<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
BEI MEDICAL SYSTEMS COMPANY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$11,656,600.00, which is the sum of: a cash payment of $11,206,600,
assumption of liabilities of up to $350,000 and forgiveness of
royalty payments due of up to $100,000
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(4) Proposed maximum aggregate value of transaction:
$11,656,600.00
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(5) Total fee paid:
$2,335.00
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(6) Amount Previously Paid:
-------------------------------------------------------------------------
(7) Form, Schedule or Registration Statement No.:
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(8) Filing Party:
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(9) Date Filed:
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Notes:
<PAGE>
COMPANY LOGO
October __, 1999
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the Stockholders
(the "Special Meeting") of BEI on Thursday, November 11, 1999 at the principal
executive offices of BEI located at 100 Hollister Road, Teterboro, New Jersey at
9:00 a.m. At our Special Meeting, you will be asked to vote upon the approval
and adoption of the Asset Purchase Agreement, dated as of October 1, 1999 (the
"Asset Purchase Agreement"), between CooperSurgical Acquisition Corp., a
Delaware corporation and BEI Medical Systems Company, Inc., a Delaware
corporation ("BEI"), providing for the sale of a substantial portion of the
assets of BEI pursuant to the terms and subject to the conditions of the Asset
Purchase Agreement (the "Asset Sale"). The foregoing proposal is described more
fully in the accompanying Proxy Statement.
After careful consideration, the BEI Board of Directors has unanimously
determined that the terms of the Asset Purchase Agreement and the Asset Sale are
fair to, and in the best interests of, BEI and its stockholders. Accordingly,
the BEI Board of Directors has unanimously approved the Asset Purchase Agreement
and unanimously recommends that the stockholders of BEI vote FOR approval and
adoption of the Asset Purchase Agreement and approval of the Asset Sale. The
approval and adoption of the Asset Purchase Agreement and approval of the Asset
Sale requires the affirmative vote of holders of at least a majority of the
outstanding shares of common stock of BEI as of the record date.
Stockholders are urged to review carefully the information contained in the
Proxy Statement attached hereto prior to deciding how to vote their shares at
the Special Meeting. Because of the significance of the Asset Sale, your
participation in the Special Meeting, in person or by proxy, is especially
important. We hope you will be able to attend the Special Meeting. Whether or
not you expect to attend the Special Meeting in person, please complete, sign
and promptly return the enclosed proxy card in the enclosed postage-prepaid
envelope to assure representation of your shares. You may revoke your proxy at
any time before it has been voted, and if you attend the Special Meeting you may
vote in person, even if you previously returned your proxy card.
Your prompt cooperation will be greatly appreciated. We look forward to
seeing you at the Special Meeting.
Sincerely,
[Charles Crocker Signature] [Richard W. Turner Signature]
Charles Crocker Richard W. Turner
Chairman of the Board President and Chief Executive Officer
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
100 Hollister Road
Teterboro, New Jersey 07608
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 11, 1999
To the Stockholders of BEI Medical Systems Company, Inc.:
Notice Is Hereby Given that a Special Meeting of Stockholders of BEI
Medical Systems Company, Inc., a Delaware corporation (the "Company" or "BEI"),
will be held on November 11, 1999 at 9:00 a.m. local time, at the Company's
facility located at 100 Hollister Road, Teterboro, New Jersey, for the following
purposes:
1. To approve the sale of a substantial portion of the assets of the Company
to CooperSurgical Acquisition Corp., a Delaware corporation ("CSAC"),
pursuant to an Asset Purchase Agreement, dated as of October 1, 1999, by
and between the Company and CSAC (the "Asset Purchase Agreement") (the
"Asset Sale Proposal").
2. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
The foregoing items of business are more completely described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on October 15, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at this Special Meeting of Stockholders and at any adjournment or
postponement thereof.
By Order of the Board of Directors
Thomas W. Fry
Corporate Secretary
Teterboro, New Jersey
October ___, 1999
All Stockholders are cordially invited to attend the meeting in person. Whether
or not you expect to attend the meeting, please complete, date, sign and return
the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting.
Please note, however, that attendance at the meeting will not by itself revoke a
proxy. Furthermore, if your shares are held of record by a broker, bank or
other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
100 Hollister Road
Teterboro, New Jersey 07608
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
November 11, 1999
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of BEI Medical Systems Company, Inc., a Delaware corporation (the
"Company" or "BEI"), for use at the Special Meeting of Stockholders to be held
on November 11, 1999, at 9:00 a.m. local time (the "Special Meeting"), or at any
adjournment or postponement thereof, to approve the sale (the "Asset Sale") of a
substantial portion of the assets of BEI to CooperSurgical Acquisition Corp., a
Delaware corporation ("CSAC"), pursuant to an Asset Purchase Agreement, dated as
of October 1, 1999, by and between BEI and CSAC (the "Asset Purchase Agreement")
(the "Asset Sale Proposal"). The Special Meeting will be held at BEI's facility
located at 100 Hollister Road, Teterboro, New Jersey. BEI intends to mail this
proxy statement and accompanying proxy card on or about October ___, 1999, to
all stockholders entitled to vote at the Special Meeting.
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of the Company's common stock (the
"Common Stock") beneficially owned by others to forward to such beneficial
owners. The Company may reimburse persons representing beneficial owners of
Common Stock for their costs of forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of the Company. No additional compensation will be paid to
directors, officers or other regular employees for such services.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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FORWARD-LOOKING STATEMENTS................................................................. 1
WHERE YOU CAN FIND MORE INFORMATION........................................................ 1
SUMMARY.................................................................................... 2
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION.......................................... 8
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA................................................. 9
MARKET FOR THE COMPANY COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................... 11
COMPARATIVE PER SHARE DATA................................................................. 12
RISK FACTORS............................................................................... 13
Risks If The Asset Sale Is Not Consummated............................................... 13
Lack of Adequate Capital.............................................................. 13
Risks If The Asset Sale Is Consummated................................................... 13
Narrowed Focus of Company Business; Dependence Upon HTA Technology.................... 13
SPECIAL MEETING............................................................................ 14
Date, Time And Place..................................................................... 14
Matters To Be Considered At The Special Meeting.......................................... 14
Record Date And Voting Rights And Requirements........................................... 14
Voting Of Proxies........................................................................ 14
Revocation Of Proxies.................................................................... 15
Solicitation Of Proxies.................................................................. 15
Stockholder Proposals.................................................................... 15
THE ASSET SALE PROPOSAL.................................................................... 16
Background of the Asset Sale............................................................. 16
BEI's Reasons for the Asset Sale......................................................... 17
Recommendation of the BEI Board.......................................................... 19
Opinion of Financial Advisor to BEI...................................................... 19
Material Federal Income Tax Consequences................................................. 21
Accounting Treatment..................................................................... 22
Regulatory Matters....................................................................... 22
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
(continued)
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Page
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Rights of Appraisal...................................................................... 22
THE ASSET PURCHASE AGREEMENT............................................................... 22
Sale of Assets........................................................................... 22
Liabilities Assumed...................................................................... 22
Asset Sale Consideration; Purchase Price Adjustments..................................... 22
Use of Proceeds.......................................................................... 23
Representations and Warranties........................................................... 23
Conduct of BEI's Business Prior to the Asset Sale........................................ 24
Exclusivity.............................................................................. 24
Termination Fees......................................................................... 24
Conditions to the Asset Sale............................................................. 24
Termination.............................................................................. 26
Indemnification.......................................................................... 26
Post-Closing Covenants Related to Receivables............................................ 27
RELATED AGREEMENTS......................................................................... 28
Transition Agreement..................................................................... 28
BEI Noncompetition Agreement............................................................. 28
Turner Noncompetition Agreement.......................................................... 29
INTERESTS OF MANAGEMENT OR DIRECTORS IN THE ASSET SALE..................................... 29
BEI's BUSINESS............................................................................. 31
Industry Overview........................................................................ 31
BEI Business Strategy.................................................................... 32
Base Business............................................................................ 32
The HTA.................................................................................. 33
The HTA Solution......................................................................... 36
The HTA System........................................................................... 37
Results of Clinical Trials............................................................... 38
Sales and Marketing...................................................................... 39
Competition.............................................................................. 40
Manufacturing............................................................................ 40
</TABLE>
ii.
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
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Page
<S> <C>
Research and Development; Technology..................................................... 41
Licenses, Patents and Proprietary Technology............................................. 42
Government Regulation.................................................................... 43
Employees................................................................................ 45
BEI PROPERTIES............................................................................. 47
LEGAL PROCEEDINGS INVOLVING BEI............................................................ 47
SELECTED FINANCIAL DATA.................................................................... 48
BEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 49
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 49
Nine-months Ended July 3, 1999 and June 27, 1998......................................... 49
Fiscal years 1998, 1997 and 1996......................................................... 51
Revenue............................................................................... 51
Cost of Sales and Gross Profit........................................................ 51
Selling, General and Administrative Expenses.......................................... 51
Research, Development and Related Expenses............................................ 52
Interest Expense and Other Income..................................................... 52
Income Tax Benefit.................................................................... 52
Discontinued Operations............................................................... 53
Liquidity and Capital Resources.......................................................... 53
Year 2000 Compliance: Modification of Management Information Systems..................... 54
Recent Accounting Pronouncements......................................................... 55
Effects of Inflation..................................................................... 56
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK................................. 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 58
EXPERTS.................................................................................... 60
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS.......................................... 60
OTHER MATTERS.............................................................................. 60
</TABLE>
iii.
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
INDEX TO ANNEXES........................................................................... 61
Appendix A -- Asset Purchase Agreement
Appendix B -- Opinion of Ewing Monroe Bemiss & Co.
INDEX TO FINANCIAL STATEMENTS.............................................................. F-1
</TABLE>
iv.
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this proxy statement constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21B of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The reasons for the asset sale
discussed under the caption "The Asset Sale," statements about the expected
impact of the asset sale on the Company's business, financial performance and
condition, and statements about the accounting and tax treatment of the Company
related to the asset sale are forward-looking statements. Further, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements.
Without limiting the foregoing, the words "projects," "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company after the asset
sale to differ materially from those indicated by such forward-looking
statements, including factors related to the timely development and acceptance
and pricing of BEI's products and in particular its Hydro ThermAblator ("HTA")
products; whether BEI's new products now in U.S. or international clinical
trials prove to be safe and effective under applicable regulatory guidelines;
receipt of required United States Food and Drug Administration ("FDA")
approvals; the impact of competitive products and pricing; and general economic
conditions, such as the rate of employment, inflation, interest rates, and the
condition of the capital markets. This list of factors is not exclusive. The
Company undertakes no obligation to update any forward-looking statements.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and files annual, quarterly and special reports, proxy statements and other
information with the SEC. These reports and information may be read and copied
at the following SEC locations:
<TABLE>
<CAPTION>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
Copies of the reports and information filed by the Company may also be
obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street,
Room 1024, Washington, D.C. 20549, at prescribed rates. Further information on
the operation of the SEC's Public Reference Room may be obtained by calling the
SEC at 1-800-SEC-0330.
The SEC also maintains a world wide web site that contains reports, proxy
statements and other information about registrants, such as the Company, that
file electronically with the SEC. The address of that web site is
http://www.sec.gov.
1.
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that is important to you. To understand the
asset sale fully and for a more complete description of the legal terms of the
Asset Sale, you should read carefully this entire document and the Asset
Purchase Agreement attached hereto as Annex A. We have included page references
parenthetically to direct you to a more complete description of the topics
presented in this summary.
THE COMPANIES
BEI
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, New Jersey 07608
(201) 727-4900
BEI develops, manufactures and markets a broad array of advanced systems
and devices for minimally invasive diagnostic and therapeutic procedures in the
field of gynecology.
CSAC
CooperSurgical Acquisition Corp.
c/o The Cooper Companies, Inc.
6140 Stoneridge Mall Road, Suite 590
Pleasanton, California 94588
CSAC is a subsidiary of The Cooper Companies, Inc. ("Cooper"). Cooper,
through its principal subsidiaries, develops, manufactures and markets
healthcare products, including hard and soft daily, flexible and extended wear
contact lenses, and diagnostic products, surgical instruments and related
products.
THE SPECIAL MEETING
The Special Meeting will be held at the Company's facility located at 100
Hollister Road, Teterboro, New Jersey at 9:00 a.m. local time, on November 11,
1999. At the Special Meeting, the Company's stockholders will be asked to
consider and vote on a proposal to approve the Asset Sale and approve and adopt
the Asset Purchase Agreement. Only stockholders of record of Common Stock at
the close of business on October 15, 1999, will be entitled to notice of and to
vote at the Special Meeting. At the close of business on October 15, 1999, the
Company had outstanding and entitled to vote __________ shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one vote
for each share held on all matters to be voted upon at the Special Meeting.
THE ASSET SALE
Reasons for the Asset Sale (page ______)
The BEI Board of Directors (the "BEI Board") believes, among other things,
that:
. Although the assets to be sold represent a substantial portion of the
value of the Company, the proposed purchase price is approximately equal
to the entire market capitalization of the
2.
<PAGE>
Company both at the time of the initial offer by CooperSurgical, Inc.
("CSI") and at the time of the execution of the Asset Purchase
Agreement;
. The assets to be sold constitute a business of developing,
manufacturing, marketing and servicing a broad array of advanced systems
and devices for diagnostic and therapeutic procedures in the medical
fields of gynecology and gastroenterology (the "Base Business"). In
addition to the Base Business, the Company is developing a new
therapeutic system, the Hydro ThermAblator for treatment of excessive
uterine bleeding. The Company has been unable to secure additional
financial resources from traditional debt or equity markets on terms
acceptable to the Company to: (i) complete the clinical trials of the
HTA product as a result of the expansion of these trials mandated by the
FDA; (ii) when and if approved by the FDA, launch the HTA product into
the market; and (iii) continue to build the Base Business.
. The BEI Board now believes that the value of the Base Business can be
optimized only through a synergistic combination with a similar business
and the consequent leveraging of common systems of management, marketing
and distribution. In the event the Asset Sale is not consummated and the
Company is unable to secure additional financing, the Company's ability
to continue as a going concern may be impaired.
. The BEI Board believes that the Company's HTA technology has significant
commercial potential, but does not believe that the public capital
markets currently represent a realistic source of funding adequate to
complete the development and commercialization of the HTA. The BEI Board
believes that it can best enhance stockholder value by applying the
proceeds from the Asset Sale to the further development and promotion of
the HTA, including the development of an appropriate marketing channel.
These and other reasons for approving and recommending the Asset Sale, as
well as negative factors in considering the Asset Sale, are discussed further on
pages _____ through ____ of this document.
The Sale of Assets (page ________)
CSAC will purchase substantially all of the assets of the Base Business.
After the sale, BEI will remain a public company and will continue to operate
its business in order to complete the development and commercialization of its
new HTA product.
Risk Factors (page ______)
There are certain risks that exist if the Asset Sale is not consummated,
including the impact it would have on BEI's ability to raise sufficient capital
to meet BEI's liquidity requirements. The consummation of the Asset Sale also
involves certain risks and uncertainties, including risks relating to the
ability of BEI to achieve its business goals with respect to the approval,
marketing and sale of its HTA products.
Consideration to be received by BEI (page ________)
Total Consideration. If the Asset Sale is consummated, BEI will receive total
consideration consisting of the following:
3.
<PAGE>
. $11,206,600 for the sale of the assets, subject to adjustment;
. up to $350,000 of specified liabilities being assumed by CSAC (the
"Assumed Liabilities");
. the assumption by CSAC of certain contracts of BEI (the "Assumed
Contracts"); and
. the forgiveness by CSI of royalty payments that may be due to it in the
future from BEI in an amount of up to $100,000.
Cash Proceeds Paid at Closing and Adjustments. At the closing of the Asset Sale
(the "Closing"), BEI will receive total consideration of up to $11,206,600 in
cash (the "Cash Proceeds"), subject to:
. a dollar-for-dollar downward adjustment if the inventory and net
receivables of BEI on the Closing Date, as reflected in a balance sheet
prepared by BEI after the Closing, are in the aggregate less than
$3,600,000;
. a dollar-for-dollar upward adjustment if the inventory and net
receivables of BEI on the Closing Date, as reflected in a balance sheet
prepared by BEI after the Closing, are in the aggregate greater than
$3,750,000;
. a downward adjustment based on a complex valuation matrix which is
dependent upon both (i) BEI's sales for the nine month period ended
October 2, 1999, on an annualized basis, and (ii) the sales mix of the
Base Business during the same nine month period;
. a dollar-for-dollar upward adjustment to the extent the amount of the
liabilities being assumed by Cooper is less than $350,000; and
. a downward adjustment if certain customers indicate that they will not
continue after the Closing to purchase products that are included in the
product lines being sold in the Asset Sale based upon the sales to these
customers as included in the sales valuation matrix mentioned above.
Obligations of BEI. In connection with the Asset Sale, BEI has agreed to
provide certain transition services to CSAC pursuant to a transition agreement.
Under the transition agreement, for three months following the Closing (and at
CSAC's option, for up to an additional three months), BEI will operate on behalf
of CSAC certain aspects of the Base Business. The transition agreement is more
fully described below. See "The Asset Sale Proposal - Related Agreements -
Transition Agreement." Under the transition agreement, the Company is obligated
to do the following:
. pay approximately $210,000 in connection with severance payments,
bonuses and other costs associated with the transition services to be
provided by BEI to CSAC; and
. provide the first $245,000 of products and services to CSAC without cost
for transition services.
Use of Proceeds (page ______________)
The Cash Proceeds will be utilized by BEI (i) to pay certain of BEI's
current operating liabilities, (ii) as working capital to finance completion of
the FDA Phase III clinical trials and initiate commercialization of the HTA
product, (iii) to repay the outstanding amount owed under the credit
4.
<PAGE>
facility with Transamerica Business Credit Corporation and (iv) to pay expenses
associated with the Asset Sale. BEI's stockholders are not expected to receive
any distribution from the proceeds of the Asset Sale.
Recommendation of the Board of Directors of BEI (page ____________)
THE BEI BOARD HAS APPROVED THE ASSET SALE AND THE ASSET PURCHASE AGREEMENT
AND HAS DETERMINED THAT THE ASSET SALE AND THE ASSET PURCHASE AGREEMENT ARE FAIR
TO, AND IN THE BEST INTERESTS OF, BEI AND THE BEI STOCKHOLDERS. ACCORDINGLY,
THE BEI BOARD HAS UNANIMOUSLY RECOMMENDED THAT THE BEI STOCKHOLDERS VOTE FOR
APPROVAL OF THE ASSET SALE PROPOSAL.
Opinion of Financial Advisor to BEI (page _______________)
Ewing Monroe Bemiss & Co. delivered its opinion dated September 23, 1999
(the "Opinion") to the BEI Board that, as of the date of such opinion, the
consideration to be paid to BEI by CSAC was fair from a financial point of view
to the BEI stockholders. The full text of the Opinion, which sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations on the scope of review undertaken in connection with the Opinion, is
attached hereto as Annex B. The Opinion does not constitute a recommendation as
to how any holder of BEI Common Stock should vote at the Special Meeting. BEI
stockholders are urged to, and should, read the Opinion in its entirety.
Conditions to the Asset Sale (page _____)
BEI and CSAC will complete the Asset Sale only if several conditions are
satisfied, including the following:
. the representations and warranties of BEI and CSAC contained in the
Asset Purchase Agreement shall be true and correct in all respects as of
the closing date, subject to certain exceptions;
. BEI and CSAC shall have performed or complied in all material respects
with all agreements and covenants required by the Asset Purchase
Agreement unless the failure to perform will not result in a material
adverse effect;
. there shall not have been commenced and be pending against BEI or CSAC
any material legal proceeding that is reasonably likely to have the
effect of preventing, delaying, making illegal or seeking material
damages in connection with the Asset Sale;
. no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
constraint or prohibition preventing the consummation of the Asset Sale
shall be in effect and no action taken or entered into or law enacted or
enforced which makes the consummation of the Asset Sale illegal;
. the Asset Purchase Agreement and the Asset Sale shall have been approved
by the requisite vote of the stockholders of BEI;
. required consents shall have been obtained for contracts being assumed
by CSAC;
. Transamerica Business Credit Corporation has released its encumbrances
on the assets being sold;
5.
<PAGE>
. a noncompetition agreement and a transition agreement between CSAC and
BEI are entered into and a noncompetition agreement between Richard W.
Turner, the President and Chief Executive Officer of BEI ("Turner"), and
CSAC is entered into (such agreements are collectively referred to
herein as the "Related Agreements"); and
. certain royalty obligations of BEI to Cooper shall have been terminated.
Termination of the Asset Purchase Agreement (page ___)
Either BEI or CSAC can terminate the Asset Purchase Agreement if:
. the Closing has not taken place on or before November 30, 1999;
. a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a ruling
prohibiting the Asset Sale;
. the holders of a majority of the BEI Common Stock shall not have
approved the Asset Sale and the Asset Purchase Agreement;
. either BEI or CSAC has willfully breached the Asset Purchase Agreement
and such breach shall not have been cured within 10 business days of
receipt of notice thereof; or
. if the matters contained in an amendment to BEI's disclosure schedule to
the Asset Purchase Agreement constitute a material adverse effect as
described in the Asset Purchase Agreement.
BEI and CSAC may also mutually agree to terminate the Asset Purchase
Agreement at any time prior to the Closing.
Indemnification
BEI is required to indemnify Purchasers Indemnified Persons, which include
CSAC and its affiliates, for losses suffered as a result of, among other things,
inaccuracies and breaches of any representation or warranty made by BEI under
the Asset Purchase Agreement and the Related Agreements, failure by BEI to
perform any agreement or covenant under the Asset Purchase Agreement and the
Related Agreements, losses from liabilities CSAC is not assuming or assets it is
not acquiring, and certain tax losses. The indemnification obligations of BEI
survive for 15 months following the Closing Date with respect to breaches of
certain of its representations and warranties, and throughout the applicable
statutes of limitations with respect to certain other representations and
warranties and certain other indemnity obligations. The aggregate
indemnification obligations of BEI shall not exceed the purchase price for the
Asset Sale. Purchaser Indemnified Persons may only seek indemnification from
BEI when the aggregate amount of losses suffered by CSAC reaches $125,000;
thereafter, those persons will be able to recover on the full amount of losses,
including losses less than $125,000.
The Related Agreements (pages ______________)
Pursuant to the Asset Purchase Agreement, as a condition to the
consummation of the Asset Sale, CSAC and BEI shall enter into a transition
agreement under which BEI will provide certain services to CSAC in connection
with the Base Business and the assets being sold in the Asset Sale. CSAC and
BEI shall also enter into a noncompetition agreement whereby BEI shall agree to
be subject to certain noncompetition covenants for a period of five years. Also
as a condition to the consummation of the
6.
