation 202 499
Returns 136 85
Taxes 136 137
Vacation 135 224
Commissions 127 177
Royalties and related costs 102 98
Other 234 237
- --------------------------------------------------------------------------------
Accrued Expenses and Other Liabilities $2,785 $2,332
================================================================================
38
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
Note 7 -- Long-Term Debt
<CAPTION>
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to the previous owner of Zinnanti Surgical Instruments,
Inc. with interest at 5.0%; payable in monthly installments of $10,883
through 1998 $147 $266
Note payable to a related party with interest at the lessor of 1.0% below the
Bank of America reference rate or 8.0% (5.0% at September 27, 1997); due in
annual installments of $60,000 plus interest through 1998 60 120
Asset purchase agreement with zero interest; payable in monthly
installments through 1998 5 10
- --------------------------------------------------------------------------------------------------------------------
212 396
Less current portion 190 184
- --------------------------------------------------------------------------------------------------------------------
Long-term debt $22 $212
====================================================================================================================
</TABLE>
Annual maturities of long-term debt are as follows: fiscal 1998--$190,000;
1999--$22,000.
Interest of approximately $11,000, $31,000 and $63,000 was paid on long-term
debt by Medical during fiscal 1997, 1996 and 1995, respectively. Interest of
approximately $50,000, $96,000 and $124,000 was paid on noncompetition
agreements by Medical during fiscal 1997, 1996 and 1995, respectively. In
connection with the Distribution, Technologies assumed Electronics' obligations
related to the service and repayment of $22.4 million in Senior Notes. The
interest expense related to the notes was allocated to Technologies for fiscal
years 1996 and 1997.
Note 8
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
39
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax liabilities and assets as
of September 27, 1997 and September 28, 1996 are as follows (in thousands):
Deferred tax liabilities 1997 1996
- --------------------------------------------------------------------------------
Depreciation and property basis difference $ 12 $ 7
Intangibles -- 548
Prepaid expenses -- 32
Accrued expenses 213 32
- --------------------------------------------------------------------------------
Total deferred tax liabilities 225 619
- --------------------------------------------------------------------------------
Deferred tax assets
Intangibles 536 --
Accrued expenses 98 140
Inventory valuation 85 124
State net operating loss carryovers 1,177 929
Allowance for bad debt 55 36
- --------------------------------------------------------------------------------
Total deferred tax assets 1,951 1,229
Valuation allowance for deferred tax assets 1,784 929
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 58 $ 319
================================================================================
The valuation allowance for deferred tax assets increased by $855,000 during the
year ended September 27, 1997. The valuation allowance was adjusted to reflect
uncertainties regarding realizability of deferred tax assets related to certain
intangibles and state net operating loss carryovers. As of September 27, 1997,
the Company has net operating loss carryforwards for state income tax purposes
of approximately $12.5 million which expire from 2001 through 2003. The Company
has no net operating loss carryforwards for federal income tax purposes.
<TABLE>
Significant components of the provision (benefit) for income taxes from
continuing operations are as follows:
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current (credit)
Federal ($1,039) ($1,358) ($1,071)
State -- -- (182)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current (1,039) (1,358) (1,253)
Deferred (credit)
Federal (261) (23) 72
State -- (3) 20
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deferred (261) (26) 92
- ------------------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) ($1,300) ($1,384) ($1,161)
====================================================================================================================================
</TABLE>
40
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax (credit) at the statutory rate of 34% $(1,920) $(1,382) $(1,194)
Federal income tax effect of state income taxes -- 1 (55)
Goodwill amortization 81 81 82
Increase in federal valuation allowance 607 -- --
Other (68) (81) 168
- ------------------------------------------------------------------------------------------------------------------------------------
Federal income taxes (credit) (1,300) (1,381) (999)
State income taxes (credit), net of increase in state
valuation allowance -- (3) (162)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision(credit) for income taxes $(1,300) $(1,384) $(1,161)
====================================================================================================================================
</TABLE>
Note 9
Stockholders' Equity
The Company's preferred stock may be issued from time to time in one or more
series. The Board of Directors is authorized to establish from time to time the
number of shares to be included in each series, and to designate the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption, redemption price or prices and liquidation preferences.
During fiscal 1992 and 1990, the Board of Directors of the Company authorized
the purchase from time to time in open market transactions of up to 300,000 and
500,000 shares of common stock, respectively. During fiscal year 1996, the Board
approved an additional repurchase of up to 200,000 shares on the open market. At
the end of fiscal year 1997, 934,424 shares had been repurchased at a cost of
$6,969,178 under this program. The treasury stock shares were then retired at
September 27, 1997.
Note 10
Stock Option and Restricted Stock Plans
In 1982, the Company's stockholders voted to adopt an incentive stock option
plan. The plan provided for option prices based on the fair market value of the
stock on the date the option is granted. The Incentive Stock Option Plan of 1982
terminated December 15, 1991. The remaining outstanding options in the plan were
exercised during fiscal year 1997. No shares were outstanding or available for
grant at September 27, 1997.
