UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 28, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
__________.
Commission file number 0-17885
BEI ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 71-0455756
- ------------------------------------ --------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
-------------------------------
(Address of principal executive offices)
(415) 956-4477
--------------
(Registrant's telephone number)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.001 Par Value, 7,025,843 shares as of July 30, 1997
1 of 28
<PAGE>
BEI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--June 28, 1997 and 3
September 28, 1996
Condensed Consolidated Statements of Operations--Quarter 4
and Nine Months ended June 28, 1997 and June 29, 1996
Condensed Consolidated Statements of Cash Flows--Nine 5
Months ended June 28, 1997 and June 29, 1996
Notes to Condensed Consolidated Financial Statements--June 6
28, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and 14
Results of Operations
PART II. OTHER INFORMATION
Item 5. Summary Description of Continuing Operations
(Medical Systems) 20
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2 of 28
<PAGE>
BEI ELECTRONICS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements classify the Company's Sensors & Systems and
Defense Systems business segments as discontinued operations, reflecting the
Company's current intent to distribute ownership of these operations to its
stockholders. See Notes 1 and 3 to the Financial Statements and Item 5 of the
Form 10-Q for further information.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, September 28,
1997 1996
(Unaudited) (Note)
(amounts in thousands)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 972 $ 9,128
Trade receivables, net 2,094 1,713
Inventories, net -- Note 2 3,023 2,085
Deferred income taxes 248 456
Current assets of discontinued operations,
net -- Note 3 49,018 55,499
Other current assets 317 144
-------- --------
Total current assets 55,672 69,025
Property, plant and equipment, net 788 817
Goodwill 3,655 3,835
Other assets, net 4,007 4,662
Non-current assets of discontinued
operations -- Note 3 37,650 36,672
-------- --------
$101,772 $115,011
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 834 $ 683
Accrued expenses and other liabilities 2,781 2,337
Current portion of long-term debt 181 179
Current liabilities of discontinued
operations -- Note 3 22,307 27,724
-------- --------
Total current liabilities 26,103 30,923
Long-term debt, less current portion 62 212
Non-current liabilities of discontinued
operations -- Note 3 18,802 24,426
Deferred income taxes and other liabilities -- 1,960
Minority interest in consolidated subsidiary 1,539 1,518
Stockholders' equity 55,266 55,972
-------- --------
$101,772 $115,011
======== ========
See notes to condensed consolidated financial statements.
Note: The condensed consolidated balance sheet at September 28, 1996 has been
derived from the audited consolidated balance sheet at that date after giving
effect to the reclassification of assets and liabilities of discontinued
operations.
3 of 28
<PAGE>
BEI ELECTRONICS, INC. AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
----------------------- ------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
(amounts in thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,472 $ 2,336 $ 7,606 $ 6,935
Cost of sales 1,534 1,410 4,426 4,323
------- ------- ------- -------
Gross Profit 938 926 3,180 2,612
Selling, general and administrative expenses 2,216 1,958 6,012 4,922
Research, development and related expenses 479 334 1,380 1,004
------- ------- ------- -------
Operating income (loss) (1,757) (1,366) (4,212) (3,314)
Other income 16 87 128 223
Interest expense 13 24 53 86
------- ------- ------- -------
Income (loss) before income taxes (1,754) (1,303) (4,137) (3,177)
Income taxes (credit) (617) (440) (1,422) (1,070)
------- ------- ------- -------
Income (loss) from continuing operations (1,137) (863) (2,715) (2,107)
Income from discontinued operations,
net of income taxes 1,696 1,639 3,183 3,845
------- ------- ------- -------
Income $ 559 $ 776 $ 468 $ 1,738
======= ======= ======= =======
Earnings (loss) from continuing operations
per common and common equivalent
share -- Note 5 ($ 0.16) ($ 0.12) ($ 0.38) ($ 0.30)
Earnings from discontinued operations per
common and common equivalent share-- Note 5 0.24 0.23 0.45 0.55
------- ------- ------- -------
Earnings per common and common
equivalent share -- Note 5 $ 0.08 $ 0.11 $ 0.07 $ 0.25
======= ======= ======= =======
Shares used in per share computations -- Note 5 7,175 7,215 7,131 7,082
======= ======= ======= =======
Dividends per common share $ 0.02 $ 0.02 $ 0.06 $ 0.06
======= ======= ======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
BEI ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------------
June 28, June 29,
1997 1996
(amounts in thousands)
- --------------------------------------------------------------------------------
Net cash used in operating activities ($2,231) ($6,513)
Cash flows from investing activities:
Acquisitions -- (325)
Proceeds from sale of Medical stock -- 1,475
Purchases of property, plant and
equipment (161) (231)
Decrease (increase) in other assets (218) 133
------- -------
Net cash provided(used) in investing
activities (379) 1,052
Cash flows from financing activities:
Principal payments on long-term debt (6,313) (554)
Proceeds from issuance of common stock 326 744
Purchase of treasury stock (1,303) --
Payment of cash dividends (422) (416)
Funding from discontinued operations 2,166 3,604
------- -------
Net cash used (provided) by financing
activities (5,546) 3,378
------- -------
Net decrease in cash and cash equivalents (8,156) (2,083)
Cash and cash equivalents at beginning of period 9,128 9,023
------- -------
Cash and cash equivalents at end of period $ 972 $ 6,940
======= =======
See notes to condensed consolidated financial statements.
5 of 28
<PAGE>
BEI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 28, 1997
NOTE 1 -- BASIS OF PRESENTATION
On June 30, 1997, the Board of Directors of BEI Electronics, Inc. ("Electronics"
or "the Company") approved a plan of distribution to holders of Electronics
common stock of one share of common stock of BEI Technologies, Inc.
("Technologies"), a newly formed subsidiary, for each share of Electronics
common stock held (the "Distribution"). In connection with the Distribution,
Electronics will transfer to Technologies all of the assets, liabilities and
operations of its BEI Sensors & Systems Company, Inc. ("Sensors & Systems") and
Defense Systems Company, Inc. ("Defense Systems") business segments. Currently,
the Distribution is expected to occur at the end of September, 1997. For
purposes of the presentation herein, the term "Technologies" is applied to the
combination of the business segments which will comprise this operation,
effective upon the Distribution. On June 30, 1997, the Board of Directors of
Electronics also approved a formal plan to discontinue the operations of its
Defense Systems segment (the "Discontinuation").