<PAGE>
Asset Sale, Richard W. Turner, the President and Chief Executive Officer of BEI,
and CSAC shall enter into a noncompetition agreement whereby Mr. Turner will be
subject to certain noncompetition covenants for a period of three years.
Regulatory Matters
BEI is not aware of any regulatory or governmental approvals required to
consummate the Asset Sale.
Material Federal Income Tax Consequences (page ___)
The Company will recognize a gain on the Asset Sale, but anticipates that,
for Federal and New Jersey state tax purposes, it will have net operating losses
("NOLs") in amounts sufficient to offset such taxable gain. However, the
Company may be required to pay alternative minimum tax and sales tax as a result
of the Asset Sale. The Asset Sale will not have a tax consequence for
stockholders of the Company.
Accounting Treatment (page ___)
The transaction will be accounted for as a sale of assets in accordance
with generally accepted accounting principles. The Company will recognize a
gain for book purposes based upon the excess net proceeds to be received under
the Asset Purchase Agreement over the book value of the net assets sold.
Appraisal Rights
Under Delaware law, BEI stockholders do not have dissenters' rights of
appraisal as a result of the Asset Sale.
7.
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following information to aid you in your analysis of
the financial aspects of the Asset Sale. The summary selected consolidated
financial data for each of the five years in the period ended October 3, 1998
have been derived from the audited Consolidated Financial Statements of BEI,
which are included herein. The summary selected consolidated financial data as
of and for the periods ended June 27, 1998 and July 3, 1999 have been derived
from unaudited Condensed Consolidated Financial Statements of BEI which are
included herein, and which, in the opinion of BEI management, have been prepared
on a basis substantially consistent with the audited financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the information for the period. The results of such interim
periods are not necessarily indicative of the results for the full fiscal year.
The data presented below should be read in conjunction with BEI's Audited
Consolidated Financial Statements for each of the fiscal years in the five year
period ended October 3, 1998 and the Unaudited Condensed Consolidated Financial
Statements as of and for the periods ended June 27, 1998 and July 3, 1999, which
are included herein.
BEI Summary Selected Historical Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
October 3, September 27, September 28, September 30, October 1, July 3, June 27,
1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $9,651 $10,005 $9,357 $8,847 $8,678 $6,512 $7,246
Loss from continuing operations.. (4,971) (4,348) (2,682) (2,350) (2,458) (4,891) (3,324)
Loss from continuing operations
per common share, basic and
diluted......................... ($0.68) ($0.64) ($0.40) ($0.36) ($0.38) ($0.65) ($0.45)
Cash dividends per common share.. -- $0.08 $0.08 $0.08 $0.08 -- --
Weighted average shares 7,354 6,817 6,737 6,617 6,541 7,497 7,316
outstanding.....................
Balance Sheet Data:
Cash and cash equivalents........ $3,504 $9,271 $9,128 $9,023 $1,103 $2,429
Working capital (1).............. 8,284 11,085 38,102 35,923 40,189 5,075
Total assets (1)................. 17,388 22,584 115,011 113,738 112,432 12,922
Long-term debt (excluding
current portion)................ -- 22 212 392 560 1,000
Stockholders' equity (1)......... 14,440 17,660 55,972 53,319 57,829 9,710
</TABLE>
___________________
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for 1996, 1995 and 1994.
8.
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma financial data is based on the
historical financial statements of BEI. The pro forma statement of operations
data has been prepared assuming the Asset Sale was completed as of the beginning
of the periods indicated (October 3, 1998 and July 3, 1999). The pro forma
financial data and notes thereto should be read in conjunction with the
historical financial statements of BEI included herein. The unaudited pro forma
financial data is based upon certain assumptions and estimates of management
which are subject to change. The pro forma financial data is presented for
illustrative purposes only and is not necessarily indicative of any future
results of operations or the results that might have occurred if the Asset Sale
had actually occurred on the indicated dates.
(in thousands, except per share amounts)
Statement of Operations Data
<TABLE>
<CAPTION>
Nine Months Ended July 3, 1999 Year Ended October 3, 1998
------------------------------ -------------------------
Pro Forma Pro Forma Pro Forma
Historical Adjustments as Adjusted Historical Adjustments
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $6,512 $6,252 (1) $ 260 $ 9,651 $9,385 (1)
Cost of sales................................ 3,878 3,129 (1) 749 5,638 4,617 (1)
------- ------ ------- ------- -----
Gross Profit................................. 2,634 3,123 (489) 4,013 4,768
Selling, general and administrative expenses. 5,414 2,585 (1) 2,829 8,688 4,534 (1)
Research, development and related expenses... 2,485 -- 2,485 2,866 --
------- ------ -------- ------- ------
7,899 2,585 5,314 11,554 4,534
Income (loss) from operations................ (5,265) 538 (5,803) (7,541) 234
Interest income.............................. 88 -- 88 312 --
Interest expense............................. (29) (29) (2) -- (21) --
------- ------- ------- ------ ---------
Income (loss) before income taxes............ (5,206) 509 (5,715) (7,250) 234
Income tax benefit........................... (315) -- (315) (2,279) --
------- ------- -------
Net income (loss)............................ $(4,891) $ 509 $(5,400) $(4,971) $ 234
======== ======== ======== ======== =========
Income (loss) per common share:
Income (loss) per common share, basic and
diluted.................................... $(0.65) $ 0.07 $ (0.72) $ (0.68) $ 0.03
======= ======== ======== ======= =======
Weighted average shares outstanding.......... 7,497 7,497 7,497 7,354 7,354
======= ======== ======== ======= =======
<CAPTION>
Year Ended October 3, 1998
----------------------------------------------
Pro Forma
as Adjusted
-----------
<S> <C>
Revenues...................................... $ 266
Cost of sales................................. 1,021
-------
Gross Profit.................................. (755)
Selling, general and administrative expenses.. 4,154
Research, development and related expenses.... 2,866
-------
7,020
Income (loss) from operations................. (7,775)
Interest income............................... 312
Interest expense.............................. (21)
--------
Income (loss) before income taxes............. (7,484)
Income tax benefit............................ (2,279)
-------
Net income (loss)............................. $(5,205)
=======
Income (loss) per common share:
Income (loss) per common share, basic and
diluted..................................... $ (0.71)
=======
Weighted average shares outstanding........... 7,354
=======
</TABLE>
9.
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of July 3, 1999
------------------------------------------------------------------
Pro Forma Other Pro Forma
Historical Adjustments (3) Adjustments as Adjusted
---------- -------------- ----------- -----------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents................................. $ 2,429 $ -- $ 9,681 (4) $12,110
Trade receivables, net.................................... 1,675 (1,514) 161
Inventories............................................... 2,559 (2,211) 348
Refundable income taxes................................... 423 423
Other current assets...................................... 201 201
------- -------
Total current assets...................................... 7,287 (3,725) 9,681 13,243
Property, plant and equipment, net........................ 611 (92) -- 519
Tradenames, patents and other, net........................ 1,656 (1,420) 236
Goodwill, net............................................. 3,173 (3,173) --
Other assets.............................................. 195 (58) (6) 137
------- ----------- -------
Total assets.............................................. $12,922 ($8,410) $ 9,623 $14,135
======= ======== =========== =======
Liabilities and stockholder's equity
Current liabilities:
Trade accounts payable.................................... $ 664 $ (200) $ -- $ 464
Accrued expenses and other liabilities.................... 1,548 (150) 1,155 (5) 2,553
------- -------- ----------- -------
Total current liabilities................................. 2,212 (350) 1,155 3,017
Long-term debt, less current portion...................... 1,000 (1,000) (4) --
Stockholders' equity...................................... 9,710 (8,060) 9,468 11,118
------- -------- ----------- -------
Total liabilities and stockholders' equity................ $12,922 ($8,410) $ 9,623 $14,135
======= ======== =========== =======
</TABLE>
The unaudited pro forma financial information as of and for the nine month
period ended July 3, 1999 and for the year ending October 3, 1998, give effect
to the following pro forma adjustments:
(1) To give retroactive effect to the decrease in revenues and operating
expenses estimated by the Company to be attributable to substantially all
operating activities of the Company, other than that which is required to
support the on going development of its HTA product line.
(2) To reflect a reduction in interest expense incurred related to the
$1,000,000 Transamerica Business Credit Corporation credit facility,
assuming the application of proceeds from the Asset Sale to repay the
outstanding indebtedness under this facility.
(3) Represents assets to be sold to and liabilities assumed by Cooper.
(4) Represents estimated net proceeds from the sale of $10,681,000, less
repayment of amounts due under the $1,000,000 Transamerica Business Credit
Corporation credit facility.
(5) Includes estimated profession fees to be paid by BEI in connection with the
Asset Sale and the estimated cost of severance payments, bonuses and other
costs associated with the transition services agreement.
(6) Represents the write-off of the fair value of stock purchase warrants
issued to Transamerica Business Credit Corporation in connection with the
$1,000,000 credit facility.
10.
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company'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 "BEIV". After October 7, 1997, the Company's common stock began trading
under the Nasdaq symbol "BMED."
On September 27, 1997, having transferred all of its non-medical device
businesses to BEI Technologies, Inc. ("Technologies") in exchange for all of
Technologies' outstanding common stock, BEI Electronics, Inc. ("Electronics")
distributed that stock to its stockholders in a tax-free spin-off of
Technologies (the "Distribution"). 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, Electronics merged with its subsidiary, BEI Medical Systems
Company, Inc., and changed its name to BEI Medical Systems Company, Inc.
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.
<TABLE>
<CAPTION>
1999 Fiscal Year Cash Dividend
(ended 10/02/99) High Low Declared
<S> <C> <C> <C>
Fourth Quarter $3.50 $1.12 $0.00
Third Quarter $1.56 $0.94 $0.00
Second Quarter $2.19 $1.44 $0.00
First Quarter $2.06 $1.50 $0.00
</TABLE>
<TABLE>
<CAPTION>
Cash Dividend
1998 Fiscal Year High Low Declared
(ended 10/03/98)
<S> <C> <C> <C>
Fourth Quarter $4.25 $1.06 $0.00
Third Quarter $5.50 $3.13 $0.00
Second Quarter $4.88 $3.69 $0.00
First Quarter $4.38 $3.50 $0.00
(from October 9, 1997)
</TABLE>
On October 1, 1999, the last full trading day prior to the date of the
public announcement of the asset sale, BEI's common stock closed at $1.44 per
share. On October 15, 1999, the closing bid price for BEI's common stock was
$_____ per share. As of October 15, 1999, BEI had _______ stockholders of
record.
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. The Board of Directors has not declared and the
Company did not pay dividends in fiscal 1999 or fiscal 1998.
11.
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data and
unaudited pro forma per share data to reflect the consummation of the Asset
Sale. The pro forma data is not necessarily indicative of actual or future
operating results or of the financial position that would have occurred or will
occur upon consummation of the Asset Sale The data presented below should be
read in conjunction with the unaudited pro forma financial data set forth under
"Summary Unaudited Pro Forma Financial Data" and the separate historical
consolidated financial statements which are included herein.
Historical and pro forma book value per share is calculated by dividing
stockholders' equity at the end of the period by the number of common shares
outstanding at the end of the period.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
------------ ----------------------------------------------------------------------
July 3, October 3, September 28, September 27, September 30, October 1,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Historical:
Loss from continuing operations per common
share, basic and diluted.................. ($0.65) ($0.68) ($0.64) ($0.40) ($0.36) ($0.38)
Cash dividends per common share.............. -- -- 0.08 0.08 0.08 0.08
Book value per share......................... 1.30 1.96 2.59 8.31 8.06 8.84
Pro Forma:
Loss from continuing operations per common
share, basic and diluted.................. (0.72) (0.71)
Cash dividends per common share.............. -- --
Book value per share......................... 1.48
</TABLE>
12.
<PAGE>
RISK FACTORS
Risks If The Asset Sale Is Not Consummated
Lack of Adequate Capital
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 expand and develop a direct sales force in the United States, 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.
The Company unsuccessfully sought additional financing. The Company believes its
existing cash balances and credit facility together with operating revenues and
tax refunds will provide funding to meet the Company's liquidity requirements
only to the end of 1999. There is no assurance that additional financing will be
available on terms favorable to the Company, or at all. In the event the Asset
Sale is not consummated and the Company is unable to secure additional
financing, the Company's ability to continue as a going concern may be impaired.
Any additional equity financing may be dilutive to stockholders and additional
debt financing, if available, may involve restrictive covenants and/or also be
dilutive to stockholders.
Risks If The Asset Sale Is Consummated
Narrowed Focus of Company Business; Dependence Upon HTA Technology
The consummation of the Asset Sale, if approved, will narrow the focus of the
Company to its HTA technology. Following completion of the Asset Sale, the
profitability of the Company will depend on the Company's ability to generate
meaningful revenues from the HTA product at acceptable margins. The Base
Business represented approximately 96% of the Company's revenues for the nine
month period ended July 3, 1999. HTA revenues were only $260,000 for that
period. There can be no assurance that the Company will be successful in
increasing revenue from the HTA product at acceptable margins, or if it does,
that it will become profitable. While the Company believes that its HTA
technology is suited to present market conditions, there are several factors
that may offset the eventual success of this technology. These include the risk
that: (i) the Company does not obtain FDA approval to market the HTA product in
the United States, (ii) the demand for the HTA product may fail to materialize;
(iii) BEI will not be able to produce the HTA in commercial quantities at
reasonable costs; (iv) BEI will not be able to develop and maintain the
proprietary aspects of its technology and that the Company's issued patents, or
any future patents will not offer any significant degree of protection against
competitive products; (v) the Company may not be able to develop products that
gain market acceptance.
13.
<PAGE>
SPECIAL MEETING
Date, Time And Place
This document is being furnished to the holders of BEI Common Stock in
connection with the solicitation of proxies by the BEI Board for use at the
Special Meeting to be held at the Company's facility located at 100 Hollister
Road, Teterboro, New Jersey on November 11, 1999, starting at 9:00 a.m., local
time.
Matters To Be Considered At The Special Meeting
At the Special Meeting, BEI stockholders will be asked to consider and vote
on the Asset Sale Proposal and such other matters as may be properly brought
before the Special Meeting or any adjournment or postponement thereof.
Record Date And Voting Rights And Requirements
Record Date. The BEI Board has fixed October 15, 1999, as the record date
for the Special Meeting. Accordingly, only BEI stockholders of record at the
close of business on the record date will be entitled to notice of, and to vote
at, the Special Meeting. At the close of business on the record date, there were
__________ shares of BEI Common Stock entitled to vote at the Special Meeting,
held by approximately __________ holders of record.
Voting Rights. Each share of BEI Common Stock outstanding on the record
date entitles its holder to one vote on the Asset Sale Proposal.
Quorum Requirement. To constitute a quorum at the Special Meeting, the
majority of the total number of shares entitled to vote on the record date must
be present, represented either in person or by proxy.
Vote Required. Under Delaware law, the affirmative vote of a majority of
the shares of BEI Common Stock issued and outstanding on the record date is
required to approve the Asset Sale Proposal. As of the record date, there were
__________ shares of BEI Common Stock outstanding, of which _______ shares
(approximately __% of the outstanding shares) of BEI Common Stock were held by
directors in their capacity as stockholders of BEI. Although the directors have
not entered into any voting agreements, they currently intend to vote their
shares in favor of the Asset Sale Proposal.
Abstentions and Broker Nonvotes. All votes will be tabulated by the
inspector of election appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes. Abstentions
will be counted toward the tabulation of votes cast on proposals presented to
the stockholders. An abstention from voting or a broker non-vote will have the
practical effect of voting against approval of the Asset Sale since a vote to
abstain or a broker non-vote represents one less vote cast in favor of such
approval.
Voting Of Proxies
BEI stockholders may use the proxy that came with this document if they are
unable to attend the Special Meeting in person or wish to have their shares
voted by proxy even if they do attend the Special Meeting. All shares
represented by valid proxies received pursuant to this solicitation, and not
revoked before they are exercised, will be voted in the manner that they
specify. IF A BEI STOCKHOLDER DOES NOT SPECIFY HOW HIS OR HER PROXY IS TO BE
VOTED, IT WILL BE VOTED FOR APPROVAL OF THE ASSET SALE PROPOSAL. There are no
matters other than voting on the Asset Sale Proposal that are scheduled to be
brought before the Special Meeting. If any other business is
14.
<PAGE>
properly brought before the Special Meeting, including a motion to adjourn or
postpone the Special Meeting for the purpose of soliciting additional proxies in
favor of the Asset Sale Proposal or to permit the dissemination of information
regarding material developments relating to the Asset Sale or otherwise relevant
to the Special Meeting, one or more of the persons named in the proxy will vote
the shares represented by proxies as determined in their discretion. If the
Special Meeting is adjourned for any reason prior to the approval and adoption
of the Asset Purchase Agreement and the Asset Sale, stockholders may, at any
meeting, consider and vote on the approval and adoption of the Asset Purchase
Agreement.
Revocation Of Proxies
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 100
Hollister Road, Teterboro, New Jersey 07608, a written notice of revocation or a
duly executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person. Please note, however, that attendance at the
meeting will not by itself revoke a proxy. Furthermore, if the shares are held
of record by a broker, bank or other nominee and the stockholder wishes to vote
at the meeting, the stockholder must obtain from the record holder a proxy
issued in the stockholder's name.
Solicitation Of Proxies
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by our directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
Stockholder Proposals
Pursuant to Rule 14a-8 of the Securities and Exchange Commission, to
include a stockholder proposal in the Company's proxy statement and form of
proxy for a meeting of stockholders other than a regularly scheduled annual
meeting, the stockholder proposal must be submitted at a reasonable time before
the Company begins to print and mail its proxy materials. Stockholders are also
advised to review the Company's By-laws, which contain additional requirements
with respect to advance notice of stockholder proposals.
15.
<PAGE>
THE ASSET SALE PROPOSAL
This section of the Proxy Statement describes certain aspects of the Asset
Sale. The description does not purport to be complete and is qualified by
reference to the Asset Purchase Agreement, which is attached as Annex A hereto
and is incorporated by reference herein.
Background of the Asset Sale
The terms and conditions of the Asset Purchase Agreement and the Asset Sale
are the result of arm's length negotiations between the representatives of
Cooper and the representatives of BEI. Set forth below is a summary of the
background of these negotiations.
During the second half of fiscal year 1998, the clinical trial protocols
mandated by the FDA for the Company's HTA product were changed in a manner that
substantially increased the time required for these tests and the associated
costs. Management believed that the HTA technology had significant commercial
potential that could only be realized if the Company could attract sufficient
capital to complete the development and marketing of the HTA.
Accordingly, management accelerated a search for additional sources of
capital, particularly a minority equity or convertible debt investment, that
would enable the Company to (i) complete the clinical trials of the HTA system
in full compliance with the FDA revised protocol and (ii) to launch the product
into the U.S. market when and if approved by the FDA.
Throughout the January 1999 to March 1999 timeframe, BEI management further
explored the possibility of a minority equity or convertible debt investment
with a number of investment bankers, brokers, advisors, and private investor
groups. By April 1999, management concluded it would not be possible to raise
financing sufficient to meet its objectives from traditional sources of debt and
equity capital and on terms acceptable to the Company.
In April, confidential discussions were initiated with another small
public company regarding a proposed transaction that would have provided the
necessary financing. As a part of these discussions, Mr. Samuel M. Bemiss, III,
Managing Director of Ewing Monroe Bemiss & Co. ("EMB&Co), was engaged in June
1999 to assist the Company with due diligence studies and to render a fairness
opinion on the proposed transaction.
During June and July, Mr. Bemiss assisted the Company by initiating
discussions with the Management of several companies regarding possible
transactions with the Company, including senior management of Cooper. Following
further study, the Company's management concluded that the transaction that had
been proposed in June should not be completed and these discussions were
terminated.
On August 2, 1999, Cooper sent to Richard W. Turner, the President and the
Chief Executive Officer of BEI ("Turner"), a draft nondisclosure and
nonsolicitation letter and a Preliminary Non-Binding Summary of Indicative
Business Terms (the "Proposal Summary") which outlined a proposal to acquire the
Base Business for $11,250,000 in cash, plus the assumption of up to $350,000 in
BEI Liabilities and the cancellation of a BEI royalty obligation to Cooper
related to the HTA.
On August 4, at a special teleconference meeting of the BEI Board, the BEI
Board and management discussed certain aspects of the proposed Asset Sale,
including (i) the likely time schedule for due diligence, negotiation,
documentation and closing of the proposed transaction; (ii) regulatory
requirements and stockholder notice and vote requirements; (iii) the terms of a
"no shop" agreement proposed by Cooper, and (iv) the tax consequences of the
proposed transaction. The BEI Board then
16.
<PAGE>
authorized Mr. Bemiss and management to proceed to complete negotiations and
document the Asset Sale and authorized the management to enter into a "no shop"
agreement with Cooper. On August 4, 1999, BEI entered into a "no shop" agreement
with Cooper, which provided, among other things, that for 45 days from August 4,
1999, BEI would not, subject to certain fiduciary obligations of the BEI Board,
solicit, initiate, or engage in discussions or negotiations with any third party
regarding a possible acquisition transaction with BEI.
Between August 5, 1999 and September 22, 1999, there were frequent meetings
and discussions between Company management, Cooper management, Mr. Bemiss and
lawyers and advisors to the various parties regarding the Asset Purchase
Agreement and the Related Agreements.
On September 23, 1999 at a special teleconference meeting of the BEI Board,
management and Cooley Goodward LLP, counsel to BEI, reported on the terms of the
draft Asset Purchase Agreement and the Related Agreements, including a specific
discussion on the purchase price adjustments set forth in the Asset Purchase
Agreement. Mr. Bemiss reviewed EMB&Co.'s financial analyses with respect to the
proposed Asset Sale and delivered an oral opinion (subsequently confirmed in
writing) that the consideration to be paid pursuant to the Asset Purchase
Agreement was fair to the BEI stockholders from a financial point of view. After
consideration of these presentations, the BEI Board unanimously approved the
Asset Purchase Agreement and the Asset Sale, concluding that the Asset Sale was
fair to, and in the best interests of, the BEI stockholders. The BEI Board also
authorized management to conclude negotiation of and execute the Asset Purchase
Agreement.