41
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
Transactions relating to the Incentive Stock Option Plan of 1982 are summarized
as follows:
<CAPTION>
Number of Exercise Price Weighted
common shares per share average price
per share
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at October 1, 1994 28,000 $3.75 $3.75
Exercised -- --
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 1995 28,000 $3.75 $3.75
Exercised (4,000) $3.75 $3.75
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996 24,000 $3.75 $3.75
Exercised (24,000) $3.75 $3.75
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at September 27, 1997 -- -- --
=================================================================================================================
</TABLE>
In November 1987, the Company's stockholders voted to adopt an additional
incentive stock option plan and a supplemental (nonqualified) stock option plan.
The incentive stock option plan provides for option prices based on the fair
market value of the stock on the date the option is granted, as determined by
the Board of Directors. The supplemental stock option plan requires that the
exercise price of each option shall not be less than 50% of the fair market
value on the date the option is granted. Under both plans the options are
generally exercisable in three approximately equal installments commencing one
year from the date of grant with accumulation privileges.
In January 1997, the Board combined the Incentive and Supplemental Plans into
one plan, and amended it to change the name to the Amended 1987 Stock Option
Plan (the "Amended Plan"), provide for the granting of both incentive and
non-statutory stock options, provide for grants to non-employee consultants to
the Company, and increase the share reserve for option grants by 100,000 so that
shares issued pursuant to options granted under these two plans shall not exceed
1,350,000 in the aggregate.
As a result of the Distribution, all the outstanding options for common stock of
the Company, vested and non-vested, were converted to options for common stock
of Technologies, at a rate of approximately 1.07 options for Technologies stock
for every 1.0 Electronics option held. The exercise price of the options was
also adjusted so that the aggregate value of all outstanding options was the
same after the Distribution as before.
See Note 1 -- Basis of Presentation for more information.
42
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
Transactions relating to the Amended 1987 Stock Option Plan are summarized as
follows:
<CAPTION>
Number of Weighted Average
Common Exercise Exercise Price
Shares Price Per Share Per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at October 1, 1994 667,465 $2.88 - $9.13 $5.88
Granted 31,000 $5.00 $5.00
Exercised (16,814) $2.88 - $4.38 $3.85
Terminated (71,256) $4.38 - $9.13 $7.41
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 1995 610,395 $2.88 - $9.13 $5.71
Granted 11,000 $6.00 - $7.13 $6.42
Exercised (115,922) $2.88 - $9.13 $6.27
Terminated (48,511) $5.00 - $9.13 $7.80
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996 456,962 $2.88 - $9.13 $5.36
Exercised (137,866) $2.88 - $7.25 $5.33
Terminated (3,500) $3.75 - $9.13 $7.95
- -------------------------------------------------------------------------------------------------------------------
Options outstanding prior to Distribution 315,596 $2.88 - $9.13 $5.35
Distribution conversion to Technologies options (315,596) $2.88 - $9.13 $5.35
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at September 27, 1997 -- -- --
===================================================================================================================
</TABLE>
As of September 27, 1997, no options were outstanding and 792,915 shares were
available for grant under the Amended Plan.
In July 1995, Medical's stockholders adopted an incentive stock option plan and
a supplemental (nonqualified) stock option plan for Medical stock. The incentive
stock option plan provided for option prices based on Medical's fair market
value of the stock on the date the option is granted, as determined by Medical's
Board of Directors. The supplemental stock option plan required that the
exercise price of each option shall not be less than 85% of the fair market
value on the date the option is granted.
43
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
Transactions related to the incentive and supplemental Medical stock option
plans of 1995 are summarized as follows:
<CAPTION>
Number of Weighted Average
Common Exercise Exercise Price
Shares Price Per Share Per Share
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at October 1, 1994 -- $ -- $ --
Granted 85,500 $1.72 $1.72
Exercised -- $ -- $ --
Terminated -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 1995 85,500 $1.72 $1.72
Granted 34,800 $3.00 - 3.85 $3.48
Exercised -- $ -- $ --
Terminated -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996 120,300 $1.72 - 3.85 $2.23
Granted 2,500 $20.65 $20.65
Exercised (9,000) $1.72 $1.72
Terminated (5,800) $3.00 $3.00
- -----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 27, 1997 108,000 $1.72 - 20.65 $2.66
=======================================================================================================================
</TABLE>
On November 4, 1997, Medical and Electronics merged into one company, with
Electronics as the surviving legal entity. As a result of the Merger, options
outstanding under the Medical Stock Option Plans of 1995 were converted to
Electronics options at a rate of approximately 5.51615 Electronics options for
every one Medical option outstanding. Electronics' outstanding options increased
to 595,739 after the Merger from zero outstanding at September 27, 1997.
Medical's outstanding options decreased to zero and the Medical Stock Option
Plans of 1995 were cancelled as a result of the Merger.
Number of Shares
-------------------------------------------------
Medical Options Electronics Options
---------------------- ------------------------
September 27, 1997 108,000 --
November 4, 1997 -- 595,739
<TABLE>
<CAPTION>
Weighted Weighted
Average Remaining Average
Options Contractual Exercise Price Number
Exercise Prices Outstanding Life (Years) Per Share Exercisable
- --------------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
$0.31 .......................................... 421,982 7.8 $0.31 421,982
$0.54 .......................................... 52,403 8.3 $0.54 13,101
$0.70 .......................................... 107,564 8.6 $0.70 26,891
$3.74 .......................................... 13,790 9.4 $3.74 --
- ----- ------- --- ----- -------
$0.31 - $3.74 .................................. 595,739 8.0 $0.48 461,974
============= ======= === ===== =======
</TABLE>
44
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 27, 1997, 83,750 Medical options were exercisable and 24,000
shares were available for stock option grants under the 1995 plans. If the
Merger and conversion to Electronics options had taken place at that date,
options exercisable and available for grant would have been 461,978 and 132,388
shares, respectively, based on the conversion rate of 5.51615 Electronics
options for every Medical option.