See Note 3 -- Discontinued Operations for a description of the Distribution and
the Discontinuation. See Item 5 -- Summary Description of Continuing Operations
(Medical Systems), for more information on the continuing business of BEI
Electronics, Inc.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the year ending
September 27, 1997 or any future period. For further information, refer to the
consolidated financial statements and footnotes thereto in the Company's annual
report on Form 10-K for the year ended September 28, 1996.
6 of 28
<PAGE>
NOTE 2 -- INVENTORIES
June 28, September 28,
1997 1996
-------- --------
(amounts in thousands)
- --------------------------------------------------------------------------------
Continuing Operations:
Finished products $ 1,774 $ 1,116
Work in process 353 182
Materials 896 787
-------- --------
Net inventories $ 3,023 $ 2,085
======== ========
Discontinued Operations:
Finished products $ 1,281 $ 289
Work in process 7,361 6,621
Materials 12,635 10,873
Costs incurred under long-term contracts,
including U.S. Government contracts 1,823 3,840
Unapplied progress payments (138) (451)
-------- --------
Net inventories 22,962 21,172
Inventories included in current assets of
discontinued operations of Defense Systems,
net of progress payments of $138 and $451 658 1,971
-------- --------
Net inventories $ 22,304 $ 19,201
======== ========
NOTE 3 -- DISCONTINUED OPERATIONS
The condensed consolidated financial statements of Technologies shown below
present the combined financial position and results of operations of Sensors &
Systems and Defense Systems, wholly-owned subsidiaries of Electronics, which are
predecessor entities to Technologies. All intercompany accounts and transactions
have been eliminated. The financial position and results of operations of the
Sensors & Systems business segment are presented as continuing operations and
those of the Defense Systems business segment are presented as discontinued
operations. Long-term debt of Electronics that will be assumed by Technologies
in connection with the Distribution has been included in the accompanying
condensed consolidated balance sheets.
For more information, please refer to the Form 10 General Form for Registration
of Securities as filed by BEI Technologies, Inc. on July 3, 1997.
7 of 28
<PAGE>
DISCONTINUED OPERATIONS - TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, September 28,
1997 1996
(Unaudited) (Note)
(amounts in thousands)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,622 $ 8,201
Trade receivables, net 16,563 16,712
Inventories, net -- Note 2 22,304 19,201
Refundable income taxes -- 388
Deferred income taxes 4,387 2,564
Current assets of discontinued operations
of Defense Systems, net 743 6,508
Other current assets 1,399 1,925
------- -------
Total current assets 49,018 55,499
Property, plant and equipment, net 25,107 22,191
Goodwill 668 707
Other assets, net 10,188 11,812
Non-current assets of discontinued operations
of Defense Systems, net 1,687 1,962
------- -------
$86,668 $92,171
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 5,574 $ 5,025
Accrued expenses and other liabilities 9,218 12,602
Current portion of long-term debt 5,627 5,625
Current liabilities of discontinued operations
of Defense Systems 1,888 4,472
------- -------
Total current liabilities 22,307 27,724
Long-term debt, less current portion 18,516 24,137
Deferred income taxes and other liabilities 286 1,002
Payable to Electronics 3,896 6,062
Stockholders' equity 41,663 33,246
------- -------
$86,668 $92,171
======= =======
Note: The condensed consolidated balance sheet at September 28, 1996 has been
derived from the audited consolidated balance sheet at that date after giving
effect to the reclassification of assets and liabilities of discontinued
operations.
8 of 28
<PAGE>
<TABLE>
DISCONTINUED OPERATIONS - TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------- -------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
(amounts in thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $26,824 $24,336 $74,437 $71,398
Cost of sales 17,347 14,916 48,383 44,390
------- ------- ------- -------
Gross profit 9,477 9,420 26,054 27,008
Selling, general and administrative expenses 5,985 6,321 19,014 18,500
Research, development and related expenses 1,194 894 3,159 2,682
------- ------- ------- -------
Operating income 2,298 2,205 3,881 5,826
Other income 57 62 246 166
Interest expense 441 625 1,392 1,879
------- ------- ------- -------
Income before income taxes 1,914 1,642 2,735 4,113
Income taxes 718 567 941 1,407
------- ------- ------- -------
Income from continuing operations 1,196 1,075 1,794 2,706
Income from discontinued operations of Defense
Systems, net of income taxes 500 564 1,389 1,139
------- ------- ------- -------
Income $ 1,696 $ 1,639 $ 3,183 $ 3,845
======= ======= ======= =======
Earnings from continuing operations
per common and common equivalent
share $ 0.17 $ 0.15 $ 0.25 $ 0.38
Earnings from discontinued operations
per common and common equivalent share 0.07 0.08 0.20 0.16
------- ------- ------- -------
Earnings per common and common
equivalent share $ 0.24 $ 0.23 $ 0.45 $ 0.54
======= ======= ======= =======
Shares used in per share computations 7,175 7,215 7,131 7,082
======= ======= ======= =======
</TABLE>
9 of 28
<PAGE>
DISCONTINUED OPERATIONS
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------------
June 28, June 29,
1997 1996
(amounts in thousands)
- --------------------------------------------------------------------------------
Net cash provided by operating activities $ 2,940 $ 7,891
Cash flows from investing activities:
Purchases of property, plant and
equipment (6,033) (3,016)
Decrease in other assets 699 144
------- -------
Net cash used in investing activities (5,334) (2,872)
Cash flows from financing activities:
Principal payments on long-term debt (19) (70)
Funding of continuing operations of Electronics (2,166) (3,604)
------- -------
Net cash used in financing activities (2,185) (3,674)
Net increase (decrease) in cash and cash equivalents (4,579) 1,345
Cash and cash equivalents at beginning of period 8,201 2,667
------- -------
Cash and cash equivalents at end of period $ 3,622 $ 4,012
======= =======
10 of 28
<PAGE>
DISCONTINUED OPERATIONS OF DEFENSE SYSTEMS
In June of 1997, the Board of Directors of the Company adopted a plan to
discontinue the Defense Systems segment whose principal product was the HYDRA 70
(H 70) Rocket. The rocket line of the segment was shut down at the end of fiscal
year 1996.