From September 24 through October 1, the parties and their legal advisors
held daily telephone conferences to resolve remaining minor issues. Of
particular importance to the Company was achieving an agreement with Cooper that
would allow the Company to continue to maximize the value of its Hydro
ThermAblation technology through its own activities or any of a wide range of
possible contractual or other arrangements with any third party.
The Board of Directors of CSAC approved the Asset Sale and the Asset
Purchase Agreement on September 29, 1999 by unanimous written consent.
The definitive Asset Purchase Agreement was executed on October 1, 1999.
BEI's Reasons for the Asset Sale
The BEI Board believes that the Asset Sale is fair to, and in the best interests
of, BEI and its stockholders and the BEI Board has unanimously approved the
Asset Purchase Agreement and the Asset Sale. The BEI Board believes that the
Asset Sale will be beneficial to BEI and its stockholders for several reasons,
including the following:
. Although the assets to be sold represent a substantial portion of the
value of the Company, the proposed purchase price was approximately
equal to the entire market capitalization of the Company both at the
time of Cooper's initial offer and at the time of the signing of the
Asset Purchase Agreement;
. The Company has been unable to secure a minority equity or convertible
debt financing from traditional debt or equity markets on terms
acceptable to the Company to: (i) complete the expanded clinical
trials of the HTA system; and (ii) aggressively launch the HTA product
into the market and (iii) continue to build the Base Business.
17.
<PAGE>
. The BEI Board believes that the Company's HTA technology has
significant commercial potential, but does not believe that the public
capital markets currently represent a realistic source of funding for
BEI adequate to complete the development and commercialization of the
HTA. The BEI Board believes that it can best enhance stockholder value
by applying the proceeds from the Asset Sale to the further
development and promotion of the HTA.
In addition to the factors set forth above, in the course of its
deliberations concerning the Asset Sale, the BEI Board consulted with BEI's
legal and financial advisors as well as BEI's management team, and reviewed a
number of other factors relevant to the Asset Sale, including:
. reports from management and legal and financial advisors on specific
terms of the draft Asset Purchase Agreement and ancillary agreements;
. the need for BEI to secure the financing required to complete
development of the HTA and to launch the HTA in the U.S. market;
. the alternatives available to BEI in light of the consideration
proposed to be paid to BEI pursuant to the Asset Purchase Agreement;
. the belief that the terms of the Asset Purchase Agreement are
reasonable;
. the expected tax and accounting treatment of the Asset Sale; and
. financial presentations by EMB&Co. at the BEI Board meeting of
September 23, 1999 and EMB&Co.'s opinion to the effect that, as of
that date and based upon and subject to certain matters stated in such
opinion, the consideration proposed to be paid pursuant to the Asset
Purchase Agreement was fair from a financial point of view to the BEI
stockholders.
The BEI Board also considered a number of potentially negative factors in
its deliberations concerning the Asset Sale, including
. the possibility that the public announcement of the Asset Sale might
adversely affect BEI's relationships with certain distributors and
customers for HTA;
. the possibility of management disruption associated with the Asset
Sale and the risk that certain key technical and management personnel
of BEI might not continue with BEI;
. the risk of market confusion and potential delay or reduction in
orders for products and services of the Base Business; and
. the history of litigation between the Company and Cooper and the risk
that history might interfere with the consummation of the Asset
Sale.
The BEI Board believed that certain of these risks were unlikely to occur
or unlikely to have a material impact on BEI, while others could be avoided or
mitigated by BEI or Cooper, and that overall, the risks associated with the
Asset Sale were outweighed by the potential benefits of the Asset Sale.
The foregoing discussion of information and factors considered by the BEI
Board is not intended to be all-inclusive. In view of the wide variety of
factors considered by the BEI Board, the BEI Board did
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not find it practicable to quantify or otherwise assign relative weight to the
specific factors considered. However, after taking into account all of the
factors set forth above, the BEI Board unanimously agreed that the Asset
Purchase Agreement and the consummation of the Asset Sale were fair to, and in
the best interests of, BEI and its stockholders and that BEI should proceed with
the Asset Sale.
Recommendation of the BEI Board
FOR THE REASONS DISCUSSED ABOVE, THE BEI BOARD HAS APPROVED THE ASSET SALE
AND THE ASSET PURCHASE AGREEMENT AND HAS DETERMINED THAT THE ASSET SALE AND THE
ASSET PURCHASE AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, BEI AND THE
BEI STOCKHOLDERS. ACCORDINGLY, THE BEI BOARD HAS UNANIMOUSLY RECOMMENDED THAT
THE BEI STOCKHOLDERS VOTE FOR APPROVAL OF THE ASSET SALE PROPOSAL.
Opinion of Financial Advisor to BEI
Opinion of Ewing Monroe Bemiss & Co.
BEI retained EMB&Co. to act as its financial advisor in connection with an
analysis of strategic alternatives, including a possible sale of assets to CSAC.
The BEI Board selected EMB&Co. to act as BEI's financial advisor based on
EMB&Co.'s qualifications, expertise and reputation as well as EMB&Co.'s
investment banking relationship and familiarity with BEI.
At the meeting of the BEI Board on September 23, 1999, EMB&Co. rendered its
oral opinion, subsequently confirmed in writing (the "Opinion"), that, as of
such date, based upon and subject to the various considerations set forth in the
Opinion, the consideration to be paid pursuant to the Asset Purchase Agreement
was fair from a financial point of view to the BEI stockholders.
The full text of the Opinion, which sets forth, among other things,
assumptions made, procedures followed, matters considered, and limitations on
the scope of the review undertaken by EMB&Co. in rendering the Opinion, is
attached as Annex B to this proxy statement. BEI stockholders are urged to read
the Opinion carefully and in its entirety. EMB&Co. did not recommend to BEI that
any specific consideration constituted the appropriate purchase price for the
Asset Sale. The Opinion addresses only the fairness of the consideration
proposed to be paid pursuant to the Asset Purchase Agreement from a financial
point of view to the BEI stockholders as of the date of the Opinion, and does
not constitute a recommendation to any stockholder as to how such stockholder
should vote at the BEI stockholders meeting. The summary of the Opinion set
forth in this proxy statement is qualified in its entirety by reference to the
full text of the Opinion.
In rendering the Opinion, EMB&Co., among other things, (i) analyzed certain
publicly available financial statements and other information of BEI; (ii)
analyzed certain internal financial statements and other financial and operating
data concerning BEI prepared by the management of BEI; (iii) analyzed certain
financial projections relating to BEI prepared by the management of BEI; (iv)
discussed the past and current operations and financial condition and the
prospects of BEI with senior executives of BEI; (v) reviewed the reported prices
and trading activity for BEI Common Stock; (vi) compared the financial
performance of BEI and the prices and trading activity of BEI Common Stock with
those of certain other publicly-traded companies which EMB&Co. deemed to be
comparable and relevant; (vii) reviewed the financial terms, to the extent
publicly available, of certain business combination and asset purchase
transactions which EMB&Co. deemed to be relevant; (viii) participated in
discussions and negotiations among representatives of BEI and Cooper and their
respective legal advisors; (ix) reviewed the Asset
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Purchase Agreement and related schedules and the Related Agreements; and (x)
performed such other analyses and considered such other factors as EMB&Co.
deemed appropriate.
In rendering the Opinion, EMB&Co. assumed and relied upon, without
independent verification, the accuracy and completeness of the information that
it reviewed for the purposes of the Opinion. EMB&Co. assumed that the financial
projections provided by BEI were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of BEI. With respect to the information furnished by BEI, and with
respect to the information discussed with the management of BEI regarding its
views of future operations, EMB&Co. assumed that such information was reasonably
prepared and reflected the best currently available estimates and judgments of
BEI's management as to the competitive, operating and regulatory environments
and related financial performance of BEI for the relevant periods. EMB&Co. did
not make any independent valuation or appraisal of the assets, liabilities or
technology of BEI, and it was not furnished with any such appraisals. EMB&Co.
assumed that the Asset Sale would be accounted for in accordance with generally
accepted accounting principles and would be consummated in accordance with the
terms set forth in the Asset Purchase Agreement. The Opinion is necessarily
based on economic, market and other conditions as in effect on, and the
information made available to EMB&Co. as of, the date of the Opinion.
The following is a summary of the analysis performed by EMB&Co. in its
preparation of the Opinion, and reviewed with the BEI Board at a meeting held on
September 23, 1999. This analysis was provided to the Board of Directors of BEI
for background information only and was one of the many factors considered by
EMB&Co. in rendering its Opinion. No conclusions can be independently drawn from
any individual part of the analysis described below.
Peer Group Comparison: EMB&Co. examined certain available financial and
market information of nine selected publicly traded companies in the medical
device sector of the health care industry which EMB&Co. deemed comparable to at
least some portion of BEI's business for purposes of EMB&Co.'s financial
analysis. To the extent that supporting financial data were available, such
financial and market information included, among other things, market valuation
as a multiple of book value and earnings and aggregate market valuation as a
multiple of revenues; earnings before interest, taxes, depreciation and
amortization (EBITDA); earnings before interest and taxes (EBIT); and assets.
The multiples are based on a compilation of publicly available information and
earnings forecasts by securities research analysts.
Selected Precedent Transactions: EMB&Co. reviewed 29 stock acquisition
transactions and 15 asset acquisition transactions completed since 1996
involving companies engaged in the manufacture and sale of medical devices, none
of which were deemed directly comparable to the Asset Sale. EMB&Co. compared
certain of the financial statistics for these transactions with those for the
Asset Sale. This analysis showed a mean sales multiple paid by the acquiring
company of 0.85. Consideration in the Asset Sale, prior to any purchase price
adjustments, represents a multiple of 1.43 times projected sales for fiscal year
1999.
Pro Forma Analysis of the Asset Sale: EMB&Co. reviewed BEI management's
analysis of certain pro forma effects of the Asset Sale on the earnings and
capitalization of BEI. Such analysis was based on management's estimates BEI's
performance for the fiscal year 1999, and internal projections for the fiscal
year 2000. Based on such analysis, EMB&Co. observed that, before taking into
account any one-time restructuring charges, the Asset Sale would result in an
increase in the Company's loss per share of $0.07 per share for the nine months
ended July 3, 1999.
EMB&Co. performed a variety of financial and comparative analyses for the
purpose of rendering the Opinion. While the foregoing summary describes all
material analyses and factors
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reviewed by EMB&Co. with the BEI Board, it does not purport to be a complete
description of the presentations by EMB&Co. to the BEI Board or the analyses
performed by EMB&Co. in arriving at the Opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. EMB&Co. believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create a misleading view of the processes underlying the Opinion. In addition,
EMB&Co. may have given various analyses more or less weight than other analyses,
and may have deemed various assumptions more or less probable than other
assumptions, so that the range of valuations resulting from any particular
analysis described above should not be taken to be EMB&Co.'s view of the actual
value of the Base Business of BEI. In performing its analyses, EMB&Co. made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
BEI. The analyses performed by EMB&Co. are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of businesses or assets do not purport to be appraisals or necessarily to
reflect the prices at which businesses or assets may actually be sold. The
analyses performed were prepared solely as part of EMB&Co.'s analysis of the
fairness of the consideration to be paid pursuant to the Asset Purchase
Agreement, from a financial point of view, to the BEI stockholders and were
provided to the BEI Board in connection with the delivery of the Opinion.
BEI has agreed to pay EMB&Co. a fee for its financial advisory services in
connection with the Asset Sale, including, among other things, rendering the
Opinion and making the presentation referred to above. Pursuant to a letter
agreement between BEI and EMB&Co. dated June 9, 1999, BEI has agreed to pay
EMB&Co., in the event the Asset Sale is consummated, a transaction fee of
$100,000 plus 5% of aggregate Consideration received in excess of $10,000,000.
In addition, BEI has agreed to reimburse EMB&Co. for its reasonable out-of-
pocket expenses incurred in connection with its engagement, and to indemnify
EMB&Co. and certain related persons against certain liabilities and expenses
arising out of or in conjunction with its rendering of services under its
engagement, including certain liabilities under the federal securities laws.
Material Federal Income Tax Consequences
The following summary of certain tax consequences of the Asset Sale by the
Company is not intended to be tax advice to any person, nor is it binding upon
the Internal Revenue Service. In addition, no information is provided herein
with respect to the tax consequences of the Asset Sale under applicable foreign
or local laws.
The Company will recognize a gain on the Asset Sale equal to the amount
realized by the Company from the sale less the Company's adjusted basis in the
net assets sold. The amount realized will equal the sum of money received by the
Company in consideration for the assets plus the amount of the liabilities
assumed by CSAC. The Company anticipates that its available NOL will offset the
taxable gain attributable to the Asset Sale. The Company will also be subject to
an alternative minimum tax. The gain on the Asset Sale will be included with the
Company's alternative minimum taxable income or loss for the tax year ending
September 30, 2000 and may result in alternative minimum tax liability. In
addition, the Company and CSAC will each pay one-half of the sales tax on the
Asset Sale, which in the aggregate is expected to be less than $7,500.
Consummation of the transaction will not result in any federal income tax
consequences to the BEI stockholders.
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Accounting Treatment
The Asset Sale will be accounted for as a sale of assets, in accordance
with generally accepted accounting principles. The Company will recognize a
gain, for book purposes based upon the excess net proceeds to be received under
the Asset Purchase Agreement over the book value of the net assets sold.
Regulatory Matters
BEI and CSAC are aware of no governmental or regulatory approvals required
for consummation of the asset sale.
Rights of Appraisal
Under Delaware corporate law, BEI stockholders are not entitled to
dissenters' rights of appraisal with respect to the Asset Sale.
THE ASSET PURCHASE AGREEMENT
Sale of Assets
BEI and its subsidiaries are engaged in the business of developing,
manufacturing, marketing and servicing a broad array of advanced systems and
devices for diagnostic and therapeutic procedures in the medical fields of
gynecology and gastroenterology. BEI also produces a variety of products for
use in various medical and surgical procedures that are sold by it under
original equipment manufacture labeling arrangements. BEI is currently focusing
its development and commercialization efforts on its new HTA product and related
accessories for treatment of excessive uterine bleeding through endometrial
ablation. Pursuant to the Asset Purchase Agreement, BEI will sell its Base
Business. The Base Business accounted for approximately 96% of BEI's revenues
for the nine month period ended July 3, 1999.
Liabilities Assumed
CSAC will assume the liabilities and obligations of BEI accruing from and
after the Closing Date (as defined below) for continued performance under
certain contracts related to the Base Business and certain purchase orders and
other sales orders that were incurred in the ordinary course of the business of
the Base Business (the "Assumed Contracts"). The "Closing Date" is the date no
later than two days after the date that all closing conditions set forth in the
Asset Purchase Agreement have been satisfied or waived or on such other date to
which the parties mutually agree. In addition, CSAC will be assuming certain
identified liabilities of BEI related to the Base Business, including trade
accounts payable, warranty obligations, accrued sales return obligations and
accrued royalty obligations, in such order of priority (the "Assumed
Liabilities"). The Assumed Liabilities (excluding certain liabilities related
to the performance of the Assumed Contracts) shall not exceed $350,000.
Asset Sale Consideration; Purchase Price Adjustments
The cash portion of the purchase price to be paid on the Closing Date will
be $11,206,600 minus the amount by which BEI estimates the inventory and net
receivables being transferred in the Asset Sale will be, in the aggregate, less
than $3,600,000 (the "Estimated Shortfall") and the Sales Shortfall amount. The
purchase price is subject to several adjustments:
. Inventory and Net Receivables Statements. The purchase price is
subject to an upward or downward adjustment based on the amount of
BEI's net receivables and inventory transferred
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to CSAC on the Closing Date. BEI will perform a physical inventory as
of the Closing Date and will prepare a written statement setting forth
the value of the inventory as of the Closing Date. BEI will also
prepare a written statement which sets forth the amount as of the
Closing of BEI's net receivables and the Assumed Liabilities. BEI will
deliver such statements (the "Statements") to CSAC for review, and if
the Statements are acceptable to CSAC, the amount of the purchase
price will be adjusted downward dollar-for-dollar if the value of the
inventory and net receivables as reflected on such Statements is less
than $3,600,000 in the aggregate. The purchase price will be adjusted
upward dollar-for-dollar if the value of the inventory and net
receivables as reflected on such Statements is more than $3,750,000.
In either case, the adjustment will take into account and be adjusted
by the amount of the Estimated Shortfall paid at the time of the
Closing.
If CSAC objects to the Statements, the parties will attempt in good
faith to resolve the dispute, and if they are unable to resolve the
dispute, the matter will be submitted to binding resolution by an
independent accountant.
. Assumed Liabilities. If the Statements reflect that the Assumed
Liabilities are less than $350,000, CSAC will pay to BEI the amount by
which the Assumed Liabilities are less than $350,000.
. Sales Shortfall. The purchase price may be adjusted downward based on
a complex valuation matrix. The adjustment will depend on both (a)
BEI's actual sales for the nine month period ended October 2, 1999,
annualized, and (b) the sales mix of the Base Business during the same
nine month period. The methodology for calculating whether a sales
shortfall exists is set forth on Schedule 1.8(a) of the Asset Purchase
Agreement attached hereto as Annex A.
Use of Proceeds (page ______________)
The Cash Proceeds will be utilized by BEI (i) to pay certain of BEI's
current operating liabilities; (ii) as working capital to finance completion of
the FDA Phase III clinical trials and initiate commercialization of the HTA
product; (iii) to repay the outstanding amount owed under the credit facility
with Transamerica Business Credit Corporation and (iv) to pay expenses
associated with the Asset Sale. BEI's stockholders are not expected to receive
any distribution from the proceeds of the Asset Sale.
Representations and Warranties
The Asset Purchase Agreement contains various representations and
warranties made by BEI and certain representations and warranties made by CSAC.
The representations and warranties made by BEI include those regarding, among
other things, (i) the due organization, qualification, authority, and power of
BEI and each subsidiary and similar corporate matters; (ii) the authorization,
execution, delivery, and enforceability of the Asset Purchase Agreement and the
Related Agreements of BEI and each subsidiary; (iii) the lack of conflicts with
charters or bylaws or violations of agreements or laws applicable to BEI and
each subsidiary; (iv) compliance of BEI and each subsidiary with laws and FDA
regulations, certain tax matters, certain environmental matters and other
matters related to BEI's business; (v) BEI's title to assets being purchased by
Cooper, and the lack of encumbrances upon and the condition and sufficiency of
such assets; (vi) certain contracts related to the Base Business to which BEI or
any subsidiary is a party, (vii) the absence of litigation; (viii) insurance
matters; (ix) BEI's accounts receivable; (x) the absence of certain changes and
events; (xi) no undisclosed liabilities and (xii) the intellectual property
being transferred. The representations by CSAC include those regarding, among
other things, (i) the due organization and qualification of CSAC, (ii) the
authorization, execution, delivery, and enforceability of the Asset Purchase
Agreement, and the Related Agreements and (iii) other matters related to CSAC's
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ability to enter into the Asset Purchase Agreement and the Related Agreements
and to consummate the transactions contemplated thereby.
Conduct of BEI's Business Prior to the Asset Sale
During the period from the date of the Asset Purchase Agreement until the
Closing Date, BEI has agreed to, among other things, (i) conduct its operations
as they relate to the Base Business in the ordinary course of business
consistent with BEI's past practices; (ii) maintain and preserve the assets,
relationships, practices and policies related to the Business; (iii) obtain the
written consent of Cooper prior to changing BEI's pricing or commission policies
or sales incentive programs; (iv) not sell or dispose of or permit any
encumbrances to be placed on any intellectual property related to the Base
Business; (v) file necessary notices and obtain certain consents of third
parties; (vi) notify CSAC of events that may cause the representations and
warranties made by BEI to be materially untrue or inaccurate and (vii) not take
any other action or enter into any transaction that might reasonably be expected
to cause or constitute a breach of any representation or warranty made by BEI in
the Asset Purchase Agreement.
In addition, BEI has agreed to give CSAC reasonable access to, among other
things, BEI's books, records, and work papers related to the Base Business, and
access to BEI's representatives and, with the consent of BEI, BEI's vendors. In
certain situations, CSAC is also permitted under the Asset Purchase Agreement to
contact certain customers of BEI. Any such contacts with BEI's customers or
vendors are to be made jointly with BEI.
Exclusivity
Subject to the BEI Board's good faith determination about its fiduciary
duties (after consultation with legal counsel), BEI cannot, and is required to
use its best efforts to cause its directors, officers and agents to not, enter
into an agreement with another party to consummate Another Transaction (as
defined below), negotiate regarding entering into Another Transaction or provide
non-public information to another party in connection with entering into Another
Transaction. In addition, BEI shall disclose to CSAC the terms of Another
Transaction that BEI negotiates or discusses as permitted by the Asset Purchase
Agreement. Another Transaction is defined as (i) the sale of the Base Business
or any of the assets being purchased pursuant to the Asset Purchase Agreement
(the "Purchased Assets") other than in the ordinary course, or (ii) the sale of
more than 50% of the voting securities of BEI.
Termination Fees
If BEI terminates the Asset Purchase Agreement because the BEI Board has
determined (after consultation with legal counsel) that its fiduciary duties
require it to consider and authorize Another Transaction, then BEI must pay CSAC
$300,000 upon such termination.
Conditions to the Asset Sale
The respective obligations of BEI and CSAC to effect the Asset Sale are
subject to the satisfaction or waiver in writing on or prior to the Closing Date
of certain conditions. CSAC's obligations under the Asset Purchase Agreement are
conditioned upon satisfaction or waiver on or prior to the Closing Date of,
among other things, the following:
(i) each representation and warranty of BEI contained in the Asset Purchase
Agreement and any Related Document shall have been true and correct in all
respects as of the Closing Date, except (a) for changes contemplated by the
Asset Purchase Agreement, (b) for those representations and
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warranties that address matters only as of a particular date (which shall have
been true and correct as of such date) and (c) where the failure or failures of
such representations and warranties to be so true and correct, individually or
in the aggregate, has not resulted in a Material Adverse Effect (as such term is
defined in the Asset Purchase Agreement);
(ii) the obligations of BEI contained in the Asset Purchase Agreement and
any Related Document required to be performed or complied with in all material
respects on or before the Closing Date shall have been performed or complied
with in all respects on or before the Closing Date, except where any failure to
perform has not had and is not reasonably expected to have a Material Adverse
Effect (as such term is defined in the Asset Purchase Agreement);
(iii) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by the Asset Purchase Agreement shall be in effect; and there shall
not be any action taken, or any law enacted, entered or enforced which makes the
consummation of the transactions contemplated by the Asset Purchase Agreement
illegal;
(iv) no legal proceeding presenting a material challenge to, preventing,
delaying, making illegal or seeking material damages in connection with the
Asset Sale exists;
(v) the Asset Purchase Agreement and the consummation of the
transactions contemplated thereby shall have been duly approved and adopted by
the requisite affirmative vote of the stockholders of BEI and by BEI's Board of
Directors;
(vi) all duly executed consents, certificates and approvals required for
or in connection with the Assumed Contracts (as identified in the Asset Purchase
Agreement) shall have been received;
(vii) BEI's lender, Transamerica Business Credit Corporation, shall have
consented to the transactions contemplated by the Asset Purchase Agreement and
released its encumbrances and liens on the Purchased Assets; and
(viii) the execution and delivery of the Transition Agreement, by BEI, the
Noncompetition Agreements by BEI and Turner, and the Bill of Sale, Assignment
and Assumption Agreement by BEI and, as required, by each subsidiary.