In February 1992, the Company's Board of Directors approved the 1992 Restricted
Stock Plan (the "Restricted Plan"), ratified by the Company's shareholders in
February 1993, and authorized up to 350,000 shares to be issued to certain key
individuals subject to forfeiture if employment terminated prior to the end of
prescribed periods. In January 1997, the Restricted Plan was amended to increase
the shares reserved for issuance under the plan from 350,000 to 700,000. As of
September 27, 1997, 419,926 shares had been granted and of these, 354,250 shares
were outstanding and are included in the Company's total common stock
outstanding. Of the outstanding shares, 129,195 had fully vested. There are
345,750 shares reserved for issue. The market value at the date of grant of
shares awarded under the plan is recorded as unearned restricted stock. The
market value of shares granted is amortized to compensation expense over the
periods of vesting. No compensation expense for Medical was recorded in fiscal
1997, 1996 or 1995.
The impact of the calculation required by FAS No. 123 on proforma results of
operations and earnings (loss) per share was determined to be immaterial for
fiscal years 1997 and 1996.
Note 11
Employee Benefit Plans
The Company has a defined contribution retirement plan for the benefit of all
eligible employees. The plan qualifies under Section 401(k) of the Internal
Revenue Code thereby allowing eligible employees to make tax deductible
contributions to the plan. Non-discretionary employer contributions are based on
a fixed percentage of total eligible employee compensation and a formula based
matching of the participant's contribution to the plan. Additional contributions
are at the discretion of the Board of Directors. The Company's contributions to
the plan for fiscal 1997, 1996 and 1995 for the benefit of the employees of
continuing operations were approximately $62,000, $54,000, and $43,000
respectively.
The Company also has an employee stock purchase plan. The purchase plan
qualifies as an employee stock purchase plan under Section 423 of the Internal
Revenue Code. Under the purchase plan, the Board of Directors may authorize the
participation by employees (excluding certain highly compensated employees) in
offerings of its common stock. Under the purchase plan, employees may have up to
10% of their salary withheld to be used to purchase shares of common stock at a
price equal to not less than 85% of the fair market value of the stock at
specified applicable dates. The purchase plan was suspended as of August 1,
1996, due to efforts to simplify the Company's equity accounts to support
analysis of various organizational alternatives. At that date, 459,174 shares
had been issued and 140,826 shares were reserved for purchase over the ten year
life of the purchase plan.
45
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12
Lease Commitments
Operating leases consist principally of leases for structures and land. Certain
of the operating leases contain various options for renewal and/or purchase of
the related assets for amounts approximating their fair market value at the date
of exercise of the option. The future minimum payments for operating leases
consisted of the following at September 27, 1997:
(dollars in thousands)
- -----------------------------------------------------
1998 $184
1999 9
2000 7
2001 2
Thereafter --
- -----------------------------------------------------
Total minimum lease payments $202
=====================================================
There are no minimum capital lease payments beyond fiscal 1996.
Total rental expense attributable to property, plant and equipment amounted to
approximately $268,000, $228,000, and $198,000 for fiscal 1997, 1996 and 1995
respectively.
Note 13
Contingencies and Litigation
CooperSurgical, Inc. vs. BEI Medical Systems Company, Inc. et al.
In October 1993, CooperSurgical, Inc., a subsidiary of The Cooper Companies,
filed a claim for unspecified damages alleging unfair competition due to actions
by Medical and its president Richard Turner, a former employee of The Cooper
Companies, and others. On January 31, 1996, the Court issued a ruling which
affirmed the legal basis for Medical to assert a counterclaim for damages
against CooperSurgical regarding the parties' electrosurgical generator
contract.
CooperSurgical's original damage claims were for approximately $11 million. In
June 1996, more than one year after expert discovery closed in May 1995,
CooperSurgical's counsel sent to the Company's counsel a letter purporting to
supplement CooperSurgical's previous responses to interrogatories. The June 1996
letter indicated that CooperSurgical's damages for one particular aspect of the
claim were between $24 and $50 million with respect to a claim for which
CooperSurgical's experts had previously estimated damages of $3.4 million. The
Company will vigorously oppose any CooperSurgical attempt whatsoever to
introduce at trial any evidence of a damage claim based upon its June 1996
purported supplement.
46
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management has vigorously defended its rights in this action and believes after
discussion with legal counsel that the CooperSurgical claims are exaggerated. In
1995, expert witnesses for the Company prepared a formal response to the damage
computations CooperSurgical previously submitted. The Company's experts stated
that if CooperSurgical were entitled to damages, those damages would total less
than $100,000, and would be more than offset by the Company's counterclaims
against CooperSurgical, if the Company were successful in its counterclaims.
The trial started in October 1997 and is currently ongoing in the Superior Court
of New Jersey for Bergen County, Chancery Division. While the outcome of this
matter cannot be determined at this time, management believes, taking known
factors into account and after consultation with legal counsel, that this matter
will not result in a material adverse impact on the financial position of the
Company. However, any settlement of this case on a basis that results in an
unfavorable outcome for the Company could have a material adverse effect on the
results of operations of any quarterly or annual reporting period.