As a result of the decision to exit the rocket line of business, the Company had
recorded a reserve for employee severance and facility closure costs. At the end
of fiscal year 1996, the balance in the reserve account consisted of $374,000
and $500,000 for employee severance and facility closure costs, respectively.
During the first nine months of fiscal 1997, the Company accrued an additional
$33,000 for employee severance costs. Costs incurred during the period for
severance and facilities closure of $302,000 and $357,000, respectively, were
charged against the reserve. The balance in the reserve at June 28,1997
consisted of $105,000 for employee severance and $143,000 for facilities closure
costs. Management believes at this time the reserve is adequate to cover future
shutdown costs.
RESERVE ACTIVITY
- --------------------------------------------------------------------------------
September 28, Costs June 28,
1996 Adjustments Incurred 1997
(dollars in thousands)
- --------------------------------------------------------------------------------
Employee Severance $374 $33 $302 $105
Facilities Costs 500 -- 357 143
-----------------------------------------------------------
Total Reserve $874 $33 $659 $248
===========================================================
NOTE 4 -- TAX CONSEQUENCES TO BEI MEDICAL SYSTEMS OF THE PROPOSED
DISTRIBUTION
The Company files a consolidated federal income tax return which includes all of
its eligible subsidiaries. In accordance with the tax allocation arrangement
between the Company and its subsidiaries, income taxes are allocated generally
as if the Company and its subsidiaries filed separate U.S. and state income tax
returns. Under this arrangement, operating losses of Medical Systems have offset
taxable income of Technologies, and Medical Systems recorded income tax credits
as a result of the tax benefit to Technologies of such operating losses.
Subsequent to the Distribution, any operating losses of Medical Systems cannot
be used to offset any future taxable income of Technologies generated after the
date of the Distribution.
As of June 28, 1997, Medical Systems had recorded net deferred tax assets of
approximately $800,000 relating primarily to the timing of deductions resulting
from an acquisition by Medical Systems. As a result of the uncertainty of the
realization of these deferred tax assets after the Distribution, Electronics
will provide a valuation allowance against certain of these deferred tax assets
at the time of the Distribution. Management estimates that the establishment of
such a valuation allowance will result in an additional income tax provision of
approximately $600,000 in the fourth quarter of fiscal 1997.
11 of 28
<PAGE>
NOTE 5 -- EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
Earnings per common and common equivalent share are computed based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period.
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------------------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
(amounts in thousands except per share data)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 7,016 6,973 7,021 6,898
Net effect of dilutive stock options
based on the treasury stock method 159 242 110 184
--------------------------------------------------------
Total fully diluted weighted average shares 7,175 7,215 7,131 7,082
outstanding
========================================================
Income (loss) from continuing operations ($1,137) ($863) ($2,715) ($2,107)
Income from discontinued operations,
net of tax 1,696 1,639 3,183 3,845
--------------------------------------------------------
Income $559 $776 $468 $1,738
========================================================
Earnings (loss) from continuing operations per
common and common equivalent share ($0.16) ($0.12) ($0.38) ($0.30)
Earnings from discontinued operations per
common and common equivalent share 0.24 0.23 0.45 0.55
--------------------------------------------------------
Earnings per common and common equivalent
share $0.08 $0.11 $0.07 $0.25
========================================================
Pro forma loss per share from continuing operations
based on weighted average shares outstanding ($0.16) ($0.12) ($0.39) ($0.31)
========================================================
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement No.
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 all prior
periods. Had the Statement been implemented for the quarter and nine months
ended June 28, 1997 and June 29, 1996, respectively, the impact on the
calculation of earnings per share would not have been material.
12 of 28
<PAGE>
NOTE 6 -- 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 BEI 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 BEI Medical Systems to assert a counterclaim
for damages against CooperSurgical regarding the parties' electrosurgical
generator contract.
In June 1996, more than one year after fact and 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 BEI Medical Systems'
counterclaims against CooperSurgical, if BEI Medical Systems were successful in
its counterclaims.
The trial is currently scheduled for September 1997. The Company, after
consultation with counsel, believes that the additional damage figures stated in
the June 1996 letter from CooperSurgical's counsel are exaggerated. 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.
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.
13 of 28
<PAGE>
Item 2. 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.
On June 30, 1997, the Board of Directors of BEI Electronics, Inc. (Electronics)
approved a plan of distribution to holders of Electronics common stock of one
share of common stock of BEI Technologies, Inc. (Technologies), a newly formed
subsidiary, for each share of Electronics common stock held (the Distribution)
as part of a plan to separate the two main businesses of BEI Electronics, BEI
Sensors & Systems Company, Inc. and BEI Medical Systems Company, Inc. In
connection with the Distribution, Electronics will transfer to Technologies all
of the assets, liabilities and operations of its Sensors & Systems and Defense
Systems business segments. See Note 3 -- Discontinued Operations of Notes to
Condensed Consolidated Statements.
The continuing operations of Electronics as discussed herein consist of Medical
Systems (Medical) and its related corporate expenses. Discontinued operations of
the Company represent BEI Technologies, Inc. and consist of the Sensors &
Systems and Defense Systems segments and their related corporate expenses. On
June 30, 1997, the Board of Directors also approved a formal plan for the
discontinuance of the Defense Systems business segment. Within the Discontinued
Operations discussion of Technologies herein, the results of operations for the
Defense Systems business segment are presented as discontinued operations.
14 of 28
<PAGE>
CONTINUING OPERATIONS (MEDICAL)
<TABLE>
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 62.1 60.4 58.2 62.3
---------- ---------- --------- ---------
Gross profit 37.9 39.6 41.8 37.7
Selling, general and administrative expenses 89.6 83.8 79.1 71.0
Research, development and related expenses 19.4 14.3 18.1 14.5
---------- ---------- --------- ---------
Operating income (loss) (71.1) (58.5) (55.4) (47.8)
Other income 0.6 3.7 1.7 3.2
Interest expense 0.6 1.0 0.7 1.2
---------- ---------- --------- ---------
Income (loss) before income taxes (71.1) (55.8) (54.4) (45.8)
Income taxes (25.1) (18.8) (18.7) (15.4)
---------- ---------- --------- ---------
Income (loss) from continuing operations (46.0) (37.0) (35.7) (30.4)
========== ========== ========= =========
</TABLE>
Quarters ended June 28, 1997 and June 29, 1996
Net sales for the quarter ended June 28, 1997 increased $136 thousand or 5.8%
from the same period in fiscal 1996. Sales of gynecology products were up at a
higher rate but were partially offset by declines in gastrointestinal products
and other sales. In the quarter, shipments to distributors contributed to the
increased sales of gynecologic instruments as well as international shipments of
the Hydro-ThermAblator product.