BEI's obligations under the Asset Purchase Agreement are conditioned upon
satisfaction or waiver at or prior to the Closing Date of, among other things,
the following:
(i) each representation and warranty of CSAC contained in the Asset
Purchase Agreement and any Related Document shall be true and correct in all
respects as of the Closing Date, except (a) for changes contemplated by the
Asset Purchase Agreement, (b) for those representations and warranties that
address matters only as of a particular date (which shall have been true and
correct as of such date) and (c) where the failure or failures of such
representations and warranties to be so true and correct, individually or in the
aggregate, has not resulted in a Material Adverse Effect on the business or
financial condition of the consolidated group of CSAC, taken as a whole;
(ii) the obligations of CSAC contained in the Asset Purchase Agreement
and any Related Document shall have been performed in all material respects on
or before the Closing Date;
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(iii) the Asset Purchase Agreement and the consummation of the
transactions contemplated thereby shall have been duly approved and adopted by
the requisite affirmative vote of the stockholders of BEI and by BEI's Board of
Directors;
(iv) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by the Asset Purchase Agreement shall be in effect; and there shall
not be any action taken, or any law enacted, entered or enforced which makes the
consummation of the transactions contemplated by the Asset Purchase Agreement
illegal;
(v) no legal proceeding presenting a material challenge to, or that is
reasonably likely to have the effect of preventing, delaying, making illegal or
seeking material damages in connection with the Asset Sale exists;
(vi) the execution and delivery by CSAC of the Transition Agreement, a
Noncompetition Agreement to be entered into by BEI and a Noncompetition
Agreement to be entered into by Richard Turner, and Bill of Sale, Assignment and
Assumption Agreement; and
(vii) the HTA-related royalty obligations of BEI to Cooper under a prior
agreement between the parties are terminated.
Termination
Either BEI or CSAC can terminate the Asset Purchase Agreement if:
. the Closing has not taken place on or before November 30, 1999;
. a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a ruling
prohibiting the Asset Sale;
. the holders of a majority of the BEI Common Stock shall not have
approved the Asset Sale;
. either BEI or CSAC has willfully breached the Asset Purchase Agreement
and such breach shall not have been cured within 10 business days; or
. if the matters contained in an amendment to BEI's disclosure schedule
to the Asset Purchase Agreement constitute a material adverse effect
as described in the Asset Purchase Agreement.
BEI and CSAC may also mutually agree to terminate the Asset Purchase
Agreement at any time prior to the Closing.
Indemnification
Subject to certain limitations, pursuant to the terms of the Asset Purchase
Agreement, each of the parties has agreed to indemnify the other party and its
affiliates and their respective officers, directors, successors and assigns
against any and all losses, claims, shortages, damages, expenses (including
reasonable attorneys' and accountants' and other professionals' fees and
litigation expenses), assessments, taxes (including interest or penalties
thereon) and insurance premium increases.
BEI has agreed to indemnify CSAC and its related parties, as mentioned
above, in connection with (i) any inaccuracy or breach of any representation or
warranty of BEI or its subsidiaries contained in
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the Asset Purchase Agreement or any Related Document; (ii) any breach of any
agreement or covenant of BEI or its subsidiaries contained in the Asset Purchase
Agreement or any Related Document; (iii) the Excluded Assets and the Excluded
Liabilities (as those terms are defined in the Asset Purchase Agreement); (iv)
all liabilities which arise out of events involving BEI or its subsidiaries
prior to the Closing Date; (v) non-compliance by BEI with any applicable "bulk
sales laws"; or (vi) any and all losses arising from or in connection with taxes
payable by BEI or any affiliate of BEI with respect to any period ending on or
prior to the Closing Date (or the portion ending on the Closing Date of any
period that includes but does not end on the Closing Date).
CSAC has agreed to indemnify BEI and its related parties, as mentioned
above, in connection with (i) any inaccuracy or breach of any representation or
warranty of CSAC contained in the Asset Purchase Agreement or any Related
Document; (ii) any breach of any agreement or covenant of Cooper contained in
the Asset Purchase Agreement or any Related Document; (iii) any losses arising
from CSAC's ownership and operation of the assets purchased by Cooper as
contemplated by the Asset Purchase Agreement from and after the Closing Date,
excluding any losses as a result of any transaction between CSAC and BEI after
the Closing Date not contemplated by the Asset Purchase Agreement; or (iv) the
Assumed Liabilities.
The indemnification obligation of BEI as it relates to any breach of a
representation or warranty by BEI in general survives for 15 months after the
Closing Date. BEI's indemnification obligation with respect to certain other
representations and warranties of BEI, including those relating to BEI's title
to the Purchased Assets, authority to enter into the Asset Purchase Agreement
and the Related Agreements, compliance with the FDA and other laws, sufficiency
of assets sold to CSAC and rights to intellectual property, survive for their
respective statutes of limitations. The indemnification obligation of BEI as it
relates to covenants and other agreements of BEI under the Asset Purchase
Agreement survives until terminated by the terms of such covenant or agreement.
The maximum amount that Purchaser Indemnified Persons can recover against
BEI for indemnification claims is the cash purchase price paid for the Purchased
Assets. In addition, Purchaser Indemnified Persons cannot recover against BEI
for any indemnification claims based upon breaches of representations or
warranties until the aggregate amount of indemnifiable losses exceeds $125,000;
once aggregate losses exceed $125,000, the total amount of indemnifiable losses
may be recovered, including the amount of losses less than $125,000. Further,
BEI's indemnification obligations with respect to a breach of a representation
and warranty relating to noncompliance with laws, including FDA and similar
international regulations is limited to payment of FDA consultants' fees, plus
fines and costs imposed by any governmental entity as a result of such breach.
In the event that such a breach causes a governmental order to be issued that
prevents CSAC from selling a product that is part of the Purchased Assets for
more than 90 days in any country, BEI must pay to CSAC that portion of the
purchase price attributable to the sales of such product by BEI in the country
in which such product is blocked from sale.
Indemnification under the Asset Purchase Agreement is CSAC's exclusive
remedy for any claims against BEI pursuant to the Asset Purchase Agreement or
any Related Document entered into thereunder, absent fraud or willful misconduct
on the part of BEI.
Post-Closing Covenants Related to Receivables
In the Asset Purchase Agreement, BEI (i) will guarantee to CSAC that the
accounts receivables included in the Asset Sale will be collectible in the
ordinary course of business and (ii) BEI shall, at the option of CSAC, pay to
CSAC an amount equal to the Net Receivables (as defined in the Asset Purchase
Agreement) to the extent such accounts receivable have not been collected by the
date of CSAC's written exercise of such option, which shall not be sooner than
the 180/th/ day following the Closing Date;
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provided, however, that BEI shall not be required to pay any amount to CSAC for
any accounts receivable for which the debtor has claimed in writing a right of
offset or other defense to payment based on any act or omission of CSAC
following the Closing Date.
RELATED AGREEMENTS
As a condition to the consummation of the Asset Sale, the parties are
required to enter into a Transition Agreement. Also as a condition to the
consummation of the Asset Sale, Turner and BEI are each required to enter into
Noncompetition Agreements with and for the benefit of CSAC. Forms of the
Transition Agreement and the Noncompetition Agreements are attached as exhibits
to the Asset Purchase Agreement included with this proxy statement as Annex A
and are incorporated herein by reference.
Transition Agreement
For three months following the Closing (and at CSAC's option, for up to an
additional three months), BEI will operate, on behalf of CSAC. Certain aspects
of the Base Business. BEI's activities will include, among other things,
engineering, manufacture of products pursuant to a mutually agreed upon plan,
purchase of materials, quality control, customer solicitation, invoicing and
service and accounts receivable collection. CSAC will reimburse BEI for BEI's
costs to perform the transition services, except that BEI will provide the first
$245,000 of products and services to CSAC without cost. BEI will pay
approximately $210,000 of retention bonuses and severance payments to induce
certain BEI employees to remain during the transition period.
CSAC will indemnify BEI against third party claims relating to the
Transition Agreement, except to the extent caused by BEI's breach, willful
misconduct or gross negligence. BEI will indemnify CSAC against third party
claims resulting from the gross negligence or willful misconduct of BEI or BEI's
wrongful failure to render the services or produce the products contemplated by
the Transition Agreement. BEI's total liability with respect to services
provided under the Transition Agreement will not exceed the total of all service
fees actually paid or due to BEI under the Transition Agreement plus $245,000.
BEI Noncompetition Agreement
For five years following the Closing Date, BEI will be prohibited from
engaging in a business that competes with any of BEI's products being sold to
CSAC. This prohibition is effectively world-wide. The HTA and HTA-related
products are expressly carved out from this prohibition.
If there is a change of control of or Joint Venture Arrangement involving
BEI, for a $250,000 payment to CSAC, an acquiror of BEI or other third party in
a Joint Venture Arrangement can narrow the noncompete covenants of the BEI
Noncompetition Agreement so that such party would be prohibited only from
"mimicking" and competing against five principal products CSAC is acquiring from
BEI. This option is available only for the first change of control or Joint
Venture Arrangement to occur. A "Joint Venture Arrangement" means an
arrangement between BEI and a third person to carry on a joint business activity
in the form of a joint venture, partnership or other contractual arrangement,
including a licensing, supply or distribution arrangement. A product is deemed
to "mimic" one of the five principal product if a bona fide credible argument
can be made that such product infringes a patent or patents which may at any
time have been issued for such principal product, even if such principal product
is not at any time protected by a patent.
BEI will also be precluded from (i) soliciting any employee of CSAC or any
other company in CSAC's Business Group (as defined in the BEI Noncompetition
Agreement) to leave the person's then
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current employment, (ii) hire any person within six months after that person
leaves the employ of CSAC or its Business Group, or (iii) interfere with the
relationship of CSAC and its Business Group with their customers, suppliers,
consultants and licensees, although competition and non-exclusive business
arrangements with such persons not otherwise prohibited under the Noncompetition
Agreement is permissible.
Finally, subject to certain exceptions, BEI will agree not to use or
disclose Confidential Information of the Base Business (as defined in the BEI
Noncompetition Agreement) for five years following the Closing.
Turner Noncompetition Agreement
Pursuant to the terms of the Turner Noncompetition Agreement attached as an
exhibit to Annex A, for three years following the Closing date, Richard Turner
will be prohibited from engaging in a business that competes with certain BEI
products (the "Competitive Products") being sold to CSAC (the "Competitive
Activity"). This prohibition is effectively world-wide. The HTA and HTA-related
products are expressly carved out from this prohibition.
Mr. Turner is not prohibited from serving as an employee of or consultant
to any entity whose sales to gynecological, infertility and family practice
medical markets (the "Proscribed Markets") do not exceed 25% of the total sales
of such entity, provided that none of Mr. Turner's activities as an employee of
or consultant to such entity would relate directly or indirectly to any
Competitive Activity. In addition, Mr. Turner may serve as an employee of or
consultant to any entity selling products or services to the Proscribed Markets
if such products do not include the Competitive Products or functionally
equivalent products.
If BEI exercises the option described above in "BEI Noncompetition
Agreement" (the "Option") to narrow the noncompete covenants for an acquiror of
BEI or other third party engaging in a Joint Venture Arrangement with BEI (the
"Third Party"), then Mr. Turner, at the time the Option is exercised and
provided he has been continually employed or retained as a consultant of BEI or
of such Third Party, may, solely as an employee or consultant to BEI or such
Third Party, engage in any activity that does not "mimic" or compete against the
five principal products CSAC is acquiring from BEI.
Mr. Turner will also be precluded from (i) soliciting any employee of CSAC
or any other company in CSAC's Business Group (as defined in the Turner
Noncompetition Agreement) to leave the person's then current employment, (ii)
hire any person within six months after that person leaves the employ of CSAC or
its Business Group, or (iii) interfere with the relationship of CSAC and its
Business Group with their customers, suppliers, consultants and licensees,
although competition and non-exclusive business arrangements with such persons
not otherwise prohibited under the Turner Noncompetition Agreement are
permissible.
Finally, subject to certain exceptions, Mr. Turner will agree not to use or
disclose Confidential Information of the Base Business (as defined in the Turner
Noncompetition Agreement) for three years following the Closing.
INTERESTS OF MANAGEMENT OR DIRECTORS IN THE ASSET SALE
After signing the Asset Purchase Agreement, the Company entered into a
three-year Employment Agreement with Richard W. Turner, conditioned on the
closing of the Asset Sale. The Employment Agreement provides consideration to
Mr. Turner in return for Mr. Turner entering into the Turner Noncompetition
Agreement, which, as described above, subjects Mr. Turner to certain noncompete
covenants for a period of three years. The Employment Agreement obligates the
Company to continue
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to pay Mr. Turner his full salary and benefits, through the end of the three-
year term of the Turner Noncompetition Agreement, in the event he leaves the
Company during that time, less any salary and benefits he receives from new
employment. The Employment Agreement also provides that the Company will pay Mr.
Turner a cash bonus of $80,000 upon the closing of the Asset Sale, in
satisfaction of certain bonus obligations to him under a January 1999 employment
contract.
None of the other executive officers or directors of the Company has been
offered an employment contract with CSAC, has any interest or ownership in
Cooper, or in any other way stands to personally benefit as a result of the
consummation of the Asset Sale. The BEI Board may in its discretion award
bonuses to other executive officers in connection with consummation of the Asset
Sale.
Voting
Stockholders are requested in this proposal to approve and adopt the Asset
Purchase Agreement and to approve the Asset Sale pursuant to the Asset Purchase
Agreement. The affirmative vote of the holders of a majority of the shares
issued and outstanding as of the record date will be required to approve the
Asset Sale and approve and adopt the Asset Purchase Agreement. Abstentions will
be counted toward the tabulation of votes cast on proposals presented to the
stockholders. An abstention from voting or a broker non-vote will have the
practical effect of voting against approval of the Asset Sale Proposal since a
vote to abstain or a broker non-vote represents one less vote cast in favor of
such approval.
THE BEI BOARD RECOMMENDS
A VOTE "FOR" THE APPROVAL OF THE ASSET SALE PROPOSAL
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BEI's BUSINESS
BEI currently develops, manufactures and markets a broad array of advanced
systems and devices for minimally invasive diagnostic and therapeutic procedures
in the field of gynecology. BEI has an existing Base Business of systems and
devices it markets to gynecologists in over 5,000 hospitals, clinics and office-
based practices in the United States and in 45 other countries worldwide. Those
systems and devices include both disposable and reusable medical instrumentation
used in the diagnosis and treatment of selected high incidence gynecological
conditions affecting the cervix, uterus and other aspects of the reproductive
system, as well as products used to facilitate oncological procedures and
perform pelvic reconstructive surgery. Currently, BEI is focusing its new
product development and commercialization efforts on the Hydro ThermAblator
(HTA) and related accessories to treat menorrhagia, or excessive uterine
bleeding.
For the reasons explained elsewhere in this proxy statement, BEI has
entered into the Asset Purchase Agreement to sell the Base Business and to
concentrate its future efforts on obtaining FDA approval to market the HTA and
launching this new product in the U.S. market. In the event the Asset Sale is
not consummated and BEI is unable to secure additional financing, BEI's ability
to continue as a going concern may be impaired.
Industry Overview
Women's healthcare represents a large and rapidly growing segment of
healthcare expenditures. Government spending on women's healthcare for Medicare
and Medicaid benefits alone is expected to exceed $200 billion annually. Women
rely on their gynecologists for specific healthcare needs from puberty, through
their childbearing years, to menopause and beyond. The National Ambulatory Care
Survey, conducted by the National Center for Health Statistics, indicates that
women in the United States make over 51 million visits to OB/GYN offices
annually. Additionally, as the women's population ages, the number of visits
annually and the incidence of gynecological conditions requiring diagnosis and
treatment will increase. The Company believes that better informed women,
combined with the fact that nearly half of the gynecologists under the age of 45
are women, has resulted in a heightened awareness of women's health issues. As a
result, women are driving the demand for and implementation of new and
innovative diagnostic and therapeutic procedures. In view of these developments,
HMO's have become more responsive to women's healthcare needs by increasingly
authorizing patients to go directly to gynecologists, who are more aware of the
latest technologies and procedures available for treating gynecological
conditions than are the patients' primary care physicians. Functioning as the
gatekeeper, the gynecologists are in a position to determine and recommend
which technologies and procedures are most appropriate for their patients.
Minimally invasive surgical techniques were developed in response to the
desire by physicians and patients for lower risk, less traumatic surgical
procedures. Minimally invasive procedures reduce anesthesia requirements, do
not require extensive post-operative follow-up, reduce the risk of post-
operative complications, and shorten the recovery period, allowing patients to
return to productive lifestyle activities sooner. Gynecologists have long
utilized minimally invasive techniques such as laparoscopy and hysteroscopy, and
have recently added endometrial ablation to their outpatient approach to
therapy.
The acceptance of these procedures by the healthcare industry and the
subsequent development of the ability to perform them on an outpatient basis
have contributed to cost containment and greater efficiency in the delivery of
healthcare services. In response to these pressures, hospitals are focusing on a
limited number of specialties and shifting an ever-increasing percentage of
surgical procedures to an outpatient basis to avoid the costs associated with
the patient remaining in the hospital overnight. Current
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estimates indicate that outpatient surgery represents 70% of the total surgical
market, and includes laparoscopy, hysteroscopy and endometrial ablation. As a
result, freestanding outpatient surgery centers are the fastest growing segment
of the healthcare market.
BEI Business Strategy
The Company's goal has been to provide minimally invasive advanced systems
and devices to be used in an outpatient setting serving the specific needs of
gynecologists and their patients. Its special emphasis has been on the diagnosis
and treatment of disorders and conditions of the cervix, uterus and other
aspects of the reproductive system and particularly to offer advanced
alternatives to existing procedures for the treatment of abnormal bleeding and
uterine fibroids.
Base Business
The Company's Base Business involves the manufacture and marketing of a
line of minimally invasive systems and devices for the diagnosis and treatment
of high incidence gynecological conditions affecting the cervix, uterus and
other aspects of the reproductive system, as well as products used to facilitate
oncological procedures and perform pelvic reconstructive surgery.
The Company currently sells a line of specialty instruments, procedure
kits, disposables and equipment for gynecologists, as outlined in the following
table. If the Asset Sale is consummated, the Company will no longer
manufacture, market, sell or service any of the following products, except the
HTA and related accessories:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Clinical Target Key Products
- --------------------------------------------------------------------------------------------------------
<S> <C>
Cervix . Bi-Safe I(TM) bipolar electrosurgical generator and bipolar LLETZ
electrode system, for removal of abnormal tissue from the cervix*
. Colposcopy instruments, including biopsy forceps and specula
. Gyne-Tech (TM) colposcopes systems, for tissue destruction
. Gyne-Tech cryosurgical systems, for tissue destruction
. OS Finder(TM) dilator, for cervical canal access
. Plus II(TM) monopolar generator and monopolar LLETZ Plus(TM)
electrodes, for removal of abnormal tissue from the cervix
- --------------------------------------------------------------------------------------------------------
Uterus . Corson Office Hysteroscopy System, for examination and therapy of
the inner surface of the uterus
. HTA, for treatment of excessive menstrual bleeding**
. Hysteroscopic Insufflator, for precise control of uterine
distension*
. Z-Sampler(TM) endometrial suction curette, for tissue sampling to
detect carcinoma or precancerous conditions*
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Clinical Target Key Products
- --------------------------------------------------------------------------------------------------------
<S> <C>
Infertility Diagnosis . Corson Office Hysteroscopy System, for examination and therapy of
the inner surface of the uterus
. Hysteroscopic Insufflator, for precise control of uterine distension
. Laparoscopic Insufflator, with high flow capability to maintain
proper peritoneal cavity distension*
. OS Finder dilator, for cervical canal access
. SHG catheter, for distension during sonohysterography
. Z-Sampler endometrial suction curette, for endometerial dating and
to monitor hormonal therapy effects*
. ZUI(TM) uterine injector, for hysterosalpingography
. ZUMI(TM) uterine manipulator/injector, for manipulation of the
uterus and injection of contrast media*
- --------------------------------------------------------------------------------------------------------
Oncological Surgery and . Endo-Sock(TM)/Mega Pouch, for laparoscopic tissue removal*
Pelvic Reconstruction
. Laparoscopic Insufflator, with high flow capability to maintain
proper peritoneal cavity distension*
. MIYA Hook(TM), for pelvic suspension surgery
. Nichols-Veronikis Ligature Carrier, for pelvic suspension surgery*
. Soderstrom LAVH Manipulator(TM), for laparoscopically assisted
hysterectomy
</TABLE>
- ------------------------------
* Proprietary technologies for which the Company or the manufacturer owns or
licenses patents.
** Not available in the United States
The HTA
Background
The Company has focused its recent efforts on the development and
commercialization of the patented HTA system for treatment of menorrhagia, or
excessive uterine bleeding. This new product and its potential are more fully
discussed below.
The female reproductive system consists of the uterus, ovaries and
fallopian tubes. The uterus is a highly vascular, muscular organ which lies
below the abdomen in the pelvis. Although the size and shape of a normal uterus
can vary significantly, the uterus is typically a pear shaped organ about 7 to 8
cm long and 4 to 5 cm at its widest point. Within the uterus lies the cavity
where fetal development takes place
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during pregnancy. The cavity is lined by the endometrium, which is filled, with
tiny blood vessels. The endometrium can vary in depth from 1 mm to over 10 mm.
The thick muscular layer surrounding the endometrium is called the myometrium.
The bottom of the uterus is known as the cervix. The cervix is richly supplied
with nerves, making it the most sensitive portion of the uterus. The cervix
leads to the vagina, a muscular tube that leads to the exterior of the body.