Other
The Company has pending various legal actions arising in the normal course of
business. Management believes that none of these legal actions will have a
material impact on the Company's operating results or financial condition.
Note 14
Sales
Net sales from continuing operations to customers in foreign countries amounted
to $1,430,000, $1,287,000 and $895,000 in fiscal 1997, 1996 and 1995,
respectively. In fiscal 1997, 1996 and 1995, foreign sales did not exceed 10% of
consolidated net sales in any individual geographic area.
47
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15
Quarterly Results of Operations (Unaudited)
<TABLE>
The tables below present unaudited quarterly financial information for fiscal
1997 and 1996:
<CAPTION>
(dollars in thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Three months ended
- -------------------------------------------------------------------------------------------------------------------------
December 28, March 29, June 28, September 27,
1996 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $2,584 $2,550 $2,472 $2,399
Gross profit 1,152 1,090 938 853
Loss from continuing operations (746) (833) (1,136) (1,633)
Income from discontinued operations 35 1,452 1,696 1,400
Net income (loss) (711) 619 560 (233)
Loss from continuing operations
per common and common equivalent share $(0.11) $(0.12) $(0.16) $(0.23)
Earnings from discontinued operations per
common and common equivalent share $ 0.00 $ 0.20 $ 0.24 $ 0.20
Earnings (loss) per common share $(0.10) $ 0.09 $ 0.08 $(0.03)
- -------------------------------------------------------------------------------------------------------------------------
December 30, March 30, June 29, September 28,
1995 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
Net sales $2,153 $2,446 $2,336 $2,422
Gross profit 761 925 926 953
Loss from continuing operations (536) (489) (817) (840)
Income from discontinued operations 888 1,102 1,593 988
Net income 352 613 776 148
Loss from continuing operations per
common and common equivalent share $(0.08) $(0.07) $(0.11) $(0.12)
Earnings from discontinued operations per
common and common equivalent share $ 0.13 $ 0.16 $ 0.22 $ 0.14
Earnings per common share $ 0.05 $ 0.09 $ 0.11 $ 0.02
</TABLE>
48
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
BEI Medical Systems Company, Inc.
We have audited the accompanying consolidated balance sheets of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of September 27, 1997
and September 28, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 27, 1997. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BEI Medical
Systems Company, Inc. at September 27, 1997 and September 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 27, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
San Francisco, California
November 7, 1997
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive
officers is set forth in Part I of this Report. Additional
information required by this Item is incorporated herein by
reference to the section entitled "Compliance with Section
16(a) of the Securities Exchange Act of 1934" of the Proxy
Statement related to the Company's 1998 Annual Meeting of
Stockholders to be filed by the Company with the Securities
and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the sections entitled "Compensation of
Executive Officers" and "Certain Transactions" of the
Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein
by reference to the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Company's
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference to the sections entitled "Certain Transactions"
and "Compensation Committee Interlocks and Insider
Participation" of the Definitive Proxy Statement.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
<TABLE>
The following documents are filed as part of this Form 10-K.
<CAPTION>
Form
10-K
(a)(1) Index to Consolidated Financial Statements. Page
Number
------
<S> <C>
The following Consolidated Financial Statements of BEI Medical Systems
Company, Inc. (formerly BEI Electronics, Inc.) are filed as part of this Form
10-K:
Report of Ernst & Young LLP, Independent Auditors 49
Consolidated Balance Sheets -
Years ended September 27, 1997 and September 28, 1996 29
Consolidated Statements of Operations -
Years ended September 27, 1997, September 28, 1996
and September 30, 1995 31
Consolidated Statements of Cash Flows -
Years ended September 27, 1997, September 28, 1996
and September 30, 1995 32
Consolidated Statements of Stockholders' Equity -
Years ended September 27, 1997, September 28, 1996
and September 30, 1995 33
Notes to Consolidated Financial Statements -
September 27, 1997 34
(a)(2) Index to Financial Statement Schedule.
The following Consolidated Financial Statement Schedule of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) for each of the years
ended September 27, 1997, September 28, 1996 and September 30, 1995 is filed
as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts S-1
Report of Ernst & Young LLP, Independent S-2
Auditors as to Schedule
Consent of Ernst & Young LLP, Independent
Auditors S-3
</TABLE>
51
<PAGE>
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
<TABLE>
(a)(3) Listing of Exhibits
<CAPTION>
Exhibit Numbers Description Footnote
--------------- ----------- --------
<S> <C> <C>
2.1 Distribution Agreement between BEI Electronics,
Inc. and BEI Technologies, Inc. dated September
26, 1997 (xix)
2.2 Corporate Services Agreement between BEI
Technologies, Inc. and BEI Electronics, Inc. dated
as of September 26, 1997 (xix)
2.3 Tax Allocation and Indemnity Agreement between
BEI Electronics, Inc. and BEI Technologies, Inc.