Cost of sales as a percentage of net sales increased to 62.1% from 60.4% in the
third quarter of fiscal 1997 versus the comparable period of fiscal 1996. Labor
costs for product start-ups were the primary cause of the increase.
Selling, general and administrative expenses as a percentage of net sales
increased from 83.8% in the third quarter of fiscal 1996 to 89.6% in the third
quarter of fiscal 1997. The increase was primarily due to costs associated with
the Distribution. These expenses declined from the prior year due to cost
reduction efforts even though significant effort to support FDA Phase II human
trials of the Hydra-ThermAblator continued.
Research, development and related expenses as a percentage of net sales for the
third quarter of fiscal 1997 increased to 19.4% from 14.3% in the same period of
fiscal 1996 due to increased spending for product development. This effort
included engineering support for the start up of new product manufacturing.
Other income as a percent of sales declined from 3.7% in the third quarter of
1996 to 0.6% in the third quarter of fiscal 1997 due to lower interest from cash
balances.
15 of 28
<PAGE>
Nine months ended June 28, 1997 and June 29, 1996
Net sales for the first nine months of fiscal 1997 increased $671 thousand or
9.7% from the same period of the prior year. Sales of gynecology products were
up more than 15% as compared to the first nine months of the prior year, due
primarily to the reorganization of telemarketing efforts for gynecology
instrument sales. These increases were partially offset by declines in other
product sales.
Cost of sales as a percentage of net sales decreased to 58.2% from 62.3% in the
first nine months of fiscal 1997 as compared to the same period of fiscal 1996.
This was primarily due to the increased volume of products as well as reductions
in overhead costs. Higher labor costs included in cost of goods sold for new
products partially offset the overall decrease in cost of goods sold.
Selling, general and administrative expenses as a percentage of net sales
increased from 71.0% in the first nine months of fiscal 1996 to 79.1% in the
first nine months of fiscal 1997. The increase is primarily due to Electronics'
costs associated with the Distribution. These expenses also increased to support
FDA Phase II human trials of the Hydro-ThermAblator.
Research, development and related expenses as a percentage of net sales for the
first nine months of fiscal 1997 increased to 18.1% from 14.5% in the same
period of fiscal 1996 due to increased spending for product development. This
effort included engineering support for the start up of new product
manufacturing.
Other income as a percent of sales declined from 3.2% in the first nine months
of fiscal 1996 to 1.7% in the same period of fiscal 1997, due to a decline in
cash balances caused by operating activities. Interest expense as a percent of
sales also declined from 1.2% in the first nine months of fiscal 1996 to 0.7% in
the first nine months of fiscal 1997 as a result of principal payments on
long-term debt.
Liquidity and Capital Resources
During the first nine months of fiscal 1997, operations utilized $2.2 million in
cash. Operating cash inflows consisted primarily of income from continuing
operations adjusted for the positive impact of non-cash charges to income from
depreciation and amortization of $1.3 million, and increases in trade payables,
accrued expenses and other liabilities of an additional $1.2 million. Offsetting
the inflows were inventory purchases of $0.9 million, and increases in accounts
receivable and decreases in deferred income taxes of $0.4 million and $0.6
million, respectively.
Cash used in financing activities consisted primarily of $6.3 million in
scheduled payments of long-term debt. The Company also used $1.3 million to
purchase treasury stock on the open market. Proceeds from the issuance of common
stock of $0.3 million were offset by dividend payments of $0.4 million. Funding
from discontinued operations provided $2.2 million.
The Internal Revenue Service (IRS) audited the Company's income tax returns for
the fiscal years 1993 through 1995. In the third quarter of fiscal 1997, the
Company reached a settlement with the IRS for all issues raised for these years,
resulting in the payment of $1.7 million of additional taxes for those years of
which approximately $0.7 million relates to the Medical business segment and
$1.0 million relates to Technologies. The settlement related primarily to the
timing of deductions resulting from acquisitions made by the Company. The
payment of these additional taxes resulted in an increase in the Company's
deferred tax assets and did not effect the provision for income taxes in the
third quarter of fiscal year 1997.
After the Distribution, the Company expects to have $9.0 million in cash. See
"Discontinued Operations
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- -- Liquidity and Capital Resources" below. Management believes that the existing
cash balances of Electronics will be sufficient to meet the planned cash
requirements of the Medical business segment for approximately two years.
Subsequent to the Distribution, the continuing operations of Electronics, which
currently comprise the Medical business segment of the Company, will have no
existing credit facilities.
The Company had no material capital commitments at June 28, 1997.
Based on the financial condition of the Company at June 28, 1997, management
believes that the existing cash balances, cash generated from operations, and
available lines of credit will be sufficient to meet the Company's planned needs
for the immediate future. If the Company requires additional capital, management
anticipates that such capital will be provided by bank or other borrowings,
although there can be no assurances that funds will be available on terms as
favorable as those applicable to the Company's currently outstanding debt.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
<TABLE>
DISCONTINUED OPERATIONS (TECHNOLOGIES)
The following table sets forth, for BEI Technologies, Inc., for the
fiscal periods indicated, the percentage of net sales represented by certain
items of Technologies operations.