Extending from each side near the top of the uterus are the fallopian tubes
that lead to the two ovaries. The fallopian tubes are very narrow, convoluted in
shape, with many folds, and are delicate and difficult to access. As a result,
they do not lend themselves to easy study and treatment. The ovaries' primary
functions are to secrete hormones, such as estrogen, and store the female
reproductive cells or ova. The fallopian tubes transport the ova to the uterus
for fertilization as part of the monthly menstrual cycle. The fallopian tubes
are the organs in which conception occurs and at least one fallopian tube must
be open to permit the passage of sperm. The fallopian tubes serve a critical
function in the reproductive process and are often the focus of treatment when
the objective is to increase a woman's reproductive potential, such as in the
treatment of infertility.
Normal menstruation is a 28-day cycle that repeats itself throughout a
woman's reproductive life. This cycle is controlled by the interaction between
pituitary and ovarian hormones and is associated with the release of an egg from
its ovary for possible fertilization. The ovaries secrete estrogen and a second
hormone, progesterone, which causes the endometrial lining to thicken, preparing
it to receive and nourish a fertilized egg. If an egg is fertilized, it implants
into the endometrium and is nourished by the rich endometrial blood supply. If
the egg is not fertilized, levels of estrogen and progesterone decrease, the
coil shaped arteries supplying the endometrium with blood constrict, and the
endometrial lining breaks down and is shed during menstruation. Menstruation
typically begins between the ages of 11 and 14 years and ends between the ages
of 45 and 55 with the onset of menopause, correlating with the diminution of
ovarian functional and hormonal production. At that time, the menstrual cycle
becomes irregular and eventually ceases completely.
Abnormal Uterine Bleeding
Approximately 2.5 million women each year in the United States seek medical
treatment from their gynecologists for abnormal uterine bleeding. Abnormal
uterine bleeding includes disorders of the menstrual cycle, such as irregular
bleeding, and menorrhagia, or excessive uterine bleeding (defined as total blood
loss exceeding 80 ml per menstrual cycle or prolonged bleeding beyond seven
days). Abnormal bleeding is considered a symptom of an anatomic irregularity,
hormonal imbalance or a systemic disease. Commonly, however, it is the result of
disorders within the uterus itself, such as fibroids and, more rarely,
endometrial cancer. Abnormal uterine bleeding can also be caused by other
factors, including medication side effects from post-menopausal hormone
replacement therapy, miscarriage and retained tissue after child birth. Today,
there are over 31 million post-menopausal women in the United States and over
seven million are receiving hormonal replacement therapy. These women may
experience a return to undesired menstrual bleeding as a consequence of hormonal
replacement therapy.
Various drug therapies and surgical approaches are available for treatment
of abnormal menstrual bleeding. Treatment of abnormal menstrual bleeding usually
begins conservatively with drug therapy and, if necessary, proceeds to more
invasive surgical methods.
The traditional approach to treatment of menorrhagia, or excessive uterine
bleeding has included hormonal therapy, dilation & curettage ("D&C"), and
ultimately hysterectomy. Hormonal therapy can be effective in many cases,
however, the therapy can be of long-term duration at considerable monthly
expense and menorrhagia may persist despite hormonal therapy. D&C is commonly
performed, although a significant percentage of the endometrial lining of the
uterus may be missed, and there is little evidence
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that D&C provides any meaningful long-term benefit. Many of the nearly two
million women who annually receive hormonal therapy or D&C fail to have
satisfactory resolution of their excessive 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, suggesting
that many of the procedures were not necessary.
Alternative Treatments
Rather than removing the uterus, alternative approaches to the treatment of
excessive uterine bleeding have been attempted.
The first successful endometrial ablation procedures, utilizing laser
photovaporization of the endometrium, were published in 1981 in the Journal of
the American Association of Gynecologic Laparoscopists. By 1990, reports
appeared regarding the successful use of a urologic resectoscope to deliver
electrosurgical current as the means of coagulating the endometrium. Both of
these surgical endometrial ablation techniques require significant distention of
the uterus to create working space. A risk of excessive absorption of non-
conductive (salt free) fluid into the vessels of the uterus also exists due to
the high pressures (100-150 mmHg) used to distend the uterine cavity. When
significant amounts of this non-physiologic fluid is absorbed, the resulting
fluid overload can cause hyponatremia (dilution of body fluids resulting in
electrolyte imbalance), pulmonary edema (fluid in the lungs), cerebral edema
(swelling of the brain), and even deaths have been reported.
Both of these surgical ablation techniques require the tedious "painting"
of the entire lining of the uterus to control depth of thermal destruction, as
well as attention to safety issues (i.e., perforation or hemorrhage) throughout
the typical 30-60 minutes required to complete treatment of the entire lining of
the uterus under general anesthesia. While these surgical endometrial ablation
techniques offer advantages over traditional hysterectomy, clinical results are
extremely dependent on the skill and experience of the surgeon. In general,
because of the technical proficiency required to achieve good results, the time
required to complete the procedure, and the risks associated with laser and
electrosurgical roller-ball ablation, neither of these ablation techniques have
become widely popular.
Other non-surgical techniques for treatment of excessive uterine bleeding
are under development and in various stages of FDA clinical trials, including
devices that employ fluid-filled heated balloons, electrodes on the surface of a
balloon, microwave energy, radio frequency (RF) currents, and cryosurgery
(freezing). One such device, the ThermaChoice balloon from Gynecare (a
subsidiary of Johnson & Johnson) has received permission from the FDA to market
in the United States. Valleylab announced earlier this year that it will be
conducting a limited clinical trial of the Vesta System for endometrial ablation
prior to FDA approval in the United States. The Vesta System is currently under
FDA investigation and is not for sale in the United States.
The Company believes that these devices are limited in their effectiveness
due to their inability to fully conform with the convoluted surface of the
entire uterine lining, their inability to reach into narrow cornual areas, and
their inability to conform to the shape of a broad range of uterine sizes.
Further, these devices do not allow the gynecologist to visualize the uterine
cavity prior to treatment, to definitively confirm proper placement inside the
uterine cavity to observe treatment, or to immediately evaluate the
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effect of treatment, because they do not include hysteroscopic capability. In
March 1998, the United Kingdom Department of Health, Medical Devices Agency,
notified medical administrators, surgeons and nurses of reports of a number of
incidences of uterine perforation and injury to adjacent organs involving
devices for endometrial ablation by thermal means. The notice advised
practitioners to verify the correct placement of such devices within the uterus
prior to their use. The Company believes the HTA will reduce the risk of
perforation due to its integral hysteroscope, which provides visual confirmation
of uterine anatomy and verification of instrument position. The characteristics
of various endometrial ablation technologies currently under development or
commercialization are outlined below.
<TABLE>
<CAPTION>
Comparison of Endometrial Ablation Technologies
- --------------------------------------------------------------------------------------------------------------------------------
Compatibility
With Varying Pressurization
Method of Uterine Size & of Uterine
Device Technology Introduction Location of Energy Source Shape Cavity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balloon containing heated Blind insertion Heater inside balloon, inside uterus Low High,
fluid 150+ mmHg
Balloon with conductive Blind insertion External electrosurgical generator, Low High,
electrodes electrodes inside uterus 150+ mmHg
Microwave probe Blind insertion External microwave generator, applicator Low Not applicable
inside uterus
Cryogenic probe Blind insertion External unit, probe inside uterus Low Not applicable
Conductive mesh electrode Blind insertion External electrosurgical generator, Low Vacuum
electrode inside uterus
Free fluid circulation Blind insertion Heater inside probe, inside uterus High Low,
probe (Less than) 50 mmHg
Free fluid circulation Insertion with visual External Heater, circulation to uterus High Low,
hysteroscope control, connected to (Less than) 50 mmHg
video monitor
</TABLE>
The HTA Solution
The Company has developed the patented HTA technology as an
alternative to existing treatments for menorrhagia, or excessive uterine
bleeding, as well as other proposed ablation treatments currently under
development.
Management believes that the patented HTA offers distinct advantages
compared to existing and emerging ablation technologies for the treatment
of excessive uterine bleeding:
. Integral hysteroscope provides visual confirmation of
uterine anatomy and instrument position, as well as
continuous observation of treatment effect.
. Variation in uterine size and shape are easily accommodated
by freely circulating heated saline.
. Freely circulating heated saline allows even and complete
treatment of the entire endometrium.
. Low pressurization of the uterine cavity reduces risk and
patient discomfort.
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. Does not require extensive training prior to use.
. Clinical outcome is not dependent on user experience or
variation in technique.
. Minimally invasive short duration procedure with limited
risk.
The Company's initial target market for the HTA is the 150,000
hysterectomies performed in the United States annually for menorrhagia or
excessive menstrual bleeding from benign causes. Additionally, the Company has
identified a market opportunity among the nearly two million women suffering
from abnormal uterine bleeding in the United States for whom the prospect of
long-term hormonal therapy or repeated D&C procedures is undesirable, or for
whom such treatments are ineffective. The Company also believes that a market
opportunity exists among the over seven million post-menopausal women who are
currently receiving hormonal replacement therapy that can result in an
undesirable resumption of menstrual bleeding. BEI also believes marketing
opportunities will develop among women seeking a cessation of menstruation,
either electively as a lifestyle choice or in conjunction with tubal
sterilization.
The HTA System
The HTA has been designed to offer the gynecologist a minimally invasive,
non-surgical method to treat excessive uterine bleeding in an outpatient or
office setting. The HTA consists of a portable treatment unit, incorporating
microprocessor control of fluid temperature and fluid circulation. The mobile
unit provides a drawer for procedure supplies, and a shelf to house the
Company's Integrated Video System ("IVS") 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 approximately
ten minutes to cause ablation of the entire endometrial lining. By utilizing
freely circulating heated saline at low pressure to distend the uterine cavity,
thermal energy is evenly transferred to all areas of the uterine cavity
including the areas of the cornua (the area where the fallopian tubes enter the
uterus) which can be difficult to treat with other devices. The use of
physiologic saline eliminates concerns about fluid absorption overload, and low
pressure prevents escape of fluid from the fallopian tubes. The incorporation of
a hysteroscopic telescope provides visual control during introduction, positive
visual confirmation of proper placement within the uterine cavity as well as
continuous visualization of the effects of the treatment. The digital displays
of the HTA control unit guide the user through the HTA procedure, providing
step-by-step visual prompts that facilitate 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 and assure consistent treatment effect without
depending on user skill level. At any time, the gynecologist can interrupt the
treatment and, if desired, the circulation of room temperature saline will
rapidly cool the patient's uterus. As a result of 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 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 to identify
fibroids, make directed biopsies, and perform minimally invasive therapeutic
procedures. Direct visualization of the lining of the uterus provides a more
precise diagnosis of uterine abnormalities than D&C, HSG or ultrasound imaging.
Gynecologists commonly use hysteroscopy; however, in the past most
hysteroscopic procedures have been done in the hospital environment, often in
the operating room under general anesthesia. This
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has been due to a number of factors, including the high cost of complete
hospital style hysteroscopy systems, large diameter instrumentation that makes
comfortable use in the office with local anesthesia impractical, and the lack of
third party payor incentives for office based procedures.
The transition of hysteroscopic procedures from the hospital environment to
the gynecologist's office practice is being driven by the following: (i)
patient's desire to avoid hospitalization, (ii) physician's desire for efficient
use of time resulting in improved office economics, and (iii) third party payors
are providing incentives to relocate procedures to more cost-effective
environments. The Company believes that only 20-25% of the approximately 19,000
gynecology practices in the United States are currently equipped to offer
office-based hysteroscopic procedures to their patients, providing a significant
business opportunity to the Company.
Results of Clinical Trials
The Company completed FDA required Phase I clinical trials in April 1996,
and was given permission to proceed to a Phase II trial of the HTA. Phase II
treatments of 20 patients were completed in December 1997. Follow-up outcome
data from the Phase II patients was compiled and submitted to the FDA in June
1998. This outcome data compared favorably with the results of alternative
therapies, showing an amenorrhea rate of 57.9%, at six months follow-up
examinations. When these patients whose menstrual bleeding was eliminated are
grouped with the remainder of the patients whose menstrual bleeding was
significantly reduced, the overall success rate was 94.7%. A protocol violation
related to pharmaceutical administration required that one patient be removed
from consideration in the study, with only one of the remaining 19 patients
(5.3%) failing to show an improvement from HTA treatment. There is no assurance
the Phase III results will be consistent with the results obtained by the
Company in its Phase II trials or that they will support the safety and efficacy
of the HTA.
The Company received approval to begin Phase III Clinical Trials in August
1998, and the first treatments were conducted in September 1998. BEI initiated
its Phase III clinical trials at 9 sites and enrolled 276 patients suffering
from menorrhagia, or excessive uterine bleeding. The study compared the safety
and efficacy of the HTA endometrial ablation treatment to electrosurgical
rollerball ablation, one of the current treatments for excessive uterine
bleeding. The Company completed the treatment phase of the clinical trials in
early August 1999. Data from examinations one year following treatment are
required for approval of its premarket approval ("PMA") application, but the
Company will submit six-month data to the FDA after review and analysis by its
contract research organization (Quintiles). There can be no assurance that any
data obtained from the Phase III trial will support the safety and effectiveness
of the HTA. Failure of the data to support the safety and effectiveness of the
HTA would have a material adverse effect on the Company's business.
Certain international markets will require similar regulatory approvals.
The Company has received permission from Lloyd's Registered Quality Assurance
Ltd. ("LRQA"), the Company's "notified body", to apply the CE Mark to the HTA
and to the sterile disposable HTA Procedure Kit. In February 1997, the Company
selectively initiated deliveries of HTA systems in some of those countries where
regulatory authorities permit sales. Since then treatment centers have been
established in Australia, Brazil, Canada, France, Hong Kong, Israel, Italy,
Germany, New Zealand, Portugal, Spain, Switzerland, and in the United Kingdom.
More recently, regulatory authorities in Australia and in Canada have granted
permission for the sale of the HTA system. Over 600 treatments using the HTA
have been completed worldwide, demonstrating its ease of use. Management is
encouraged by the follow-up of patients at selected international sites, which
now exceeds 24 months. The Company believes the pattern of patient follow-up
condition reflects results that are consistent with traditional laser and
electrosurgical ablation methods and superior to other emerging technologies.
See "Business - Government Regulation."
38.
<PAGE>
Sales and Marketing
Although the Company's sales and marketing strategy with respect to its
Base Business has been to increase market penetration through the expansion of
its direct sales and marketing activities targeting the more than 33,000
gynecologists practicing in the United States, the Company's shortage of
available funds will require decreasing this activity if the Asset Sale is not
consummated. BEI's domestic distribution network for its Base Business currently
includes approximately 11 inside sales personnel and two field managers in
addition to 14 independent manufacturers' representative organizations,
employing approximately 52 field representatives to market its products directly
to gynecologists in hospitals, surgical centers and office based practices. They
also represent manufacturers of other medical products that are complementary
with the Company's products and work on a straight commission basis.
Internationally, BEI currently sells its Base Business products through
distributors in 45 countries, and distributors in 17 countries have begun
marketing the HTA. 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 does not currently have
distributors in a number of significant international markets that it has
targeted and would need to establish additional international distribution
relationships in order to sell its products, including the HTA, in those
markets.
As a part of its Base Business, the Company has offered electrosurgical
devices and disposable electrodes designed specifically for gastrointestinal
endoscopy. These products are sold through a separate network of independent
manufacturer's representatives. This range of gastrointestinal products is not
expected to provide a significant increase in future Base Business revenues.
Also, a variety of products are manufactured by BEI for sale by third parties
under various original equipment manufacture ("OEM") agreements, but the Company
expects these OEM arrangements to decline as a percentage of revenues of the
Base Business. In fiscal 1998, revenue of gastrointestinal endoscopy products
and OEM revenue were 9.7% and 9.9% of BEI's revenue, respectively, compared to
8.9% and 17.1% in fiscal 1997 and 15.5% and 14.5% in fiscal 1996.
The Company also markets products that are manufactured by third party
vendors, where the regulatory approval and compliance for these products has
been obtained and is controlled exclusively by the third party vendor. Any FDA
regulatory or compliance actions against these companies could affect the third
party vendor's ability to supply the Company, which in turn could have a
material adverse impact on the Base Business and the Company.
If the Asset Sale is not consummated and if BEI is able to secure adequate
financing, BEI plans to continue to support its gynecology sales and marketing
efforts through the participation in regional and national trade shows which the
Company believes will reinforce market presence, increase awareness of its
products, introduce new products, and develop actionable sales leads for its
sales force. Periodic distribution of its specialty office gynecology direct
mail catalog will also be continued. Promotional literature and new product
announcements will continue to be distributed via insertion with invoices and
insertion in merchandise shipments to leverage relationships with existing
customers as well as maintaining its on-line catalog (www.beimedical.com).
The Company plans to provide sponsorship for clinically-based seminars
conducted by the Company's clinical investigators to familiarize practitioners
with innovative systems and devices developed by the Company, such as the HTA.
Internationally, BEI will continue to support the efforts of its distributors
through sponsorship of guest speakers at national conventions and at clinical
seminars and through the sponsorship of postgraduate courses.
39.
<PAGE>
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 have larger technical staffs than the Company. BEI
believes that its products compete primarily on the basis of price, design,
performance, reliability, delivery service and support.
Base Business. The principal competitors for the core gynecology products
in the Company's Base Business include Circon Corporation, CooperSurgical, Inc.,
a subsidiary of The Cooper Companies, Inc., Karl Storz GmbH, Leisegang Medical,
Inc., a subsidiary of NetOptix Corporation, Olympus Corp., Utah Medical
Products, Inc., Wallach Surgical Devices, Inc., and Richard Wolf Medical
Instruments Corp.
HTA. The principal competitors for the Company's HTA include Gynecare, a
subsidiary of Ethicon, Inc./Johnson & Johnson (whose ThermaChoice balloon, a
device for endometrial ablation, has been cleared to be marketed in the United
States by the FDA) and Cavaterm, a product of Wallsten Medical SA, which is
being sold internationally, but is not for sale in the United States.
Valleylab, a subsidiary of U.S. Surgical/Tyco, announced in February 1999 that
it will be conducting a limited clinical trial of the Vesta System for
endometrial ablation prior to FDA approval in the United States. The Vesta
System is currently under FDA investigation and is not for sale in the United
States. Other technologies available for sale internationally but not
domestically include the Gynelase product, (a laser intrauterine thermal therapy
device) distributed by Sharplan, and the Microsulis PLC MEA device which employs
a hand-held applicator to apply low power microwaves to the uterine cavity.
Other large healthcare companies may enter the market for minimally
invasive diagnostic and therapeutic 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 BEI.
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
BEI's manufacturing operations consist primarily of the manufacture and
assembly of electromechanical equipment such as electrosurgery generators,
endoscope illuminators, endoscopes and electronic insufflators, all of which are
included in the Base Business, and the HTA. Some component fabrication and
assembly of various non-electrical products, both disposable and reusable, is
also performed. Approximately 29.3% of the Company's annual revenue in fiscal
1998 was derived from internally manufactured products. The Company also
utilizes contract manufacturers to make a variety of non-electrical medical
devices to Company design specifications, including the disposable HTA procedure
kit, hysteroscopy systems, disposable catheters and reusable instruments.
Approximately 54.1% of the Company's annual revenue in fiscal 1998 was derived
from products produced for the Company by contract manufacturers. In addition,
the Company purchases a number of products for resale under both exclusive
license agreements and non-exclusive agreements including the Company's line of
bipolar generators and disposables, smoke evacuators, colposcopes and
cryosurgery products. Engineering efforts are continuing to reduce the cost of
the disposable HTA procedure kit as volume
40.
<PAGE>
increases by streamlining production methods and eliminating or replacing higher
cost methods and materials.
As a part of its Base Business, BEI 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.
In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA itself or through third parties in accordance with the 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 transferable 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.
During fiscal 1996, BEI's manufacturing facilities received ISO 9001
certification from Lloyds Register Quality Assurance, Ltd. ("LRQA"). LRQA will
conduct semiannual audits in Teterboro, New Jersey. The most recent audit of the
Company's manufacturing facilities in Teterboro, New Jersey was in August 1999.
The audit report did not include any negative observations or identify any areas
of noncompliance thereby resulting in re-certification. This re-certification
dated effective September 1, 1999 will expire on August 31, 2002. Additionally,
the Company's facilities and documentation procedures for the manufacture of
medical devices are required to conform to the FDA's Quality System Regulations
("QSR") through its facilities inspection program. The FDA most recently
inspected the Company's manufacturing facilities in Teterboro, New Jersey in
September 1998 for compliance with the QSR. Upon completion of the inspection,
the FDA did not issue a Notice of Adverse Findings. Withdrawal of QSR compliance
status would have a material adverse effect on the Company's business, financial
condition and results of operations.
Research and Development; Technology
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 $2,866,000,
$1,864,000 and $1,328,000 for the fiscal years 1998, 1997 and 1996,
respectively. Even if the Asset Sale is not consummated, the Company anticipates
that the majority of spending on research and development over the next 12
months will be devoted to completing the HTA clinical trials and gaining FDA
approval of the product. If the Asset Sale is not consummated, the Company would
need to obtain additional financing to continue to engage in such activities
beyond the end of calendar year 1999. There is no assurance such financing will
be available on terms acceptable to the Company, if at all.
41.
<PAGE>
Licenses, Patents and Proprietary Technology
The Company's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business.
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products and processes, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. The
Company's strategy regarding the protection of its proprietary rights and
innovations has been to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential and
proprietary information.
As of October 2, 1999, the Company had a portfolio including 17 United
States patents, either licensed or owned, in addition to certain issued foreign
patents. Among the 17 patents issued in the United States, four patents are
related to the development of the HTA. Corresponding applications have been
filed in certain foreign countries relative to the HTA. The Company's other
patents relate to products in its Base Business and will therefore be sold to
CSAC if the Asset Sale is consummated. The Company's policy is generally to
file patent applications in foreign countries where rights are available and the
Company believes it is commercially advantageous to do so. No assurance can be
given that any patents from pending patent applications or from any future
patent applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. The Company also owns certain
registered trademarks, and has applied for other trademarks in certain foreign
countries.
Inclusive to the patent portfolio, the Company holds the rights and title
to the patent for its Uterine Manipulator/Injector ZUMI product line, under an
agreement with the Estate of James H. Harris, M.D. This patent was issued in
1984 and is expected to expire in 2001. This ZUMI product line, which accounts
for a significant percentage of the Company's disposable instrument revenues,
will be sold to CSAC pursuant to the Asset Purchase Agreement.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement litigation or an interference proceeding
declared by the United States Patent and Trademark Office ("USPTO") to determine
the priority of inventions. The defense and prosecution of patent suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued 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 interference 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.