dated as of September 26, 1997 (xix)
2.4 Assumption of Liabilities and Indemnity
Agreement between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of September 26, 1997 (xix)
2.5 Technology Transfer and License Agreement by
and between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of September 26, 1997 (xix)
2.6 Trademark Assignment and Consent Agreement
by and between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of September 26, 1997 (xix)
2.7 Agreement Regarding Certain Representations
and Covenants by and between BEI Electronics,
Inc. and BEI Technologies, Inc. dated as of (xix)
September 26, 1997
3.1 Restated Certificate of Incorporation (i)
3.2 Amended Bylaws of the Company as of June 30,
1997 (xviii)
3.3 Certificate of Designation of Series A Junior
Participating Preferred Stock (xviii)
4.1 Reference is made to exhibits 3.1, 3.2 and 3.3
4.2 Form of Rights Certificate (xviii)
52
<PAGE>
4.3 Summary of Rights to Purchase Preferred Shares (xviii)
10.2 * Registrant's 1987 Incentive Stock Option Plan, as
amended and standard option grant form used in
connection with the plan (iii)
10.3 * Additional standard option grant form used in
connection with Registrant's 1987 Incentive Stock
Option Plan, as amended (ii)
10.4 * Registrant's 1987 Supplemental Stock Option
Plan, as amended November 12, 1990, and
standard option grant form used in connection (v)
with the plan
10.5 * Option grant forms used in connection with
options granted to certain employees on May 1, (i)
1989
10.6 * Description of Management Incentive Bonus Plan (i)
10.7 * Consulting Agreement, dated July 3, 1990,
between BEI Electronics, Inc. and George S. (iv)
Brown
10.8 * Registrant's 1992 Restricted Stock Plan and
standard form of restricted stock agreement used
in connection with the plan (vi)
10.10 Credit Agreement, dated June 1, 1993, between
BEI Electronics, Inc., Defense Systems Company,
Inc., Motion Systems Company, Inc., New SD,
Inc., BEI Medical Systems Company, Inc. and
Canadian Imperial Bank of Commerce (viii)
10.11 * Personal Service Contract, dated June 14, 1993,
between BEI Electronics, Inc. and William G.
Howard, Jr. (viii)
10.12 First Amendment to Credit Agreement, dated
September 23, 1993, between BEI Electronics,
Inc., Defense Systems Company, Inc., Motion
Systems Company, Inc., New SD, Inc., BEI
Medical Systems Company, Inc. and Canadian
Imperial Bank of Commerce (ix)
10.14 1989 Employee Stock Purchase Plan, adopted
June 1, 1989, as Amended through November 18, 1993 (ix)
53
<PAGE>
10.15 Second Amendment to Credit Agreement, dated
April 1, 1994, between BEI Electronics, Inc.,
Defense Systems Company, Inc., Motion Systems
Company, Inc., New SD Inc., BEI Medical
Systems Company, Inc. and Canadian Imperial (x)
Bank of Commerce
10.17 Third Amendment to Credit Agreement, dated
September 30, 1994, between BEI Electronics,
Inc., Defense Systems Company, Inc., BEI
Sensors & Systems Company, Inc., BEI Medical
Systems Company, Inc. and Canadian Imperial
Bank of Commerce (xi)
10.19 Fourth Amendment to Credit Agreement, dated
June 1, 1995, between BEI Electronics, Inc., BEI
Sensors & Systems Company, Inc., Defense
Systems Company, Inc., BEI Medical Systems
Company, Inc. and Canadian Imperial Bank of (xii)
Commerce
10.20 Fifth Amendment to Credit Agreement, dated June
1, 1996 between BEI Electronics, Inc., BEI
Sensors & Systems Company, Inc., Defense
Systems Company, Inc., BEI Medical Systems
Company, Inc. and Canadian Imperial Bank of (xiv)
Commerce.
10.21 * Extension to Consulting Agreement, effective
June 30, 1996, between BEI Electronics, Inc. and
George S. Brown. (xv)
10.22 Sixth Amendment to Credit Agreement, dated
October 31, 1996, between BEI Electronics, Inc.,
BEI Sensors & Systems Company, Inc., Defense
Systems Company, Inc., BEI Medical Systems
Company, Inc. and Canadian Imperial Bank of
Commerce. (xv)
10.24 Seventh Amendment to Credit Agreement, dated
February 28, 1997 between BEI Electronics, Inc.,
BEI Sensors & Systems Company, Inc., Defense
Systems Company, Inc., BEI Medical Systems
Company, Inc. and CIBC Inc., and Canadian
Imperial Bank of Commerce. (xvi)
54
<PAGE>
10.25 Eighth Amendment to Credit Agreement, dated
July 31, 1997, between BEI Electronics, Inc., BEI
Sensors & Systems Company, Inc., Defense
Systems Company, Inc., and CIBC Inc. and
Canadian Imperial Bank of Commerce. (xvii)
10.26 Ninth Amendment to Credit Agreement, dated
September 19, 1997, between BEI Electronics,
Inc., BEI Sensors & Systems Company, Inc.,
Defense Systems Company, Inc., and CIBC Inc.
and Canadian Imperial Bank of Commerce.
10.27 Rights Agreement dated June 30, 1997 among BEI
Electronics, Inc. and ChaseMellon Shareholder
Services, LLC. (xviii)
11.1 Statement regarding computation of per share
earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, LLP, Independent
Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule (EDGAR only)
<FN>
* Indicates management contracts or compensatory plans or
arrangements filed pursuant to Item 601(b)(10) of regulation S-K.
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No.
33-29032).
(ii) Incorporated by reference. Previously filed as an exhibit to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (File No. 33-29032).
(iii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated December 30, 1989.
(iv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated June 30, 1990.