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................. 64.7 61.3 65.0 62.2
----- ----- ----- -----
Gross profit.................................................. 35.3 38.7 35.0 37.8
Operating expenses:
Selling, general and administrative expenses............. 22.3 26.0 25.5 25.8
Research, development and related expenses............... 4.5 3.7 4.2 3.8
----- ----- ----- -----
Operating income.............................................. 8.5 9.0 5.3 8.2
Other income.................................................. 0.2 0.3 0.3 0.2
Interest expense.............................................. (1.6) (2.6) (1.9) (2.6)
----- ----- ----- -----
Income before income taxes from continuing
operations................................................. 7.1 6.7 3.7 5.8
Income taxes ................................................. 2.7 2.2 1.3 2.0
----- ----- ----- -----
Income from continuing operations............................ 4.4 4.5 2.4 3.8
Income from discontinued operations, net of income
taxes...................................................... 1.9 2.3 1.9 1.6
----- ----- ----- -----
Income ....................................................... 6.3% 6.8% 4.3% 5.4 %
===== ===== ===== =====
</TABLE>
Quarters ended June 28, 1997 and June 29, 1996
Net sales for Technologies for the quarter ended June 28, 1997 increased $2.5
million or 10.2% from the prior year. Sales of automotive and other commercial
products increased $1.2 million and $4.5 million, respectively, but were
partially offset by decreases in sales to government contractors or
subcontractors
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of $3.2 million.
Technologies cost of sales as a percentage of net sales increased from 61.3% in
the third quarter of fiscal 1996 to 64.7% in the third quarter of fiscal 1997.
Technologies incurred cost overruns on the development of some products for
aerospace applications. In addition, average costs of goods sold as a percentage
of sales for new automotive applications have been higher than for other
commercial products due to start-up efforts.
Technologies selling, general and administrative expenses as a percentage of net
sales decreased from 26.0% in the third quarter of fiscal 1996 to 22.3% in the
third quarter of fiscal 1997, as a result of increased sales and cost reduction
efforts in the past year.
Research, development and related expenses as a percentage of net sales for the
third quarter of fiscal 1997 increased 0.8% from the same period in fiscal 1995
due to increased research spending to support the production of
micro-electromechanical sensors and product development for automotive and other
commercial products.
Interest costs in the third quarter of fiscal 1997 decreased as a percentage of
net sales from 1.6% to 2.6% during the same period in fiscal 1996. The lower
interest expense is the result of the repayment of $5.6 million of debt in
October and November 1996.
The increase in income from continuing operations of $0.1 million to $1.2
million in the third quarter of fiscal 1997 from $1.1 million in the third
quarter of fiscal 1996 primarily reflects reductions in interest expense and
selling, general and administrative costs.
Nine months ended June 28, 1997 and June 29, 1996
Net sales for Technologies for the first nine months of fiscal 1997 increased
$3.0 million or 4.3% from the prior year. Sales of automotive and other
commercial products increased $1.9 million and $6.7 million, respectively, but
were partially offset by decreases in sales to government contractors or
subcontractors of $5.5 million.
Technologies cost of sales as a percentage of net sales increased from 62.2% in
the first nine months of fiscal 1996 to 65.0% in the first nine months of fiscal
1997. Technologies operations incurred cost overruns on the development of some
products for aerospace applications. In addition, average costs of goods sold as
a percentage of sales for new automotive applications have been higher than for
other commercial products due to start-up efforts.
Technologies selling, general and administrative expenses as a percentage of net
sales decreased from 25.8% in the first nine months of fiscal 1996 to 25.5% in
the first nine months of fiscal 1997. This was mainly the result of settlement
and other related charges associated with the settlement of a legal dispute by
arbitration that was resolved in the first quarter of fiscal year 1997.
Research, development and related expenses as a percentage of net sales for the
first nine months of fiscal 1997 increased 0.5% from the same period in fiscal
1996 due to increased research spending to support the production of
micro-electromechanical sensors and the development of automotive and other
commercial products.
Interest costs in the first nine months of fiscal 1997 decreased by $0.5 million
from the same period in fiscal 1996. The lower interest expense is the result of
the repayment of $5.6 million of debt in the first
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quarter of fiscal 1997.
The decline in income from continuing operations, from $2.7 million in the first
nine months of fiscal 1996 to $1.8 million in the first nine months of fiscal
1997, primarily reflects the after tax charge in fiscal year 1997 of $1.1
million incurred in connection with an arbitration to settle a royalty dispute
and a 2.8% decrease in gross profit as a percentage of sales.
Income from Discontinued Operations of Defense Systems
In June 1997, the Board of Directors of Electronics approved a formal plan for
the discontinuation of the operations of the Defense Systems business segment.
This segment was primarily a manufacturer of Hydra 70 ("H 70") military rockets
whose production was shut down at the end of fiscal 1996. Accordingly, the
results of operations of the Defense Systems segment have been reported as
discontinued operations for all periods presented. Defense Systems income
decreased slightly from $0.6 million in the third quarter of fiscal 1996 to $0.5
million in the third quarter of fiscal 1997. Defense Systems' improved gross
profit on the non-H 70 products, together with a $1.3 million decline in
selling, general and administration expenses due to the closure of the H 70
production line, resulted in income from discontinued operations increasing to
$1.4 million in the first nine months of fiscal 1997 from $1.1 million in the
first nine months of fiscal 1996.
Liquidity and Capital Resources
During the first nine months of fiscal 1997, operations provided $2.9 million in
cash. Operating cash inflows consisted primarily of income adjusted for the
positive impact of non-cash charges from depreciation and amortization of $4.3
million, a change in income taxes payable of $1.0 million, and changes in assets
and liabilities of discontinued operations of Defense Systems of $2.7 million.
Offsetting these inflows were inventory increases of $3.1 million, the negative
impact of a change in deferred taxes of $1.8 million, and a net decrease in
trade payables and accrued expenses and other liabilities of $3.6 million,
primarily due to a payment $5.3 million of amounts accrued in fiscal 1996 and in
the first quarter of fiscal 1997 in connection with the final settlement of an
arbitration.
Cash used in investing activities in the first nine months of fiscal 1997
consisted primarily of $6.0 million for capital expenditures, which is
consistent with spending in the first nine months of the prior fiscal year.
Capital equipment requirements may increase in future periods and the Company
may expand the use of lease financing to fund such requirements.
In connection with the Distribution and subject to the approval of the
noteholders, Technologies will assume existing indebtedness of Electronics in
the amount of approximately $22.4 million. Cash in the amount of $9.0 million
will remain in Electronics after the Distribution. A portion of that amount will
consist of debt assumed by Technologies in repayment of intercompany obligations
arising prior to the Distribution. Management believes that new financing will
be available to Technologies and intends to negotiate a line of credit from a
financial institution and on terms which will, in the aggregate, be more
favorable than those available on new financing available to Electronics prior
to the Distribution. However, there can be no assurances that Technologies will
be able to negotiate the assumption of such Electronics debt, obtain a line of
credit from a financial institution as discussed above, or that funds will be
available on terms as favorable as those applicable to the Company's currently
outstanding debt, if at all.