42.
<PAGE>
An adverse determination in a judicial or administrative proceeding or
failure to obtain necessary license 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.
The Company also relies upon trade secrets and technical know-how and
continuing technological innovations to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute appropriate confidentiality and assignment of invention agreements in
connection with their employment, consulting or advisory relationship with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any such breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
Government Regulation
The preclinical and clinical testing, manufacturing, labeling, distribution
and promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and other countries. Noncompliance
with applicable requirements can result in enforcement action by the United
States Food and Drug Administration, including, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution.
A medical device may be marketed in the United States only with the FDA's
prior authorization. Devices classified by the FDA as posing less risk are
placed in Class I or Class II and require the manufacturer to seek "510(k)
clearance" from the FDA prior to marketing. Such clearance generally is granted
when submitted information establishes that a proposed device is "substantially
equivalent" in intended use and safety and effectiveness to a "predicate
device," which is a legally marketed Class I or Class II device or a
"preamendment" (in commercial distribution before May 28, 1976) Class III device
for which the FDA has not called for PMA applications (defined below).
The Company's HTA system is classified by the FDA as a Class III device,
which is considered to pose the greatest risk to patients (e.g., life-
sustaining, life-supporting or implantable devices, or devices that are not
substantially equivalent to a predicate device). A Class III device generally
must undergo the FDA's PMA process, which requires the manufacturer to prove the
safety and effectiveness of the device to the FDA's satisfaction. A PMA
application must provide extensive preclinical and clinical trial data and
information about the device and its components regarding, among other things,
manufacturing, labeling and promotion. As part of the PMA review, the FDA will
inspect the manufacturer's facilities for compliance with the QSR, which
includes elaborate testing, control, documentation and other quality assurance
procedures.
Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review and, if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application,
which the Company believes typically takes one to three years, but may take
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already provided.
The FDA also may respond with a "not approvable" determination based on
deficiencies in the application and require additional clinical trials that are
often expensive and time consuming and can delay approval for months or even
years. In recent years, the FDA has heightened its scrutiny of clinical data
submitted in support of PMA applications. During the review period, an FDA
advisory committee, typically a panel of clinicians, likely will be
43.
<PAGE>
convened to review the application and recommend to the FDA whether, or upon
what conditions, the device should be approved. Although the FDA is not bound by
the advisory panel decision, the panel's recommendation is important to the
FDA's overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include post-approval
conditions that the FDA believes are necessary to ensure the safety and
effectiveness of the device, including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in enforcement action, including withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance can
be given that any PMA application will ever be approved for marketing. Even
after approval of a PMA, a new PMA or PMA supplement is required in the event of
a modification to the device, to its labeling or to its manufacturing process
that affects the safety or effectiveness of the device. There can be no
assurance that a PMA application will be submitted for any of the Company's
Class III devices or that, once submitted, the PMA application will be accepted
for filing, found approvable, or, if found approvable, will not take longer than
expected to obtain or include unfavorable restrictions.
A clinical study in support of a PMA application for a "significant risk"
device requires an Investigational Device Exemption ("IDE") application approved
in advance by the FDA for a limited number of patients. The IDE application must
be supported by appropriate data, such as animal and laboratory testing results.
The clinical study may begin if the IDE application is approved by the FDA and
the appropriate institutional review board ("IRB") at each clinical study site
or through use of a central IRB. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical study after obtaining IRB
approval without the need for FDA approval. In all cases, the clinical study
must be conducted under the auspices of an IRB pursuant to FDA's regulatory
requirements intended for the protection of subjects and to assure the integrity
and validity of the data. During a clinical study, the Company is permitted to
sell the products used in the study for an amount that does not exceed recovery
of the costs of manufacture, research, development and handling. The Company's
failure to adhere to regulatory requirements generally applicable to clinical
studies or to any conditions of IDE approval could result in a refusal by the
FDA to grant marketing clearance or approval for the Company's products. There
can be no assurance that any clinical study proposed by the Company will be
approved by the FDA, will be completed or, if completed, will provide data and
information that support PMA approval or 510(k) clearance or that support
authorization for additional clinical investigations of the type necessary to
obtain approval or clearance.
Devices manufactured or distributed by the Company pursuant to FDA
clearance or approval will be subject to pervasive and continuing regulation by
the FDA and certain state agencies. The Company will be subject to inspection by
the FDA and such state agencies, and will have to comply with the host of
regulatory requirements that usually apply to medical devices marketed in the
United States, including the FDA's labeling regulations, the QSR, the Medical
Device Reporting ("MDR") regulations (which require that a manufacturer report
to the FDA certain types of adverse events involving its products), and the
FDA's general prohibitions against promoting products for unapproved or "off-
label" uses. In addition, Class II devices can be subject to additional special
controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines) that do not apply to Class I devices. The
Company's failure to comply with applicable regulatory requirements could result
in enforcement action by the FDA, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
44.
<PAGE>
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and hazardous substance disposal.
There can be no assurance the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations.
The Company distributes products manufactured by third party vendors, where
the regulatory approval and compliance for these products has been obtained and
is controlled by the third party vendor. Any FDA regulatory or compliance
actions against these companies could affect the third party vendor's ability to
supply the Company or require the Company's participation in product recalls,
which in turn could have a material adverse impact on the Base Business and the
Company.
The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions of the Food, Drug and Cosmetic ("FDC") and
other provisions in the FDC Act affecting the regulation of devices. Among other
things, the changes will affect the IDE, 510(k) and PMA processes, and also will
affect device standards and data requirements, procedures relating to
humanitarian and breakthrough devices, tracking and postmarket surveillance,
accredited third party review, and the dissemination of off label information.
The Company cannot predict how or when these changes will be implemented or what
effect the changes will have on the regulation of the Company's products.
Distribution of the Company's products outside the United States is also
subject to regulation, which varies widely from country to country. The time
required to obtain needed regulatory clearance by particular foreign governments
may be longer or shorter than that required for FDA clearance or approval. In
addition, the export by the Company of certain of its products that have not yet
been cleared or approved for domestic distribution may be subject to FDA export
restrictions. There can be no assurance that the Company will receive on a
timely basis, if at all, any foreign government or United States export
approvals necessary for the marketing of its products abroad.
In January 1995, the Medical Device Directive ("MDD") was fully implemented
in the European Union, which is intended to make European Union regulatory
requirements more consistent. Under MDD, the Company is subject to "prior
notice" of intent to conduct clinical studies in the European Union. This
process, similar to the FDA IDE process, requires regulatory documents and test
information to be submitted to the governmental agency of each country in which
the Company intends to conduct clinical studies. In order to commence commercial
marketing of its products in the European Union, the Company is required to file
for a CE Mark approval. In January 1998, the Company received CE Mark approval
for the HTA System from LRQA, an organization that certifies the safety of
medical device products and the quality assurance systems put in place by the
manufacturer of the medical device. There can be no assurance, however, that the
Company will be successful in obtaining CE Mark approval for any other products
in a timely manner, if at all, and any failure to receive or delay in receiving
such approval could have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees
As of October 2, 1999, BEI had 62 full-time employees, including 10 in
research, development and engineering, 19 in marketing and sales, 22 in
operations and 11 in administration. There are no unions
45.
<PAGE>
representing the Company's employees. The Company believes that its relations
with its employees are good.
After completion of the Asset Sale and the Company's performance of
transition services for CSAC, the Company anticipates that the number of full-
time employees will be reduced to approximately 25.
46.
<PAGE>
BEI PROPERTIES
The Company's principal executive offices are located in leased office
space in Teterboro, New Jersey. The Company operates one other facility in
Chatsworth, California, and maintains office space in various locations
throughout the United States for sales and technical support. BEI's principal
facilities are as follows:
Location Description of Facility
Teterboro, New Jersey Leased 24,400 square foot manufacturing,
engineering, and administrative
facility.
Chatsworth, California Leased 3,400 square foot administrative
and marketing facility.
The lease agreement for the Teterboro facility expires on June 8, 2004, and
the Company has the option to extend the term of this lease for five additional
years. The monthly base rent through February 2000 is approximately $21,445,
plus the Company's pro rata share of maintenance expenses and real estate taxes
with immaterial increases thereafter through the end of the lease term. The
lease agreement for the Chatsworth facility expires on May 31, 1999. The
monthly base rent is approximately $4,225, plus the Company's pro rata share of
certain operating expenses and real estate taxes.
Management believes that the current facilities are adequate and suitable
for the current operations of the Company. If the Asset Sale is consummated,
the Company will no longer have a need for the Chatsworth facility once the
Company has completed the transition services to be provided to CSAC.
LEGAL PROCEEDINGS INVOLVING BEI
From time to time, BEI may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five years in the
period ended October 3, 1998 have been derived from the audited Consolidated
Financial Statements of BEI, which are included herein. The selected
consolidated financial data as of and for the periods ended June 27, 1998 and
July 3, 1999 have been derived from unaudited Consolidated Financial Statements
of BEI which, in the opinion of BEI management, have been prepared on a basis
substantially consistent with the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the information for the period. The results of such interim periods are
not necessarily indicative of the results for the full fiscal year. The data
presented below should be read in conjunction with BEI's audited Consolidated
Financial Statements for each of the fiscal years in the five year period ended
October 3, 1998 and the unaudited Consolidated Financial Statements as of and
for the periods ended June 27, 1998 and July 3, 1999, which are 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 segments 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 28, 1997 (File No. 0-22799).
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
----------------------------------------------------------------------------------------
October 3, September 28, September 27, September 30, October 1, July 3, June 27,
1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (unaudited)
Revenue............................... $ 9,651 $10,005 $ 9,357 $ 8,847 $ 8,678 $ 6,512 $ 7,246
Loss from continuing operations....... (4,971) (4,348) (2,682) (2,350) (2,458) (4,891) (3,324)
Income (loss) from discontinued
operations........................... -- 4,583 4,571 (2,041) 714 -- --
Net income (loss)..................... (4,971) 235 1,889 (4,391) (1,744) (4,891) (3,324)
Loss from continuing operations per
common share, basic and diluted...... ($0.68) ($0.64) ($0.40) ($0.36) ($0.38) ($0.65) ($0.45)
Earnings (loss) from discontinued per
common share, basic and diluted...... -- 0.67 0.68 (0.30) 0.11 ($0.65) ($0.45)
Earnings (loss) per common share, ($0.68) $ 0.03 $ 0.28 ($0.66) ($0.27) -- --
basic and diluted....................
Cash dividends per common share....... -- $ 0.08 $ 0.08 $ 0.08 $ 0.08
Weighted average shares outstanding... 7,354 6,817 6,737 6,617 6,541 7,497 7,316
Balance Sheet Data:
Cash and cash equivalents............. $ 3,504 $ 9,271 $ 9,128 $ 9,023 $ 1,103 $ 2,429
Working capital (1)................... 8,284 11,085 38,102 35,923 40,189 5,075
Total assets (1)...................... 17,388 22,584 115,011 113,738 112,432 12,922
Long-term debt (excluding current
portion)............................. -- 22 212 392 560 1,000
Stockholders' equity (1).............. 14,440 17,660 55,972 53,319 57,829 9,710
</TABLE>
________________________
(1) Amounts for working capital, total assets and stockholders' equity
include discontinued operations for fiscal years 1996, 1995 and 1994.
<PAGE>
BEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 those
discussed in the Company's Form 10-K for the year ended October 3, 1998.
The following table sets forth, for the fiscal periods indicated, the
percentage of revenues represented by certain items in the Company's
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------- ----------------------------------
1998 1997 1996 July 3, 1999 June 27, 1998
------- ------ ------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 58.4 59.7 61.9 59.6 58.5
Gross profit....................................... 41.6 40.3 38.1 40.4 41.5
Operating expenses:................................
Selling, general and administrative expenses....... 90.0 78.8 69.6 83.1 86.3
Research, development and related expenses......... 29.7 18.6 14.2 38.2 24.5
Loss from operations............................... (78.1) (57.1) (45.7) (80.9) (69.3)
Other income....................................... 3.2 1.3 3.5 1.4 3.8
Interest expense................................... (0.2) (0.7) (1.2) (0.4) (0.3)
Loss before income taxes........................... (75.1) (56.5) (43.4) (79.9) (65.8)
Income taxes (benefit)............................. (23.6) (13.0) (14.8) (4.8) (19.9)
Loss from continuing operations.................... (51.5) (43.5) (28.6)
Income from discontinued operations................ -- 45.8 48.8
Net income (loss).................................. (51.5)% 2.3% 20.2% (75.1%) (45.9%)
</TABLE>
Nine-months Ended July 3, 1999 and June 27, 1998
Revenues for the nine-months ended July 3, 1999, were $6,512,000 a decrease
of $734,000 or 10.1% from the comparable nine-month period ended June 27, 1998.
The lower revenue principally reflects the impact of reduced shipments of
reusable instruments to both domestic and international customers generally due
to soft market conditions and increased competition. Revenues from these
products declined $520,000 or 16.0% in the nine-month period ended July 3, 1999
compared to the nine-month period ended June 27, 1998. Additionally, revenues
from disposable instruments declined by $96,000 reflecting the market impact
early in the fiscal year of a temporary supply shortfall from one outside vendor
and revenues from gastrointestinal products declined $106,000 or 15.9%.
Partially offsetting the above were increased international revenues from
shipments of the Company's HTA system for endometrial ablation. HTA revenues for
the nine-months ended July 3, 1999 increased to $260,000 or 10.2% from the
comparable period of fiscal 1998. The higher HTA revenue in fiscal 1999 reflects
increased adaptation of the HTA procedure in certain international markets. The
HTA system is now available for sale in 18 countries. Additionally, revenues
from OEM products increased in fiscal 1999 to $818,000, a 7.8% increase.
Gross profit as a percentage of revenues decreased to 40.4% in the first
nine-months of fiscal 1999 compared to 41.5% for the first nine-months of fiscal
1998. The decrease was principally due to a
49.
<PAGE>
change in the product mix, with a larger portion of lower margin products being
sold during the nine-months ended July 3, 1999 compared to the comparable period
of fiscal 1998, and higher overhead absorption costs resulting from the reduced
volume. Partially offsetting the reduction in gross margins were decreases in
direct labor and overhead costs of $336,000 for the nine-month period ended July
3, 1999, compared to the prior period. This decrease resulted primarily from the
consolidation of the Company's manufacturing and distribution facilities that
occurred in the fourth quarter of fiscal 1998.
Selling, general and administrative expenses decreased $839,000 to
$5,414,000 or 83.1% of revenues for the nine-months ended July 3, 1999 compared
to $6,253,000 or 86.3% of revenues for the nine-month period in fiscal 1998. The
decline in expenses reflects reduced amortization of intangible assets of
$397,000 following the sale of a previously acquired product line, as well as
the impact of a non-compete agreement that became fully amortized during the
third quarter of fiscal 1998. Selling expenses declined approximately $251,000
for the nine-months ended July 3, 1999 compared to the same period in fiscal
1998, reflecting lower commissions and marketing expenses as a result of Company
efforts to reduce selling costs. Additionally, the decrease reflects the absence
in fiscal 1999 of one-time net charge of $102,000 incurred in fiscal 1998. Nine-
month fiscal 1998 results included the benefit of $723,000 representing the
reversal of previously expensed legal fees which were reimbursed by the
Company's insurance carrier partially offset by a charge of approximately
$354,000 related to the consolidation of the Company's facilities and a charge
of $471,000 to reduce the carrying value of certain intangible assets to their
net realizable value.
Research, development and related expenses as a percentage of revenues were
38.2% or $2,485,000 for the nine-months ended July 3, 1999 compared to 24.5% or
$1,772,000 for the same period of fiscal 1998. The increased spending reflects
expenses associated with recruiting and treating patients as part of the HTA
Phase III clinical trials in the United States. The Company received approval
from the Food and Drug Administration ("FDA") to proceed to the Phase III
portion of the HTA clinical trials in July 1998 and in September 1998 began to
treat patients under the approved protocol. The Company was required to enroll
276 patients at its 9 U.S. clinical sites under the Phase III protocol. As of
August 6, 1999, all treatments were completed. Data from examinations one year
following treatment is one of the requirements for FDA approval.
Interest income declined to $87,000 in the nine-month period ended July 3,
1999 compared to $272,000 in the prior period, as a result of lower average cash
balances during the period.
Interest expense increased to $28,000 in the nine-month period ended July
3, 1999 compared to $21,000 in the prior period, as a result of the Company's
$1,000,000 term note and related credit facility which the Company entered into
in May 1999.
Income tax benefit was 6.1% of the pretax loss in the nine-month period
ended July 3, 1999 compared to 30.3% of the pretax loss in the comparable period
of fiscal 1998. The income tax benefit reflects the Company's ability to carry
back losses and collect a refund against prior years' taxes paid on the earnings
of previously discontinued operations. The amount of carryback available to the
Company is limited to the taxes paid on earnings of the previous two fiscal
years and the lower effective tax rate in fiscal 1999 results from the reduced
amount of remaining carryback available to the Company compared to fiscal 1998.
The remaining carryback available to the Company is approximately $75,000, which
will be recognized in the fourth quarter of fiscal 1999.
50.
<PAGE>
Fiscal years 1998, 1997 and 1996
Revenue
In fiscal year 1998, the Company's revenues decreased 3.5% to $9,651,000
from $10,005,000 in fiscal year 1997. Revenues from gynecological products in
fiscal year 1998 increased approximately 3.8% over fiscal year 1997 reflecting
an increase in shipments of disposable catheter products and specialty stainless
steel instruments. Additionally, international revenues from the Company's new
HTA grew 40.3% to $275,000 in fiscal year 1998 compared to $196,000 in fiscal
year 1997. However, offsetting the above was a decline in OEM shipments from
$1,710,000 in fiscal year 1997 to $950,000 in fiscal year 1998 reflecting the
Company's decision to reduce marketing efforts related to its lower-margin OEM
products in order to focus on its core of higher-margin women's healthcare
products. Additionally, sales of several of the Company's OEM products declined
on a year to year basis due to increased competition.
The Company's revenues increased 6.9% to $10,005,000 in fiscal year 1997
from $9,357,000 in fiscal year 1996. Revenues from gynecology products in fiscal
year 1997 increased 3.2% compared to fiscal year 1996 due to higher shipments of
disposable catheters and reusable instruments. Additionally, OEM shipments
increased to $1,710,000 in fiscal year 1997 compared to $1,360,000 in fiscal
year 1996 reflecting shipments of special orders for minimally invasive surgery
equipment in fiscal year 1997 and increased shipments of disposable catheters.
Sales of the HTA for endometrial ablation also contributed $196,000 in revenue
in fiscal year 1997 following introduction of the system in certain
international markets in that year. Partially offsetting the above was a decline
in revenue from orthopedic products following the sale of the product line in
fiscal year 1996.
The Company's revenues from international customers were approximately
15.5%, 14.3% and 13.8% of the Company's revenue for fiscal years 1998, 1997 and
1996, respectively. International revenues can vary significantly as a
percentage of revenues depending on the timing of shipments and size of orders.
Cost of Sales and Gross Profit
Cost of sales as a percentage of revenue was 58.4%, 59.7% and 61.9% in
fiscal years 1998, 1997 and 1996, respectively.
The decrease in cost of sales as a percentage of revenue in fiscal year
1998 compared to fiscal year 1997 reflects a more favorable product mix
resulting primarily from the decline in lower margin OEM revenues compared to
the total revenue, plus reduced labor and overhead expenses following the
Company's facilities consolidation, which was completed at the end of the third
fiscal quarter of 1998.
The decrease in cost of sales as a percentage of revenue in fiscal year
1997 from fiscal year 1996 resulted primarily from improved overhead absorption
resulting from higher sales volume plus reduced overhead spending resulting from
lower personnel costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenue
were 90.0%, 78.8% and 69.6% in fiscal years 1998, 1997 and 1996, respectively.
Selling, general and administrative expenses increased from $7,883,000 in
fiscal year 1997 to $8,688,000 in fiscal year 1998. The higher expenses reflect:
a $531,000 write-down of intangible assets
51.
<PAGE>
to realizable value associated with the sale of the Company's GyneSys and
HysteroSys product lines to Ethicon, Inc.; relocation and plant shutdown
expenses of $329,000 associated with the Company's facilities consolidation;
increased selling expenses of $354,000 associated with the development of the
Company's field sales force of independent sales representatives; and higher
legal and administrative expenses associated with the Company's efforts to
obtain additional financing. The increase in expenses was partially offset by a
benefit of $701,000, net of settlement, representing the reversal of previously
expensed legal fees incurred in the completed litigation with CooperSurgical,
Inc., which fees were reimbursed by the Company's insurance carrier.
Fiscal year 1997 selling, general and administrative expenses increased by
$1,366,000 from $6,517,000 in fiscal year 1996 to $7,883,000 in fiscal year
1997. The higher expenses resulted from increased selling expense of $698,000
due to expansion of the domestic sales force, higher marketing and promotional
expenses, and the launch of the HTA in international markets. Fiscal year 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 BEI Electronics and other legal matters. See Note 1 of Notes to
Consolidated Financial Statements.
Research, Development and Related Expenses
The Company's internally funded research, development and related expenses
as a percentage of revenue were 29.7%, 18.6% and 14.2% for fiscal years 1998,
1997 and 1996, respectively.
Development expense increased from $1,864,000 in fiscal year 1997 to
$2,866,000 in fiscal year 1998 due to increased spending to support the Phase II
and Phase III portions of the HTA clinical trials in the United States.
Research and development expenses in fiscal year 1997 increased from fiscal
year 1996 primarily because of increased spending for the development of the HTA
and other new products and the Phase II clinical trials of the HTA.
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 continue to increase in absolute amount, but may fluctuate as a percentage
of revenue.
Interest Expense and Other Income
Interest expense as a percentage of revenue decreased to 0.2% in fiscal
year 1998 from 0.7% in fiscal year 1997 and decreased to 0.7% in fiscal year
1997 from 1.2% in fiscal year 1996 as existing debt was paid down and no new
debt incurred.
Other income in fiscal years 1998, 1997, and 1996 was comprised of interest
income earned on highly liquid investments. Other income in fiscal year 1998
increased as a percentage of revenue to 3.2% from 1.3% in fiscal year 1997
reflecting the larger average cash balance over the course of fiscal year 1998
compared to fiscal year 1997.
Income Tax Benefit
The Company's effective tax rate from operations was 31.4%, 23.0% and
34.0%, for fiscal years 1998, 1997 and 1996, respectively. The fiscal year 1998
and fiscal year 1997 tax rate vary from the statutory federal income tax rate as
a result of an increase in the valuation allowance due to substantial
52.