(v) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated September 29, 1990.
(vi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (File No.
33-46766).
(viii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated July 3, 1993.
55
<PAGE>
(ix) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 2, 1993.
(x) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated April 2, 1994.
(xi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 1, 1994.
(xii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated July 1, 1995.
(xiii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated September 30, 1995.
(xiv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated June 29, 1996.
(xv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated September 28, 1996.
(xvi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated March 29, 1997.
(xvii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-Q, dated June 30, 1997.
(xviii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated July 30, 1997.
(xix) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated September 27,
1997.
</FN>
</TABLE>
(b)(1) A Form 8-K dated July 2, 1997, contained the Company's press
release announcing the formation of a new company, BEI
Technologies, and outlining the reasons for and manner of the
proposed distribution of all the common stock of the new company
to the holders of the Company's stock.
(b)(2) A Form 8-K dated June 30, 1997, was filed to report the adoption
of a Share Purchase Rights Plan and the description, term and
form of the Rights.
The Company also reported its press release of July 2, 1997, and
its Amended and Restated Bylaws.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BEI Medical Systems Company, Inc.
By: /s/ Thomas W. Fry
---------------------------------
Thomas W. Fry
Vice President of Finance and
Administration, Secretary &
Treasurer
December 22, 1997
57
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles Crocker and Gary D. Wrench, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/Charles Crocker Chairman of the Board of December 22 , 1997
- -------------------------------------- Directors
(Charles Crocker)
/S/Thomas W. Fry Vice President of Finance and December 22, 1997
- -------------------------------------- Administration, Secretary
(Thomas W. Fry) and Treasurer
/S/Ralph M. Richart Director December 22 , 1997
- --------------------------------------
(Ralph M. Richart)
/S/Richard W. Turner President, Chief Executive December 22 , 1997
- -------------------------------------- Officer & Director
(Richard W. Turner)
/S/Lawrence A. Wan Director December 22 , 1997
- --------------------------------------
(Lawrence A. Wan)
/S/Gary D. Wrench Director December 22 , 1997
- --------------------------------------
(Gary D. Wrench)
</TABLE>
58
<PAGE>
<TABLE>
SCHEDULE II
BEI MEDICAL SYSTEMS COMPANY, INC.
----------------
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Column A Column B Column C Column D Column E
- ----------- --------- --------------------------- ---------- --------
Additions
---------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- -------- -------- ---------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended September 27, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 236 $ 57 $ -- $ 181(B) $ 112
Valuation allowances of deferred
tax assets 929 855(A) -- -- 1,784
Valuation allowances of
discontinued operations 701 75 (94) 682 --
------ ------ ------ ------ ------
Total $1,866 987 $ (94) $ 863 $1,896
====== ====== ====== ====== ======
Year ended September 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 56 $ 39 $ 162(E) $ (21)(B) $ 236
Valuation allowance for deferred
tax assets 1,077 (148)(D) 929
Valuation allowances of
discontinued operations 538 282 (49) 70 701
====== ====== ====== ====== ======
Total $1,671 $ 321 $ (197) $ 103 $1,866
====== ====== ====== ====== ======
Year ended September 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 83 $ 26 $ -- $ 53(C) $ 56
Valuation allowance for deferred
tax assets 603 474 -- -- 1,077
Valuation allowances of
discontinued operations 315 262 -- 39 538
------ ------ ------ ------ ------
Total $1,001 $ 762 $ -- $ 92 $1,671
====== ====== ====== ====== ======
<FN>
(A) Allowance adjustment resulting from evaluation of the realizability of
the related deferred tax assets
(B) Uncollectible accounts written off
(C) Miscellaneous adjustments to the allowance
(D) Adjustment based on evaluation of uncertainties in the realization of
state net operating loss carryovers
(E) Purchased allowance from acquisition
</FN>
</TABLE>
S-1
59
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE
The Board of Directors and Shareholders
BEI Medical Systems Company, Inc.
We have audited the consolidated financial statements of BEI Medical Systems
Company, Inc. (formerly BEI Electronics, Inc.) as of September 27, 1997 and
September 28, 1996, and for each of the three years in the period ended
September 27, 1997, and have issued our report thereon dated November 7, 1997.
Our audits also included the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
San Francisco, California
November 7, 1997
S-2
60
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-31459), as amended, pertaining to the 1982 Incentive Stock Option
Plan, the Amended 1987 Stock Option Plan, and the 1989 Employee Stock Purchase
Plan of BEI Medical Systems Company, Inc. (formerly BEI Electronics, Inc.), of
our reports dated November 7, 1997, with respect to the consolidated financial
statements and schedule of BEI Medical Systems Company, Inc. included in the
Annual Report (Form 10-K) for the year ended September 27, 1997.
Ernst & Young LLP
San Francisco, California
December 19, 1997
S-3
61
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
10.26 Ninth amendment to credit agreement
11.1 Statement regarding computation of per share earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (Reference is made
on page 61 within the 10-K)
24.1 Power of Attorney (Reference is made on page 58 within the 10-K)
27.1 Financial Data Schedule
62
EXECUTION VERSION
NINTH AMENDMENT
TO
CREDIT AGREEMENT
This NINTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
September 19, 1997, is entered into by and among:
(1) BEI Electronics, Inc., a Delaware corporation, BEI Sensors &
Systems Company, Inc., a Delaware corporation ("BEI Sensors"), Defense
Systems Company, Inc. a Delaware corporation, and BEI Medical Systems
Company, Inc., a Delaware corporation (each a "Prior Borrower" and,
collectively, the "Prior Borrowers");
(2) Each of the financial institutions listed on the signature pages
hereof (each a "Lender" and, collectively, the "Lenders");
(3) CIBC Inc., as agent for the Lenders (the "Agent"); and
(4) Canadian Imperial Bank of Commerce, as the existing Designated
Issuer (the "Existing Designated Issuer").