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<PAGE>
PART II. OTHER INFORMATION
Item 5. SUMMARY DESCRIPTION OF CONTINUING OPERATIONS
(MEDICAL SYSTEMS)
The following business description may contain forward-looking statements that
involve risks and uncertainties. When used herein, the words "intend",
"anticipate", "believe", "estimate" and "expect" and similar expressions as they
related to BEI Medical Systems Company, Inc. (hereafter Medical Systems or the
Company) are intended to identify such forward-looking statements. The Company's
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements.
Background
BEI Electronics, Inc. is a diversified technology based manufacturing company
which has historically conducted its business in several operating segments. On
July 2, 1997, the company announced a plan to form a new company 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. Therefore, following this distribution, which is expected to
occur at the end of September, 1997, the sole continuing business of BEI
Electronics, Inc. will be that carried on by its subsidiary, Medical Systems.
The following narrative text expands on previous descriptions of the business of
Medical Systems. For a more complete historic description of the other
businesses of BEI Electronics, the reader may refer to previous reports of BEI
Electronics, Inc. published on Form 10-K. In addition, a description of the
newly formed company, BEI Technologies, Inc. is more fully set forth in an
Information Statement on Form 10 filed with the SEC on July 3, 1997.
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 insufflators.
Business Strategy
The Company intends to become the leading medical device manufacturer focused
exclusively on serving the specific needs of the gynecologist. Its special
emphasis is on the diagnosis, manipulation and treatment 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 OvaMed Corporation in February 1996.
Develop and commercialize innovative medical technologies. The Company
is currently directing
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<PAGE>
product development efforts at commercialization of its
Hydro-ThermAblator(R) (HTA(R)) system, which is currently undergoing
U.S. Food and Drug Administration (FDA) Phase II human trials. The HTA
is intended to provide minimally invasive treatment 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 December 1993,
the Company acquired exclusive rights to use the Goldrath patents which
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
electrosurgery system for removal of 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 increasing the Company's complementary
direct sales effort through manufacturers' representatives assisted by
an 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 for innovative
products and procedures to 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.
Products
The Company's medical products include:
1. A small diameter flexible hysteroscope for viewing the uterus.
2. The Hydro-ThermAblator system for treatment of abnormal
uterine bleeding.
3. A specialized bipolar electrosurgery system for removal of
benign uterine fibroids.
4. The GyneSys catheter system for access to and treatment of the
uterus and fallopian tubes.
5. Complementary products such as disposable kits for biopsies
and other procedures and stainless steel instrumentation.
These products and their potential are more fully discussed below:
1. Hysteroscopes
The need to provide a definitive diagnosis of uterine abnormalities led
to the development of 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.
Direct visualization of the uterus enables a precise diagnosis of
uterine abnormalities, but at this time less than 20% of diagnostic
hysteroscopies are being performed in the office setting due to the large
diameter of traditional instrumentation for hysteroscopy requiring dilation of
the cervix combined with sedation.
The Company has developed an integrated hysteroscopy system featuring
the Company's
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<PAGE>
HysteroSys(TM) flexible hysteroscope, which has an atraumatic outer diameter of
only 3.7mm, making it suitable for use in the office setting without the
discomfort associated with larger traditional hysteroscopes. This office
hysteroscopy system includes the Company's Integrated Video System(TM) featuring
miniaturized digital video camera technology combined with a high intensity
illumination source in a compact control unit that, when mounted on a compact
mobile cart together with video monitor and video recording capability, can be
easily moved from one examination room to another.
The Company believes that its flexible hysteroscope system offers the
following advantages compared to traditional rigid and other flexible scope
systems:
o reduced outer diameter reduces patient discomfort.
o steerable tip allows panoramic view without awkward
manipulation.
o complete system cost is as low as one-half that of traditional
systems.
o modular scope design reduces operating and maintenance costs.
o a working channel in the hysteroscope allows direct visual
placement of the Uterine Cornual Access Catheter(TM)
(UCAC(TM)) into the proximal fallopian tube for infertility
diagnosis.
o the integrated video system is also compatible with the
Hydro-ThermAblator system.
2. The Hydro-ThermAblator System
Approximately 2.5 million women each year in the United States seek
medical treatment from the 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. Considerable
attention has been focused on the frequency with which hysterectomy is
performed.
The Company has developed the patented Hydro-ThermAblator technology as
an alternative to hysterectomy or to traditional treatments for abnormal
menstrual bleeding as well as other proposed ablation treatments currently under
development.
The Company believes that its HTA offers distinct advantages compared
to existing and emerging ablation technologies for the treatment of abnormal
menstrual bleeding:
o Does 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 of
treatment effect.
The Hydro-ThermAblator has been designed to offer the gynecologist a
minimally-invasive, nonsurgical method to treat abnormal menstrual bleeding in
an outpatient or office setting. The HTA consists of a portable treatment unit
incorporating microprocessor control of fluid circulation, closed-loop volume of
the circulating saline, and fluid temperature. The mobile unit provides a drawer
for procedure supplies, and a shelf to house the Company's Integrated Video
System for display of the hysteroscopic image.
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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 that assure 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, the regeneration of the endometrium and resulting periodic
menstrual bleeding is 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. Sales of the HTA system to date have been limited. In
February, 1997, the Company selectively initiated delivery of units in 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. 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.
3. Fibroid Removal System
The newly licensed bipolar fibroid removal system will be utilized by
gynecologists for a transcervical approach to the removal of fibroids found in
the internal surface of the uterus. It is anticipated that these fibroids will
be removed under fluid conditions with the added safety of bipolar
electrosurgery technology. This same technology is successfully utilized in
neurosurgery and other critical medical specialities.