<PAGE>
uncertainties regarding the realizability of certain deferred tax assets and the
Company's ability to benefit from the amortization of goodwill.
In fiscal year 1998, an income tax benefit of $2,279,000 was derived from
the carryback of losses incurred in fiscal year 1998 against taxes paid on the
earnings of discontinued operations in fiscal year 1996 and fiscal year 1997.
The amount of the carryback available to the Company is limited to the taxes
paid on the earnings of the previous two fiscal years and, in fiscal year 1999,
any carryback will be limited to approximately $300,000 remaining.
In connection with the Distribution, the Company entered into a Tax
Allocation and Indemnity Agreement with Technologies, as amended December 15,
1998. Under the terms of the agreement, Technologies and BEI are each
responsible for the payment of 100% of the portion of federal and state taxes
related to their and their respective subsidiaries activities for the periods
prior to the Distribution in which both parties were included in consolidated
income tax returns and are entitled to their portion of any income tax refunds
for the same periods. For the periods after the Distribution, BEI is entitled to
100% of any carryback of losses or credits to prior years.
Discontinued Operations
Net income for business segments now operated by BEI Technologies, Inc. was
$4.6 million in each of fiscal years 1997 and 1996, respectively.
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 expand 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. The Company is
currently seeking additional financing. Consequently, although the Company
believes its existing cash balances together with operating revenues, additional
tax refunds and funds available as a result of a financing arrangement with
Transamerica Business Credit Corporation in May 1999 (see below) will provide
adequate funding to meet the Company's liquidity requirements for the remainder
of the current calendar year, there can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. In the
event the Company is unable to generate sufficient cash flows from operations or
to secure additional sources of capital, its ability to continue as a going
concern may be impaired. Any additional equity financing may be dilutive to
stockholders and debt financing, if available, may involve restrictive covenants
and may also be dilutive to stockholders.
During the first nine-months of fiscal 1999, cash used by operations was
$2,043,000 principally due to the $4,891,000 net loss for the period, partially
offset by changes in operating assets and liabilities of $2,848,000. Cash used
in investing activities during the first nine-months of fiscal 1999 of $12,000
consisted of purchases of equipment. Cash received from financing activities
consisted of $1,000,000 from the issuance of long-term debt (see below). Cash
flows used in financing activities consisted of $21,000 in scheduled payments
made on long-term debt.
The Company had no material capital or other commitments as of July 3,
1999.
53.
<PAGE>
As of May 7, 1999, the Company signed an agreement with TBCC to provide up
to $2,500,000 in senior secured financing. Key components of the agreement are
as follows:
TBCC is providing the Company with a Revolving Credit Facility under which
the Company may from time to time borrow an aggregate amount not to exceed the
lesser of $1,000,000 or an amount equal to 85% of the amount of the Company's
eligible accounts receivable as defined in the agreement (the "Revolving Loan").
In addition to the Revolving Loan, TBCC is providing the Company with a Senior
Term Loan not to exceed $1,500,000 (the "Term Loan"). The Term Loan was made in
an initial disbursement in the amount of $1,000,000 on May 7, 1999; with an
additional disbursement of $500,000 to be made upon the closing of an equity
issuance by the Company generating net proceeds of not less than $2,000,000.
All borrowings under the TBCC agreement are collaterized by all of the assets of
the Company.
The term of the Revolving Loan is one year from the date of the agreement
and may be renewed upon the agreement of both parties. The interest rate on the
Revolving Loan will be the Base Rate (defined below) plus 3.0% per annum,
provided that the interest rate in effect in each month will not be less than
9.0% per annum, and provided that the interest charged for each month in respect
of the Revolving Credit Facility shall be a minimum of $3,000, regardless of the
amount of the obligations outstanding. Base Rate means the highest prime, base
or equivalent rate of interest announced from time to time by Citibank, N.A.
(which may not be the lowest rate of interest charged by such bank).
The term of each disbursement of the Term Loan is for 30 months after the
date of such disbursement and the interest on the Term Loan accrues at a rate
not less than 13.5% per annum. In connection with the loan-term borrowings
under the TBCC agreement, the Company may be subject to market risks resulting
from charges in the variable interest rate as provided in the agreement. At
July 3, 1999, the fair value of the borrowings outstanding under the term loan
approximates its carrying value.
Concurrent with the above transaction, the Company provided TBCC with a
seven-year warrant to purchase 92,308 shares of common stock at an initial
exercise price of $1.625 per share, subject to adjustment. The warrant is
currently exercisable.
Year 2000 Compliance: Modification of Management Information Systems
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such Year 2000 requirements,
especially those with internally developed systems.
The Company and third parties, with which the Company does business, rely
on numerous computer programs in their day-to-day operations. The Company's
Year 2000 project is divided into the following major sections: infrastructure
and applications software, commonly referred to as "IT Systems", third party
suppliers and customers, commonly referred to as "External Agents", process
control and instrumentation and Company products.
IT Systems. The Company has completed its assessment of Year 2000 issues as
they relate to the Company's IT systems. This analysis included such activities
as order taking, billing, purchasing/accounts payable, general ledger/financial,
and inventory. Systems critical to the Company's business are commercial
packages available from third party vendors and currently in use with little
modification. According to information provided by the suppliers of these
products, the versions of these systems in use are believed to be Year 2000
compliant in storage, calculation, and function. The
54.
<PAGE>
Company has upgraded these systems where necessary and believes that all mission
critical software is now Year 2000 compliant, based upon representation from the
vendors. The Company has used both internal and external resources to test the
versions of the software believed to be Year 2000 compliant and has found no
discrepancy. The Company is executing a plan to resolve the remaining software
and hardware issues. The Year 2000 analysis and upgrading of existing systems
are being performed as a part of the Company's routine maintenance of computer
systems and are not anticipated to be material to the Company's financial
results.
External Agents. The Company has sent questionnaires and letters of inquiry
to the External Agents to assist the Company in assessing the Year 2000
readiness of its External Agents and evaluate the scope of the Company's
exposure. To date, the Company is not aware of any External Agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that External Agents will be Year 2000 ready. The inability of External Agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by External Agents
is not determinable.
Process Control and Instrumentation. All other items with potential Year
2000 issues continue to be inventoried and evaluated by the Company. These
include such items as telephone systems, security systems, HVAC, copiers, FAX
machines, production equipment, tools and other process systems. The Company
anticipates that the assessment phase of this part of the project will be
completed in the third calendar quarter. To date, the Company has not
discovered any year 2000 issues with any of these items. Although the Company
is in the early phases of this portion of the Year 2000 project, based upon a
preliminary review the Company does not anticipate costs related to this portion
of the project to be material to the financial results of the Company.
Company Products. In addition, BEI has reviewed the Year 2000 issue as it
relates to the electronic products manufactured for sale by the Company. The
Company believes that none of its products are date sensitive or will require
modification to become Year 2000 compliant. Accordingly, the Company does not
believe the Year 2000 issue presents a material exposure as it relates to the
Company's products.
The Company currently believes that it has an effective program in place to
resolve the Year 2000 issues in a timely manner, however the Company has not yet
completed all necessary phases of the Year 2000 project. In the event that the
Company does not complete any additional phases, the Company would be unable to
efficiently take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy generally
resulting from Year 2000 issues could materially adversely affect the Company.
The Company currently believes it does not need a year 2000 contingency
plan. All of the Company's major systems have been upgraded or determined to be
compliant. Any remaining Year 2000 compliance issues should be minor and will be
dealt with as they are identified. The Company will continue to monitor and
evaluate the potential impact of the Year 2000 issue and adjust the plans
accordingly.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. This statement
requires that all derivatives be recorded in a company's balance sheet as either
an asset or liability measured at its fair value and that changes in the
derivative's fair value be
55.
<PAGE>
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statements No.
133." This statement defers for one year the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. Because the Company does not enter
into financial instruments for trading or speculative purposes and does not
currently utilize derivative financial instruments, management does not
anticipate that the adoption of the new Statement will have any effect on the
Company's consolidated financial position or results of operations.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had
a material effect on the Company's operations.
56.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the United
States and, as such, are not subject to material foreign currency exchange rate
risk. The Company is subject to the following interest rate market risks: (i)
the Company has cash and cash equivalents on which interest income is earned at
variable rates; (ii) the Company also has a $1,000,000 credit facility at a
variable interest rate, which is affected by the general level of U.S. interest
rates. The Company believes its market risk exposures are not material.
57.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of October 2, 1999 by: (i) each director; (ii)
each executive officer; (iii) all executive officers and directors of the
Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than five percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------------
Number of Percent of
Shares Total (2)
------ ---------
<S> <C> <C>
Mr. Charles Crocker(3) 1,557,904 20.3%
One Post Street
Suite 2500
San Francisco, CA
Brinson Partners, Inc.(4) 404,300 5.3%
209 S. LaSalle Street
Chicago, IL
SoGen International Fund, Inc.(5) 400,000 5.2%
1221 Avenue of the Americas
8th Floor
New York, NY 10020
Dimensional Fund Advisors, Inc.(6) 460,800 6.0%
1299 Ocean Avenue
Penthouse
Santa Monica, CA
Hollybank Investment, LP (7) 927,000 12.1%
One Financial Center, Suite 1600
Boston, MA
Mr. Samuel Dickstein(8) 55,457 *
Mr. Thomas W. Fry(8) 54,020 *
Dr. Ralph M. Richart(8) 105,161 1.4%
Mr. Richard W. Turner(8) 375,012 4.7%
Dr. Lawrence A. Wan(8) 29,250 *
Mr. Gary D. Wrench(8)(9) 93,047 1.2%
All executive officers and directors as a group (7 persons)(10) 2,269,851 27.8%
</TABLE>
____________________
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of the Company and upon any Schedules 13D or 13G
filed with the Securities and Exchange Commission (the "Commission").
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that each of
the stockholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned.
(2) Applicable percentages are based on 7,685,707 shares outstanding on October
2, 1999, adjusted as required by rules promulgated by the Commission.
58.
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(3) Includes 400,000 shares held by Mr. Crocker as trustee for his adult
children, as to which Mr. Crocker disclaims beneficial ownership. Also
includes 54,936 shares held in a trust of which Mr. Crocker is beneficiary
and sole trustee. Mr. Crocker, acting alone, has the power to vote and
dispose of the shares in each of these trusts.
(4) Represents shares held by Brinson Partners, Inc. ("Partners") which has the
sole power to vote and dispose of the shares held by it and shares held by
Brinson Trust Company ("Trust") which has the sole power to vote and
dispose of the shares held by it. Trust is a wholly-owned subsidiary of
Partners, which is a wholly-owned subsidiary of Brinson Holdings, Inc.
("Holdings"). Holdings may be deemed to share the power to vote and dispose
of all shares held by Partners and Trust, and Partners may be deemed to
share the power to vote and dispose of all shares held by itself or Trust.
Therefore, both Holdings and Partners each may be deemed a beneficial owner
of all the shares held by Partners and Trust.
(5) SoGen International Fund, Inc. shares with Societe Generale Asset
Management Corp. the power to vote and dispose of all shares held by it.
(6) Represents shares held by Dimensional Fund Advisors, Inc., DFA Investment
Dimensions Group Inc. and The DFA Investment Trust Company. Officers of
Dimensional Fund Advisors, Inc. have sole power to vote and dispose of
shares beneficially owned by it, including shares held by DFA Investment
Dimensions Group Inc. and The DFA Investment Trust Company.
(7) Represents shares held by Hollybank Investments, LP ("Hollybank") which has
the sole power to vote and dispose of the shares held by it and includes
88,000 shares held by Dorsey R. Gardner, general partner of Hollybank, who
has the sole power to vote and dispose of his shares. Mr. Gardner, as
general partner of Hollybank, may be deemed to beneficially own shares held
by Hollybank. Except to the extent of his interest as a limited partner in
Hollybank, Mr. Gardner disclaims such beneficial ownership.
(8) Includes shares which certain officers and directors have the right to
acquire within 60 days after the date of this table pursuant to outstanding
options as follows: Mr. Dickstein, 39,667 shares; Mr. Fry, 12,649 shares;
Mr. Turner, 375,012 shares; Dr. Wan, 10,000 shares; Mr. Wrench, 31,028
shares; and all executive officers and directors as a group, 468,356
shares. Also includes shares which certain officers and directors have the
right to vote pursuant to unvested portions of restricted stock awards as
follows: Dr. Richart, 5,014 shares; Dr. Wan, 4,453 shares; Mr. Wrench,
7,200 shares; and all executive officers and directors as a group, 16,667
shares.
(9) Includes 45,276 shares held in a revocable trust of which Mr. Wrench and
his wife, Jacqueline Wrench, are beneficiaries and sole trustees. Mr. and
Mrs. Wrench, acting alone, each has the power to vote and dispose of such
shares. Also includes 16,743 shares which Mr. Wrench, acting alone, has
power to vote and dispose of.
(10) Includes the shares described in the Notes above, as applicable.
59.
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EXPERTS
The consolidated financial statements of BEI Medical Systems Company, Inc.
at October 3, 1998 and September 29, 1997, and for each of the three years in
the period ended October 3, 1998, appearing in this Proxy Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Ernst & Young LLP, BEI's independent
public accountants, will be present at the Special Meeting where they will have
an opportunity to respond to appropriate questions of stockholders and to make a
statement if they so desire.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Special Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
Thomas W. Fry
Corporate Secretary
October ___, 1999
60.
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INDEX TO ANNEXES
Asset Purchase Agreement dated October 1, 1999
between BEI and CSAC................................................. Annex A
Opinion rendered by Financial Advisors
to BEI dated September 23, 1999...................................... Annex B
61.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at July 3, 1999 (unaudited)
and October 3, 1998....................................................... F-2
Unaudited Condensed Consolidated Statements of Operations for the
nine month periods ended July 3, 1999 and June 27, 1998................... F-3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine month periods ended July 3, 1999 and June 27, 1998................... F-4
Notes to Unaudited Condensed Consolidated Financial Statements.............. F-5
Audited Consolidated Financial Statements
Report of Independent Auditors.............................................. F-7
Consolidated Balance Sheets at October 3, 1998 and September 27, 1997....... F-8
Consolidated Statements of Operations for the fiscal years ended
October 3, 1998, September 27, 1997 and September 28, 1996................ F-9
Consolidated Statements of Stockholders' Equity for the fiscal years ended
October 3, 1998, September 27, 1997 and September 28, 1996................ F-10
Consolidated Statements of Cash Flows for the fiscal years ended
October 3, 1998, September 27, 1997 and September 28, 1996................ F-11
Notes to Consolidated Financial Statements.................................. F-12
</TABLE>
F-1
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
----------------------------------
(Unaudited) (See note below)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,429 $ 3,504
Trade receivables, net 1,675 1,897
Inventories (Note 2) 2,559 3,087
Refundable income taxes 423 2,384
Other current assets 201 360
----------------------------------
Total current assets 7,287 11,232
Property, plant and equipment, net 611 820
Tradenames, patents and other, net 1,656 1,846
Goodwill, net 3,173 3,353
Other assets 195 137
----------------------------------
Total assets $12,922 $17,388
==================================
Liabilities and stockholder's equity
Current liabilities
Trade accounts payable $ 664 $ 1,551
Accrued expenses and other liabilities 1,548 1,376
Current portion of long-term debt - 21
Total current liabilities 2,212 2,948
Long-term debt, less current portion (Note 4) 1,000 -
Stockholders' equity 9,710 14,440
----------------------------------
Total liabilities and stockholders' equity $12,922 $17,388
==================================
</TABLE>
See notes to condensed consolidated financial statements.
Note: The balance sheet at October 3, 1998 has been derived from the audited
consolidated balance sheet at the date but does not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
F-2
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-----------------------------------------------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,347 $ 2,293 $ 6,512 $ 7,246
Cost of sales 1,389 1,350 3,878 4,239
-----------------------------------------------------------
Gross Profit 958 943 2,634 3,007
Selling, general and administrative expenses 1,869 1,757 5,414 6,253
Research, development and related expenses 902 778 2,485 1,772
-----------------------------------------------------------
2,771 2,535 7,899 8,025
Loss from operations (1,813) (1,592) (5,265) (5,018)
Interest income 25 54 88 272
Interest expense (29) (2) (29) (21)
-----------------------------------------------------------
Loss before income taxes (1,817) (1,540) (5,206) (4,767)
Income tax benefit (107) (563) (315) (1,443)
-----------------------------------------------------------
Net loss ($1,710) ($977) ($4,891) ($3,324)
===========================================================
Loss per common shares (Note 3):
Loss per common share, basic and diluted ($0.23) ($0.13) ($0.65) ($0.45)
===========================================================
Weighted average shares outstanding 7,540 7,428 7,497 7,316
===========================================================
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
July 3, June 27,
1999 1998
------------------------------
<S> <C> <C>
Net cash used in operating activities ($2,043) ($3,717)
Cash flows from investing activities
Purchases of equipment (12) (247)
Purchases of patents and licenses - (108)
------------------------------
Net cash used in investing activities (12) (355)
Cash flows from financing activities
Proceeds from long-term borrowings 1,000 -
Payments on long-term debt (21) (158)
------------------------------
Net cash provided by (used in) financing activities 979 (158)
Net decrease in cash and cash equivalents (1,075) (4,230)
------------------------------
Cash and cash equivalents at beginning of period 3,504 9,271
------------------------------
Cash and cash equivalents at end of period $ 2,429 $ 5,041
==============================
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 3, 1999
1. Basis of Presentation
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 accruals) 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
October 2, 1999. 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 October 3, 1998.
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"). In connection with the
Distribution, Electronics transferred to Technologies all of the assets,
liabilities and operations of its BEI Sensors & Systems Company, Inc. and
Defense Systems Company, Inc. business segments. After the Distribution, the
sole asset of Electronics was its investment in its subsidiary, BEI Medical
Systems Company, Inc. ("Medical"). On November 4, 1997, Electronics merged with
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").
2. Inventories
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
----------------------------
(dollars in thousands)
<S> <C> <C>
Finished products $1,821 $2,128
Work in process 136 196
Materials 602 763
----------------------------
Inventories $2,559 $3,087
============================
</TABLE>
F-5
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
July 3, 1999
3. Loss Per Share
As a result of the net loss for all periods presented, weighted average shares
used in the calculation of basic and diluted loss per share are the same.
Weighted average shares exclude unvested restricted stock, which amounted to
151,000 and 338,000 shares at July 3, 1999 and June 28, 1998 respectively.
Common stock equivalents are excluded from the loss per share for all periods
presented because the effect would be anti-dilutive.
4. Note Payable
As of May 7, 1999, the Company signed an agreement with Transamerica Business
Credit Corporation ("TBCC") to provide up to $2,500,000 in senior secured
financing. Key components of the agreement are as follows:
TBCC is providing the Company with a Revolving Credit Facility under which the
Company may from time to time borrow an aggregate amount not to exceed the
lesser of $1,000,000 or an amount equal to 85% of the amount of the Company's
eligible accounts receivable as defined in the agreement (the "Revolving Loan").
In addition to the Revolving Loan, TBCC is providing the Company with a Senior
Term Loan not to exceed $1,500,000 (the "Term Loan"). The Term Loan was made in
an initial disbursement in the amount of $1,000,000; on May 7, 1999 with an
additional disbursement of $500,000 to be made upon the closing of an equity
issuance by the Company generating net proceeds of not less than $2,000,000.
All borrowings under the TBCC agreement are collaterized by all of the assets of
the Company.
The term of the Revolving Loan is one year from the date of the agreement and
may be renewed upon the agreement of both parties. The interest rate on the
Revolving Loan will be the Base Rate (defined below) plus 3.0% per annum,
provided that the interest rate in effect in each month will not be less than
9.0% per annum, and provided that the interest charged for each month in respect
of the Revolving Credit Facility shall be a minimum of $3,000, regardless of the
amount of the obligations outstanding. Base Rate means the highest prime, base
or equivalent rate of interest announced from time to time by Citibank, N.A.
(which may not be the lowest rate of interest charged by such bank).
The term of each disbursement of the Term Loan is for 30 months after the date
of such disbursement and the interest on the Term Loan accrues at a rate not
less than 13.5% per annum.
Concurrent with the above transaction, the Company provided TBCC with a seven-
year warrant to purchase 92,308 shares of common stock at an initial exercise
price of $1.625 per share, subject to adjustment. The warrant is currently
exercisable.
F-6
<PAGE>
Report of 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 October 3, 1998 and
September 27, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 3, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BEI Medical
Systems Company, Inc. at October 3, 1998 and September 27, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 3, 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
November 13, 1998
F-7
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
-----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,504 $ 9,271
Trade receivables, less allowance for doubtful accounts
(1998--$174; 1997--$112) 1,897 1,958
Inventories (Note 4) 3,087 2,939
Refundable income taxes 2,384 10
Other current assets 186 286
Deferred income taxes (Note 8) 174 -
-----------------------------------
Total current assets 11,232 14,464
Plant and equipment:
Equipment 1,569 1,461
Leasehold improvements 31 130
-----------------------------------
1,600 1,591
Less allowances for depreciation and
amortization 780 780
-----------------------------------
Net plant and equipment 820 811
Other assets:
Tradenames, patents and related assets, less amortization
(1998--$4,560; 1997--$4,142) 1,846 3,708
Goodwill, less amortization (1998--$1,457;
1997--$1,215) 3,353 3,595
Other 137 6
-----------------------------------
Total other assets 5,336 7,309
-----------------------------------
Total assets $ 17,388 $ 22,584
===================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 1,551 $ 346
Accrued expenses and other liabilities (Note
6) 1,376 2,785
Current portion of long-term debt (Note 7) 21 190
Deferred income taxes - 58
-----------------------------------
Total current liabilities 2,948 3,379
Long-term debt, less current portion (Note 7) - 22
Minority interest in consolidated subsidiary
(Note 1) - 1,523
Commitments and contingencies (Notes 12 and 13)
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;
1998-7,778,296 shares; 1997-7,114,513 shares) 10 10
Additional paid-in capital 16,291 14,204
Retained earnings (deficit) (1,525) 3,446
-----------------------------------
Less unearned restricted stock and other 14,776 17,660
(Note 10) (336) -
-----------------------------------
Total stockholders' equity 14,440 17,660
-----------------------------------
Total liabilities and stockholders' equity $ 17,388 $ 22,584
===================================
</TABLE>
See notes to condensed consolidated financial statements.