RECITALS
A. Reference is made to that certain Credit Agreement dated as of June 1,
1993, as amended by the First Amendment to Credit Agreement dated as of
September 3, 1993, as amended by the Second Amendment to Credit Agreement and
Limited Waiver dated as of April 1, 1994, as amended by the Third Amendment to
Credit Agreement dated as of September 30, 1994, as amended by the Fourth
Amendment to Credit Agreement dated as of June 1, 1995, as amended by the Fifth
Amendment to Credit Agreement dated as of June 1, 1996, as amended by the Sixth
Amendment to Credit Agreement dated as of October 31, 1996, as amended by the
Seventh Amendment to Credit Agreement dated as of February 28, 1997, and as
amended by the Eighth Amendment to Credit Agreement dated as of July 31, 1997
(as so amended, the "Credit Agreement") by and among the Prior Borrowers, the
Lenders, the Agent and the Existing Designated Issuer. Capitalized terms used
herein without definition shall have the same meanings herein set forth in the
Credit Agreement.
B. The Prior Borrowers now have requested the Lenders, the Agent and the
Existing Designated Issuer to amend the Credit Agreement in certain respects so
as to provide that as of the effectiveness of this Amendment, only BEI Sensors
shall be
<PAGE>
permitted to request Borrowings under the Revolving Commitment and shall be
obligated thereunder. The Lenders, the Agent and the Existing Designated Issuer
are willing to agree to such amendments upon the terms and subject to the
conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Prior Borrowers, the Agent, the Lenders and the Existing
Designated Issuer hereby agree as follows:
1. Definitions, Interpretation. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in the Credit Agreement, as amended by
this Amendment.
2. Credit Agreement Amendments. Subject to the satisfaction of the
conditions set forth in paragraph 3 below, the Credit Agreement is hereby
amended as follows:
(a) The introductory paragraph of the Credit Agreement is hereby
amended to read in its entirety as follows:
This Credit Agreement dated as of June 1, 1993 (as amended) is
entered into among BEI Sensors & Systems Company, Inc., a Delaware
corporation (the "Borrower"), the financial institutions named on the
signature pages hereof (each a "Lender" and collectively the
"Lenders"), CIBC Inc., as Agent for the Lenders (the "Agent"), and
Canadian Imperial Bank of Commerce.
(b) The definition of "Borrower" and "Borrowers" set forth in Section
1.1 of the Credit Agreement is hereby amended to read in its entirety as
follows:
"Borrower": As defined in the introductory paragraph of this
Agreement.
(c) The definition of "Borrower Guarantor" set forth in Section 1.1 of
the Credit Agreement is hereby deleted.
(d) The definition of "Maturity Date" set forth in Section 1.1 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Maturity Date": October 31, 1997.
2
<PAGE>
(e) (i) Each reference in the Credit Agreement to "a Borrower", "the
Borrowers", "the Borrower or Borrowers", "any Borrower", "any of the
Borrowers", "each Borrower", "such Borrower", "such Borrower or Borrowers,
"each such Borrower", "each such Borrower or Borrowers" and "the applicable
Borrower or Borrowers" is hereby changed to "the Borrower; provided,
however, that each reference to "any Borrower" in the definition of
"Disclosure Letter", "Employee Benefit Plan" and "Multi-Employer Plan" is
hereby changed to "BEI and its consolidated Subsidiaries"; (ii) each
reference in the Credit Agreement to "the Borrowers'" is hereby changed to
"the Borrower's"; (iii) each reference in the Credit Agreement to "each of
their respective" is hereby changed to "its"; and (iv) each reference in
the Credit Agreement to "the Borrowers agree", "the Borrowers hereby
agree", "the Borrowers desire", "the Borrowers hereby grant", "the
Borrowers warrant and represent", "the Borrowers each acknowledge" and each
similar reference in which it is suggested that there are multiple
Borrowers is hereby changed so that each such reference refers to only a
single Borrower.
(f) Each reference in the Credit Agreement to "for whose account the
Letter of Credit was issued" is hereby deleted.
(g) Clause (b) of the definition of "Interest Period" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read in its
entirety as follows:
(b) the Borrower may not select an Interest Period with respect
to any portion of principal of a Eurodollar Rate Loan which extends
beyond a date on which the Borrower is required to make a scheduled
payment of that portion of principal; and
(h) Article VIII of the Credit Agreement is hereby deleted and replaced
with the word "RESERVED".