4. The GyneSys Catheter System
The Company has developed a catheter system for use by a physician
attempting to diagnose whether the cause of female infertility is due to a
blockage of the fallopian tubes. The current diagnostic procedure of choice is
hysterosalpingography ("HSG"), a hospital-based procedure which 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-ray). This procedure is often painful
and is also known 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
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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 unique locking mechanism provides safety and ease of use
for passing 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 fallopian tube is observed, the GyneSys System
also accommodates the Uterine Cornual Access Catheter (UCAC) and guidewire, with
which the physician can often open the fallopian tube without the need for
laparoscopic surgery.
5. The following complementary products, which may be used alone or in
combination, are also produced and/or sold by Medical Systems.
Devices, Instruments & Procedure Kits. Medical Systems markets a line
of surgical instruments, procedure kits and devices that aid in or enable a
physician to apply various technologies to an array of medical/surgical
requirements in the field of gastroenterology, gynecology and reproductive
health care. These products come in a variety of disposable or reusable
configurations, allowing the caregiver's institution to select the most suitable
option. Products include ZUMI(TM) uterine manipulator/injectors, ZUI(TM) uterine
injectors, Z-Clamps(TM) and Z-Scissors(TM) for hysterectomy, cervical biopsy
forceps, Corson-Myoma(TM) grasping forceps, ZSI Miya Hook(TM), micro surgical
instruments, hysterectomy kits and other specialty instruments. Other products
include endoscopic illuminators, cameras, various types of endoscopes and an
automatic electronic insufflator. These products are used in laparoscopic
procedures in gastrointestinal, gynecological and general surgery.
Electrosurgery Units. These products use radio frequency electrical
energy to cut tissue and/or coagulate bleeding. Medical Systems produces a
variety of electrosurgical generators that are designed for use in various
medical and surgical procedures. These and associated supporting items are
marketed under the Company's Meditron Devices(TM) tradename and the tradenames
of OEM customers.
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 a system of independent
manufacturer's representative organizations, direct sales representatives, and
telemarketers 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 1996, international sales
were 14% of Medical Systems' sales, compared to 10% in fiscal 1995. The
Company's
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international sales are dependent on 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. 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. Additionally, a variety of products are manufactured by Medical
Systems for sale by third parties under various OEM agreements. In fiscal 1996,
OEM sales were 15% of Medical Systems' sales, compared to 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 that require special development, design, packaging and testing are
generally shipped within four to six months after an order is received.
Competition
The Company's principal competitors include Valleylab, a subsidiary of
Pfizer; Microvasive, a subsidiary of Boston Scientific; Imagyn; Gynecare;
Conceptus; Karl Storz; Richard Wolf; Circon-Cabot; Utah Medical; Leisegang;
Wallach; and CooperSurgical, Inc. 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 in production and marketing.
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.
Manufacturing
Medical Systems' manufacturing operations consist primarily of the
manufacture and assembly of equipment such as electrosurgery units, endoscopic
illuminators, endoscopes and electronic insufflators. 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. Additionally, the Company's facilities and documentation
procedures for the manufacture of medical devices are required to conform to the
Good Manufacturing Practices ("GMP"), enforced by the FDA through its facilities
inspection program. The Company's manufacturing facilities in Chatsworth,
California and Hackensack, New Jersey were most recently inspected by the FDA in
January 1996 for compliance with GMP. Upon completion of the inspections, the
FDA did not issue a Notice of Adverse Findings at either facility. Withdrawal of
GMP 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 by 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
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in commercial quantities at high quality levels and at commercially reasonable
prices could 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. Products that have been
under development include the Hydro-ThermAblator technology as 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 Hydro-ThermAblator technology
has not yet received FDA approval in the United States, it has been approved for
use and sold in several foreign countries. Additionally, the Company continues
development efforts to improve monopolar and bipolar electrosurgical generators
and the Company is developing new applications for surgical illuminator and
automatic insufflator product lines for general and laparoscopic surgery as well
as for outpatient and office applications. The Company also works with several
OEM customers for the adaptation of its proprietary technology to various
private label requirements.
Government Regulation
Medical Systems manufactures and sells medical devices. In the U.S.,
the FDA (among other government agencies) is responsible for regulating the
introduction of new medical devices and the manufacturing, labeling and
record-keeping for such devices. The FDA also reviews required reports of
adverse events involving such devices. The FDA has extensive enforcement
authority, including the power to seize products, restrain sales or prohibit the
operation of manufacturing facilities until the noted deficiencies are corrected
to the FDA's satisfaction. The FDA can also monitor recalls of products from
consumer locations.
Recent 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 now requires more 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.
26 of 28
<PAGE>
Employees
As of June 28, 1997, Medical Systems had 95 employees, including 13 in research,
development and engineering, 30 in marketing and sales, 40 in operations and 12
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 24 U.S. patents and 7
foreign patents with expiration dates ranging from May 2009 to February 2013.
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. Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
10.25 Eighth Amendment to Credit Agreement, dated July 31, 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.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 28, 1997.
27 of 28
<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 in the City of San
Francisco, County of San Francisco, State of California, on August 12, 1997.
BEI ELECTRONICS, INC.
By: /s/ Robert R. Corr
-----------------------------------
Robert R. Corr
Secretary, Treasurer and Controller
(Principal Accounting Officer)
28 of 28
BEI ELECTRONICS, INC.
EIGHTH AMENDMENT TO CREDIT AGREEMENT
This EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of
July 31, 1997 and entered into by and among BEI Electronics, Inc., a Delaware
corporation, BEI Sensors & Systems Company, Inc., a Delaware corporation,
Defense Systems Company, Inc., a Delaware corporation, and BEI Medical Systems
Company, Inc., a Delaware corporation (each a "Borrower" and collectively the
"Borrowers"), the financial institutions listed 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, as the Designated
Issuer, and is made with reference 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 and as amended by the
Seventh Amendment to Credit Agreement dated as of February 28, 1997 (as so
amended, the "Credit Agreement") by and among the Borrowers, the Lenders, the
Agent and the Designated Issuer. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, the Borrowers have requested an extension of the Maturity Date of
the Credit Agreement, and the Lenders, the Agent and the Designated Issuer have
so agreed;
WHEREAS, the Borrowers, the Lenders, the Agent and the Designated Issuer
desire to amend the Credit Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and agreements, provisions
and covenants herein contained, the parties hereto agree as follows:
1. Amendments to the Credit Agreement.
1.1. Amendments to Section 1.01: Defined Terms. The following definitions
in Section 1.01 of the Credit Agreement are hereby amended to read
in their entirety as follows:
"'Maturity Date': September 27, 1997, or, if earlier, the day
immediately prior to the distribution date of a tax free spin-off of
any of the Borrowers' Subsidiaries."