3. Effective Date. The amendments effected by paragraph 2 above shall be
effective as of September 19, 1997 (the "Effective Date"), subject to receipt by
the Agent on or prior to the date of this Amendment of each of the following,
each in form and substance satisfactory to the Agent:
(a) This Amendment, duly executed by the Prior Borrowers, BEI Sensors,
the Lenders, the Agent and the Designated Issuer;
(b) New Notes, duly executed by BEI Sensors and made payable to each
Lender; and
(c) Evidence satisfactory to the Agent that all corporate and other
proceedings taken or to be taken in
3
<PAGE>
connection with the transactions contemplated hereby and all documents
incidental thereto not previously found acceptable by the Agent, acting on
behalf of the Lenders, and its counsel shall be satisfactory in form and
substance to the Agent and such counsel, and the Agent and such counsel
shall have received all such counterpart originals or certified copies of
such documents as the Agent may reasonably request.
4. Borrowers' Representations and Warranties. In order to induce the
Lenders, the Agent and the Designated Issuer to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, BEI Sensors represents
and warrants to the Lenders, the Agent and the Designated Issuer that the
following are true and correct on the date of this Amendment and that, after
giving effect to the amendments set forth in paragraph 2 above, the following
will be true and correct on the Effective Date:
(a) The representations and warranties of BEI Sensors set forth in the
Credit Agreement are true and correct in all material respects;
(b) No Event of Default or Potential Event of Default has occurred and
is continuing; and
(c) The Credit Agreement is in full force and effect.
5. Effect of this Amendment. On and after the Effective Date, each
reference in the Credit Agreement and any related documents to the Credit
Agreement shall mean the Credit Agreement as amended by this Amendment. Except
as specifically amended by this Amendment, the Credit Agreement shall remain in
full force and effect and is hereby ratified and affirmed. Except as otherwise
expressly provided in this Amendment, the execution, delivery and effectiveness
of this Amendment shall not operate as a waiver of any right, power, or remedy
of any Lender, the Agent or the Designated Issuer, nor constitute a waiver of
any provision of the Credit Agreement or any related documents.
6. Expenses. BEI Sensors shall pay on demand all reasonable fees and
expenses, including reasonable attorneys' fees and expenses, incurred by the
Agent in connection with the negotiation, preparation, execution and delivery of
this Amendment and all related documents, instruments and agreements.
7. Counterparts. This Amendment may be executed in any number of identical
counterparts, any set of which signed by all the parties hereto shall be deemed
to constitute a complete, executed original for all purposes.
8. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first written above.
PRIOR BORROWERS: BEI ELECTRONICS, INC.
By: Robert R. Corr
---------------------------------
Title: TREASURER
------------------------------
BEI SENSORS & SYSTEMS COMPANY, INC.
By: Robert R. Corr
---------------------------------
Title: TREASURER
------------------------------
DEFENSE SYSTEMS COMPANY, INC.
By: Robert R. Corr
---------------------------------
Title: TREASURER
------------------------------
BEI MEDICAL SYSTEMS COMPANY, INC.
By: Robert R. Corr
---------------------------------
Title: TREASURER
------------------------------
NEW BORROWER: BEI SENSORS & SYSTEMS COMPANY, INC.
By: Robert R. Corr
---------------------------------
Title: TREASURER
------------------------------
5
<PAGE>
LENDERS AND AGENT: CIBC INC., Individually and as Agent
By: Cyd A. Petre
---------------------------------
Title: AUTHORIZED SIGNATORY
------------------------------
CANADIAN IMPERIAL BANK of COMMERCE,
as the Designated Issuer
By: Cyd A. Petre
---------------------------------
Title: AUTHORIZED SIGNATORY
------------------------------
6
<TABLE>
EXHIBIT 11.1
BEI MEDICAL SYSTEMS COMPANY, INC.
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
YEAR ENDED
September 27, September 28, September 30,
(in thousands except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 7,033 6,926 6,759
Net effect of dilutive stock options
based on the treasury stock method
using fair market value 170 182 --
-------------------------------------
Total weighted average shares 7,203 7,108 6,759
outstanding
=====================================
Net income $ 235 $ 1,889 $(4,391)
-------------------------------------
Earnings per common share and common
equivalent share $ 0.03 $ 0.27 $ (0.65)
=====================================
</TABLE>
EXHIBIT 21.1
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
LIST OF SUBSIDIARIES
% OF VOTING
NAME SECURITIES OWNED
1. BEI Medical Systems Company, Inc., a Delaware corporation 100%
2. Meditron Devices, Inc., a Delaware corporation 100%
3. Xylog Corporation, a New Jersey corporation 100%
4. BEI Medical Systems International, Inc., a Delaware corporation 100%
5. Calculus Instruments Company, Inc., a New Jersey corporation 100%
6. Ovamed Corporation, a California corporation 100%
7. Zinnanti Surgical Instruments, a California corporation 100%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 27, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1996
<CASH> 9,271
<SECURITIES> 0
<RECEIVABLES> 1,958
<ALLOWANCES> 0
<INVENTORY> 2,939
<CURRENT-ASSETS> 14,464
<PP&E> 1,591
<DEPRECIATION> 780
<TOTAL-ASSETS> 22,584
<CURRENT-LIABILITIES> 3,379
<BONDS> 22
0
0
<COMMON> 10
<OTHER-SE> 17,650
<TOTAL-LIABILITY-AND-EQUITY> 22,584
<SALES> 10,005
<TOTAL-REVENUES> 10,141
<CGS> 5,972
<TOTAL-COSTS> 5,972
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<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (5,648)
<INCOME-TAX> (1,300)
<INCOME-CONTINUING> (4,348)
<DISCONTINUED> 4,583
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