"'Revolving Commitment': The amount of $15,000,000 as such amount
may be reduced pursuant to Sections 2.1(c) and 2.1(d). As of the
Maturity Date, the Lenders' obligation to make Revolving Loans after
such date shall expire and the amount of the Revolving Commitment
shall be reduced to an amount equal to the Letter of Credit Usage as
of such date."
2. Conditions to Effectiveness. This Amendment shall be deemed effective as of
July 31, 1997 (the "Eighth Amendment Effective Date") upon the satisfaction
of all of the following conditions precedent:
<PAGE>
2.1. The Agent shall have received for each Lender and the Designated
Issuer counterparts hereof duly executed on behalf of the
Borrowers, the Agent and the Lenders (or notice of the approval of
this Amendment by the Lenders satisfactory to the Agent shall have
been received by the Agent).
2.2. The Agent shall have received a closing fee in the amount of US
$6,000.00.
2.3. All corporate and other proceedings taken or to be taken in
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.
3. Borrowers' Representations and Warranties. In order to induce the Lenders
to enter into this Amendment and to amend the Credit Agreement in the
manner provided herein, the Borrowers represent and warrant to each Lender
that the following statements are true, correct and complete:
3.1. Corporate Power and Authority. The Borrowers have all requisite
corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform their
respective obligations under, the Credit Agreement as amended by
this Amendment (the "Amended Agreement"). The Certificate of
Incorporation and Bylaws of each of the Borrowers have not been
amended since September 30, 1994, except for the bylaws of BEI
Electronics, Inc. which were amended as of June 30, 1997 (a copy of
the amended bylaws have been delivered to Agent).
3.2. Authorization of Agreements. The execution and delivery of this
Amendment and the performance of the Amended Agreement have been
duly authorized by all necessary corporate action on the part of
the Borrowers.
3.3. No Conflict. The execution and delivery by the Borrowers of this
Amendment and the performance by the Borrowers of the Amended
Agreement do not and will not contravene (i) any law or regulation
binding on or affecting any of the Borrowers or any of their
respective Subsidiaries, (ii) the Certificate of Incorporation or
Bylaws of any of the Borrowers, (iii) any order, judgement or
decree of any court of other agency of government binding on any of
the Borrowers or any of their respective Subsidiaries or (iv) any
contractual restriction binding on or affecting any of the
Borrowers or any of their respective Subsidiaries.
3.4. Governmental Consents. The execution and delivery by the Borrowers
of this Amendment and the performance by the Borrowers of the
Amended Agreement do not or will not require any authorization or
approval of, or other action by, or notice to or filing with any
government authority or regulatory body.
3.5. Binding Obligation. This Amendment and the Amended Agreement have
been duly executed and delivered by the Borrowers and are the
binding obligations of the Borrowers, enforceable against the
Borrowers in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws of
general application and equitable principles relating to or
affecting creditors' rights.
<PAGE>
3.6. Absence of Default. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by
this Amendment that would constitute an Event of Default or a
Potential Event of Default.
4. Miscellaneous.
4.1. Reference to and Effect on the Credit Agreement and the Other Loan
Documents.
4.1.1. On and after the Eighth Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein", or words of like import
referring to the Credit Agreement, and each reference in the
other Loan Documents to the "Credit Agreement",
"thereunder", "thereof", or words of like import referring
to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
4.1.2. Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
4.1.3. Without limiting the generality of the provisions of Section
10.01 of the Credit Agreement, nothing in this Amendment
shall by deemed to (a) constitute a waiver of compliance by
the Borrowers with respect to any term, provision or
condition of the Credit Agreement or any other instrument or
agreement referred to therein or (b) prejudice any right or
remedy that the Agent or any Lender may now have or may have
in the future under or in connection with the Credit
Agreement or any other instrument or agreement referred to
therein.
4.2. Fees and Expenses. The Borrowers acknowledge that all costs, fees
and expenses as described in Section 10.05 of the Credit Agreement
incurred by the Agent and its counsel with respect to this
Amendment and the documents and transactions contemplated hereby
shall be for the account of the Borrowers.
4.3. Headings. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be
given any substantive effect.
4.4. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
4.5. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall
constitute but one and the same instrument, signature pages may be
detached from multiple separate counterparts and attached to a
single counterpart so that all signature pages are physically
attached to the same document.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first written above.
BEI ELECTRONICS, INC.
By: \Robert R. Corr\
---------------------------------------
Title: Treasurer
------------------------------------
BEI SENSORS & SYSTEMS COMPANY, INC.
By: \Robert R. Corr\
---------------------------------------
Title: Treasurer
------------------------------------
DEFENCE SYSTEMS COMPANY, INC.
By: \Robert R. Corr\
---------------------------------------
Title: Treasurer
------------------------------------
BEI MEDICAL SYSTEMS COMPANY, INC.
By: \Robert R. Corr\
---------------------------------------
Title: Treasurer
------------------------------------
CIBC INC., Individually and as Agent
By: \Cyd Petre\
---------------------------------------
Title: Authorized Signatory
------------------------------------
CANADIAN IMPERIAL BANK OF COMMERCE, as the
Designated Issuer
By: \Cyd Petre\
---------------------------------------
Title: Authorized Signatory
------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> MAR-30-1997
<PERIOD-END> JUN-28-1997
<CASH> 972
<SECURITIES> 0
<RECEIVABLES> 2,094
<ALLOWANCES> 0
<INVENTORY> 3,023
<CURRENT-ASSETS> 55,672
<PP&E> 788
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,772
<CURRENT-LIABILITIES> 26,103
<BONDS> 62
0
0
<COMMON> 10
<OTHER-SE> 55,256
<TOTAL-LIABILITY-AND-EQUITY> 101,772
<SALES> 2,472
<TOTAL-REVENUES> 2,488
<CGS> 1,534
<TOTAL-COSTS> 1,534
<OTHER-EXPENSES> 2,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (1,754)
<INCOME-TAX> (617)
<INCOME-CONTINUING> (1,137)
<DISCONTINUED> 1,696
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