F-8
<PAGE>
BEI Medical Systems Company, Inc. Subsidiaries
Consolidated Statements of Operations
(dollars in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenue $ 9,651 $ 10,005 $ 9,357
Cost of sales 5,638 5,972 5,792
-----------------------------------------------------
Gross profit 4,013 4,033 3,565
Selling, general and administrative expenses 8,688 7,883 6,517
Research, development and related expenses 2,866 1,864 1,328
-----------------------------------------------------
11,554 9,747 7,845
-----------------------------------------------------
Loss from operations (7,541) (5,714) (4,280)
Other income 312 136 324
Interest expense (21) (70) (110)
-----------------------------------------------------
Loss before income taxes (7,250) (5,648) (4,066)
Income tax benefit (Note 8) (2,279) (1,300) (1,384)
-----------------------------------------------------
Loss from continuing operations (4,971) (4,348) (2,682)
Income (loss) from discontinued operations,
net of income taxes of $1,788 and $1,412,
for 1997 and 1996, respectively - 4,583 4,571
-----------------------------------------------------
Net (loss) income ($4,971) $ 235 $ 1,889
=====================================================
Loss from continuing operations per common
share, basic and diluted ($0.68) ($0.64) ($0.40)
Earnings (loss) from discontinued operations
per common share, basic and diluted - 0.67 0.68
-----------------------------------------------------
Earnings (loss) per common share, basic and
diluted (Note 2) ($0.68) $ 0.03 $ 0.28
=====================================================
Weighted average shares outstanding (Note 2) 7,354,416 6,816,702 6,737,399
=====================================================
Dividends per common share (Note 2) $ - $ 0.08 $ 0.08
=====================================================
</TABLE>
See notes to condensed consolidated financial statements.
F-9
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Unearned
Additional Retained Restricted
Common Paid-In Earnings Treasury Stock and
Stock Capital (Deficit) Stock Other Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 (1,303) (1,303)
shares at $9.67 average per share)
Cash dividends (563) (563)
Retirement of treasury stock (13,250) 13,250 -
---------------------------------------------------------------------------------------
Balances at September 27, 1997 before 10 14,204 42,727 - (1,393) 55,548
Distribution
Distribution (39,281) 1,393 (37,888)
---------------------------------------------------------------------------------------
Balances at September 27, 1997 10 14,204 3,446 - - 17,660
Net loss for 1998 (4,971) (4,971)
Restricted Stock Plan-Note 10 329 (250) 79
Deferred compensation 218 (86) 132
Stock options exercised 17 17
Conversion of minority interest-Note 1 1,523 1,523
----------------------------------------------------------------------------------------
Balances at October 3, 1998 $ 10 $ 16,291 ($1,525) $ - ($336) $ 14,440
========================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
F-10
<PAGE>
BEI Medical Systems Company, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
October September September
3, 1998 27, 1997 28, 1996
---------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Loss from continuing operations ($4,971) ($4,348) ($2,682)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 311 269 217
Amortization 1,115 1,356 1,530
Provision for losses on trade receivables 62 57 39
Loss on sale of assets 545 - -
Deferred income taxes (233) (261) (26)
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
Trade receivables (1) (302) (187)
Inventories (423) (854) (267)
Refundable income taxes (2,374) - -
Other assets (31) (142) 192
Trade accounts payable, accrued expenses and other liabilities (172) 164 (3,955)
----------------------------------------------
Net cash used in operating activities of continuing operations (6,172) (4,061) (5,139)
Cash flows from investing activities
Purchases of plant and equipment (372) (263) (316)
Purchases of patents and licenses (24) (186) (136)
Proceeds from sale of assets 975 - -
Other - 18 (297)
----------------------------------------------
Net cash provided by (used in) investing activities of continuing
operations 579 (431) (749)
Cash flows from financing activities
Proceeds from sale of minority interest - - 1,488
Principal payments on long-term debt and other liabilities (191) (715) (678)
Proceeds from issuance of common stock, net - 872 1,067
Proceeds from stock option exercises 17 - -
Repurchase of stock - (1,303) (154)
Payment of cash dividends - (563) (555)
----------------------------------------------
Net cash (used in) provided by financing activities of continuing
operations (174) (1,709) 1,168
Net cash provided by discontinued operations-Note 3 - 6,344 4,825
----------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,767) 143 105
Cash and cash equivalents at beginning of year 9,271 9,128 9,023
----------------------------------------------
Cash and cash equivalents at end of year $3,504 $9,271 $9,128
==============================================
</TABLE>
See notes to condensed consolidated financial statements.
F-11
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements
October 3, 1998
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"). 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.
As of September 27, 1997, the sole asset of BEI Electronics was its investment
in BEI Medical Systems Company, Inc. 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"). As a
result of the Merger, 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 were 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. After the Merger,
Electronics changed its name to BEI Medical Systems Company, Inc. (the
"Company").
The following table shows the conversion as of November 4, 1997 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.
<TABLE>
<CAPTION>
Common Shares
---------------------------------------
Pre-Merger Post-Merger
Medical Common Electronics
Stock Common Stock
---------------------------------------
<S> <C> <C>
Johnson & Johnson 52,131 287,561
Management 12,650 69,778
Others 15,721 86,716
---------------------------------------
80,502 444,055
=======================================
</TABLE>
Prior to the merger of Medical with Electronics, Medical had shares of Series A
and B preferred stock outstanding which were converted to Medical common stock
on a share-for-share basis.
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
F-12
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements
October 3, 1998
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 Teterboro, New Jersey. The
Company is currently seeking additional financing. Consequently, although the
Company believes its existing cash balances together with operating revenues,
tax refunds and anticipated working capital financing will provide adequate
funding to meet the Company's liquidity requirements for the next twelve months,
there can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. In the event the Company is unable to
generate sufficient cash flows from revenues or secure additional sources of
capital, its ability to continue as a going concern may be impaired. Any
additional equity financing may be dilutive to stockholders and debt financing,
if available, may involve restrictive covenants and/or also be dilutive to
stockholders.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest September 30. Fiscal year
1998 contained 53 weeks. Fiscal years 1997 and 1996 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.
F-13
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements
October 3, 1998
2. Summary of Significant Accounting Policies (continued)
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 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 ten years, using the straight-
line method.
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 and for
Long-Lived Assets to be Disposed of." Long-lived assets consists of plant and
equipment, patents, and trade names, related noncompetition agreements and
goodwill acquired in purchase acquisitions. Patents and noncompetition
agreements are being amortized on a straight-line basis over their terms. Trade
names are amortized on a straight-line basis over ten to twenty-five 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
expected period of use. If impairment is indicated, the carrying value of long-
lived assets would be reduced to fair value. In connection with the sale of the
Company's GyneSys and HysteroSys product lines, intangible assets of $1,133,000
were sold.
Stock Option Plan
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options. Under APB
No. 25, if the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-14
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
2. Summary of Significant Accounting Policies (continued)
Per Share Information
During the fiscal year ended October 3, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires the dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS excludes dilution and is computed
by dividing net income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised and resulted in the issuance of common stock
that then shared in the earnings or loss of the Company. Diluted EPS is computed
using the treasury stock method when the effect of common stock equivalents
would be dilutive. All prior periods have been restated to comply with the
provisions of SFAS No. 128. As a result of the net loss from continuing
operations for all periods presented, weighted average shares used in the
calculation of basic and diluted loss per share are the same. Weighted average
shares exclude unvested restricted stock which amounted to approximately
184,000, 211,000 and 190,000 shares for 1998, 1997 and 1996, respectively.
Common stock equivalents are excluded from the loss per share calculation for
all periods presented because the effect would be anti-dilutive.
Research and Development Costs
Company-sponsored product development costs are charged to expense when
incurred.
Advertising Costs
Advertising costs are charged to expense when incurred and were approximately
$489,000, $412,000 and $423,000 in fiscal years 1998, 1997 and 1996,
respectively.
Recent Accounting Pronouncements
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.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is required
to be adopted in years beginning after June 15, 1999. Because the Company does
not enter into financial instruments for trading or speculative purposes and
does not currently utilize derivative financial instruments, management does not
anticipate that the adoption of the new Statement will have any effect on the
Company's consolidated financial position or results of operations.
F-15
<PAGE>
BEI Medical Systems Company, Inc.
Notes to Consolidated Financial Statements (continued)
October 3, 1998
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.
4. Inventories
<TABLE>
<CAPTION>
1998 1997
---------------------------
(dollars in thousands)
<S> <C> <C>
Finished products $2,128 $1,843
Work in process 196 230
Materials 763 866
---------------------------
Inventories $3,087 $2,939
===========================
</TABLE>
Included in fiscal year 1998 finished goods is $245,000 of inventory which is
currently subject to FDA approval prior to its sale in the United States.
5. Bank Credit Agreements
The Company had no bank credit agreements at October 3, 1998 and September
27, 1997.
6. Accrued Expenses and Other Liabilities
<TABLE>
<CAPTION>
1998 1997
--------------------------
(dollars in thousands)
<S> <C> <C>
Insurance reimbursement $ - $ 946
Noncompetition contract - 562
Professional fees 134 205
Employee compensation 268 337
Taxes 141 136
Commissions 180 127
Royalties and related costs 130 102
Tax refund payable to BEI Technologies 327 -
Other 196 370
--------------------------
Accrued Expenses and Other Liabilities $1,376 $2,785
==========================
</TABLE>
F-16
<PAGE>
BEI Medical Systems Company, Inc.
Notes to Consolidated Financial Statements (continued)
October 3, 1998
7. Long-Term Debt
<TABLE>
<CAPTION>
1998 1997
------------------------
(dollars in thousands)
<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
December 1998 $ 21 $ 147
Note payable to a related party - 60
Asset purchase agreement with zero interest; payable
in monthly installments through 1998 - 5
------------------------
21 212
Less current portion 21 190
------------------------
Long-term debt $ - $ 22
========================
</TABLE>
Interest of approximately $7,000, $11,000 and $31,000 was paid on long-term debt
by Medical during fiscal 1998, 1997 and 1996, respectively. Interest of
approximately $35,000, $50,000 and $96,000 was paid on noncompetition agreements
by Medical during fiscal 1998, 1997 and 1996, 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.
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. Significant components of the
Company's deferred tax liabilities and assets as of October 3, 1998 and
September 27, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
(dollars in thousands)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and property basis difference $ 20 $ 12
Accrued expenses - 213
---------------------------------
Total deferred tax liabilities 20 225
Deferred tax assets:
Intangibles 465 536
Other 193 98
Inventory valuation 92 85
State net operating loss carryovers 1,177 1,177
Allowance for bad debt 51 55
---------------------------------
Total deferred tax assets 1,978 1,951
---------------------------------
Valuation allowance for deferred tax assets (1,784) (1,784)
---------------------------------
Net deferred tax assets/(liabilities) $ 174 $ (58)
=================================
</TABLE>
F-17
<PAGE>
BEI Medical Systems Company, Inc.
Notes to Consolidated Financial Statements (continued)
October 3, 1998
The valuation allowance reflects uncertainties regarding realizability of
deferred tax assets related to certain intangibles and state net operating loss
carryovers. As of October 3, 1998, the Company has net operating loss
carryforwards for state income tax purposes of approximately $19.6 million,
which expire from 2001 through 2004. The Company has no net operating loss
carryforwards for federal income tax purposes.
Significant components of the benefit for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current (credit)
Federal $(2,046) $(1,039) $(1,358)
State - - -
--------------------------------------
Total current (2,046) (1,039) (1,358)
Deferred (credit)
Federal (233) (261) (23)
State - - (3)
--------------------------------------
Total deferred (233) (261) (26)
--------------------------------------
Total income tax (benefit) $(2,279) $(1,300) $(1,384)
======================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Income tax credit at the statutory
rate of 34% $(2,465) $(1,920) $(1,382)
Federal income tax effect of state
income taxes - - 1
Goodwill amortization 131 81 81
Increase in federal valuation allowance - 607 -
Other 55 (68) (81)
----------------------------------------
Federal income taxes (credit) (2,279) (1,300) (1,381)
State income tax credit, net of
increase in state valuation allowance - - (3)
----------------------------------------
Provision (credit) for income taxes $(2,279) $(1,300) $(1,384)
========================================
</TABLE>
F-18
<PAGE>
BEI Medical Systems Company, Inc.
Notes to Consolidated Financial Statements (continued)
October 3, 1998
8. Income Taxes (continued)
In connection with the Distribution, the Company entered into a Tax Allocation
and Indemnity Agreement with Technologies as amended December 15, 1998. Under
the terms of the agreement, Technologies and Medical are each responsible for
the payment of 100% of the portion of federal and state taxes related to their
and their respective subsidiaries activities for the periods prior to the
Distribution in which both parties were included in consolidated income tax
returns and are entitled to their portion of any income tax refunds for the same
periods. For the periods after the Distribution, Medical is entitled to 100% of
any carryback of losses or credits to prior years.
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.
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 24,000 options outstanding
under the plan at an exercise price of $3.75 were exercised during fiscal year
1997. No shares were outstanding or available for grant at September 27, 1997.
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.
F-19
<PAGE>
BEI Medical Systems Company, Inc.
Notes to Consolidated Financial Statements (continued)
October 3, 1998
In March 1997, the shareholders approved an increase in the share reserve for
option grants by 250,000 so that shares issued pursuant to options granted under
the Amended Plan cannot exceed 1,600,000 in the aggregate.
As a result of the Distribution, all the outstanding options for common stock of
the Company at the date of the Distribution, both vested and unvested, 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 and the Electronics options were cancelled. 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.
Transactions relating to the Amended 1987 Stock Option Plan are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Common Price Price
Shares Per Share Per Share
------------------------------------------
<S> <C> <C> <C>
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 as of September 27, 1997 - - -
Conversion of BEI Medical 595,739 $0.31 - $3.74 $0.48
Granted 203,489 $1.94 - $4.00 $3.04
Exercised (55,161) $0.31 $0.31
------------------------------------------
Options outstanding at October 3, 1998 744,067 $0.31 - $4.00 $1.19
==========================================
</TABLE>
F-20
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
10. Stock Option and Restricted Stock Plans (continued)
As of October 3, 1998, 243,687 shares were available for grant under the Amended
Plan. Details of the 744,067 options outstanding as of October 3, 1998 were as
follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Options Contractual Price Per Number Price
Prices Outstanding Life (Years) Share Exercisable Per Share
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.31 366,821 6.8 $0.31 366,821 $0.31
$0.54 52,403 7.3 $0.54 28,960 $0.54
$0.70 107,564 7.6 $0.70 53,782 $0.70
$1.94 95,000 9.5 $1.94 - -
$3.74 13,790 8.4 $3.74 3,448 $3.74
$4.00 108,489 9.1 $4.00 - -
-------------------------------------------------------------------------------------
$0.31 - $4.00 744,067 7.7 $1.19 453,011 $0.40
=====================================================================================
</TABLE>
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.
Transactions related to the incentive and supplemental Medical stock option
plans of 1995 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Common Price Price
Shares Per Share Per Share
---------------------------------------------
<S> <C> <C> <C>
Options outstanding at September 30, 1995 85,500 $1.72 $1.72
Granted 34,800 $3.00 - $3.85 $3.48
---------------------------------------------
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
Options converted to Electronics (108,000) $1.72 - $20.65 $2.66
---------------------------------------------
Options outstanding at October 3, 1998 - - -
=============================================
</TABLE>
F-21
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
10. Stock Option and Restricted Stock Plans (continued)
On November 4, 1997, Medical and Electronics merged 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.
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
October 3, 1998, 589,926 shares had been granted and of these, 517,850 shares
were outstanding and are included in the Company's total common stock
outstanding. Of the outstanding shares, 197,801 had vested. There are 182,150
shares reserved for future 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 or 1996. In fiscal 1998, $79,000 of compensation expenses was recorded.
Pro forma information regarding net loss and net loss per common share, basic
and diluted is required by SFAS No. 123, and has been determined as if the
Company had been accounting for its employee stock options under the fair value
method of that Statement. The fair value of these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 1998: weighted-average risk-free interest rate of 4.92%; no
dividends; volatility factors of the expected market price of the Company's
common stock of 0.562 for 1998 and a weighted average expected life of the
options of 9.3 years for 1998.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
granted in 1998 is amortized to expense over the options' vesting period. The
weighted-average grant date fair value of options granted during fiscal year
1998 was $2.10. The Company's pro forma net loss was $5,036,000 for 1998 and pro
forma net loss per common share, basic and diluted was $0.68.
The pro forma disclosures presented for fiscal year 1998 may not necessarily be
indicative of the pro forma effect of SFAS No. 123 for future periods in which
options may be granted.
F-22
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
The impact of the calculation required by FAS No. 123 on pro forma results of
operations and earnings (loss) per share was determined to be immaterial for
fiscal years 1997 and 1996.
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 1998, 1997 and 1996 for the benefit of the
employees of continuing operations were approximately $76,000, $62,000 and
$54,000, 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. This plan will terminate May 31, 1999 unless
extended.
12. Lease and Other Commitments
Leases
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 October 3, 1998 (dollars in thousands):
1999 $ 355
2000 318
2001 312
2002 311
2003 306
Thereafter 204
-----------
Total minimum lease payments $1,806
===========
Total rental expense attributable to property, plant and equipment for
continuing operations amounted to approximately $297,000, $268,000, and $228,000
for fiscal 1998, 1997 and 1996, respectively.
F-23
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
12. Lease and Other Commitments (continued)
Minimum Purchase Requirements
In 1997, the Company entered into an agreement with Valley Forge Scientific
Corporation giving the Company worldwide marketing rights for distribution of
the bipolar electrosurgical therapy systems, in the field of gynecology. The
agreement is for 63 months from the date the product first becomes available and
includes minimum requirements for the first fifteen-month period and is subject
to negotiating annual minimum requirements in subsequent twelve-month periods.
As of October 3, 1998, future minimum purchases for the initial fifteen-month
period of approximately $80,000 are still required.
Minimum Royalty Payments
In 1993, the Company entered into a license agreement for the HTA endometrial
ablation technology whereby royalty payments of 10% are payable on net revenues
of certain disposal components. The agreement is subject to minimum royalty
payments for a period of three years following the first shipment of product for
revenue. The minimum royalty payments during the next two fiscal years are as
follows (dollars in thousands):
1999 $33
2000 33
-------
Total minimum royalty payments $66
=======
The Company has also entered into a number of other license and royalty
agreements that require payments based upon revenues on the sales of certain
products ranging from 4% to 10% of revenue. Except for the endometrial ablation
technology agreement mentioned above, there are no minimum requirements. Total
royalty expense attributable to various license agreements amounted to
approximately $314,000, $270,000 and $238,000 for fiscal 1998, 1997 and 1996,
respectively.
Other Commitments
In connection with a $1.5 million equity investment in Medical in February 1996,
Johnson & Johnson Development Corporation ("J&J") received a right of first
negotiation to manufacture and/or distribute any product primarily intended for
use in endometrial ablation acquired or developed after the date of the
agreement ("Ablation Products") and the right to consult in connection with FDA
applications with respect to such Ablation Products.
The right of first negotiation is effective for a ninety-day period commencing
on the earlier of i.) J&J's notice to the Company of its desire to manufacture
and/or distribute an Ablation Product and ii.) the date the Company notifies J&J
of approval from the FDA to market an Ablation Product. In the event that the
parties are unable to agree upon mutually acceptable terms, then the Company may
either manufacture and/or distribute the Ablation Product itself or enter into
an agreement with a third party on terms that in
F-24
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
12. Lease and Other Commitments (continued)
the aggregate are not materially less favorable to the Company than those
offered by J&J. In addition, the Company may enter into agreements with third
parties prior to the J&J negotiation period, provided such agreements are
terminable by the Company within two years after the Company and J&J enter into
a manufacturing and/or distribution agreement. Depending upon the timing and
progress of clinical trials, the Company expects that the HTA system may be
subject to J&J's right of negotiation and consultation.
The Company entered into a consulting agreement with a director of the Company
to assist with medical research and clinical information. In consideration
for these services, the Company has issued 50,000 shares of restricted stock,
approximately 20,000 of which vested immediately upon issuance and the remainder
will vest ratable from October 1998 through March 2000. The agreement also
provides for commissions on sales of the HTA in the Far East and Latin America
territories at $1,000 per unit and a 2% commission on certain disposable units
sold.
13. Contingencies and Litigation
In July 1998, the Company settled a lawsuit commenced in 1993 by CooperSurgical,
Inc., a subsidiary of The Cooper Companies ("CooperSurgical"), for unspecified
damages alleging unfair competition due to actions by the Company and its then
president Richard Turner, a former employee of The Cooper Companies, and others.
In July 1998, the final settlement agreement was signed whereby the Company paid
$300,000 in cash, net of insurance reimbursement, and agreed to pay up to
$100,000 in royalties on future product revenues.
From time to time, BEI Medical may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.
The Company has developed a Company-wide Year 2000 plan (the "Plan") to, among
other things, prepare its computer equipment and software and devices with date-
sensitive embedded technology for the year 2000. The estimated dates by which
the Company believes it will have completed the Plan, are based upon
management's best estimates, which rely upon numerous assumptions regarding
future events, including vendor supplied software, the availability of certain
resources, third-party remediation plans and other factors.
These estimates, however, may prove not to be accurate, and results could differ
materially from those anticipated. Factors that could result in material
differences include, without limitation, the availability of personnel with
appropriate training and experience, the ability to identify, assess, remediate
and test all relevant computer codes and embedded technology, and similar
uncertainties. In addition, Year 2000-related issues may lead to possible
third-party claims, the impact of which cannot yet be estimated. No assurance
can be given that the aggregate cost of defending and resolving such claims, if
any, would not have a material adverse effect on the Company.
F-25
<PAGE>
BEI Medical Systems Company, Inc.
Notes To Consolidated Financial Statements (continued)
October 3, 1998
14. Sales
Revenue from continuing operations to customers in foreign countries amounted to
$1,500,000, $1,430,000 and $1,287,000 in fiscal 1998, 1997 and 1996,
respectively. In fiscal 1998, 1997 and 1996, foreign revenue did not exceed 10%
of consolidated revenue in any individual geographic area.
15. Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for fiscal
1998 and 1997:
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------
Dec. 27, Mar. 28, Jun. 27, Oct. 3,
1997 1998 1998 1998
--------------------------------------------------------
(dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenue $ 2,418 $ 2,535 $ 2,293 $ 2,405
Gross profit 923 1,141 943 1,006
Loss from continuing operations (1,196) (1,151) (977) (1,647)
Net loss $(1,196) $(1,151) $ (977) $(1,647)
Loss from continuing operations per
common share, basic and diluted $ (0.17) $ (0.16) $ (0.13) $ (0.22)
Earnings from discontinued operations
per common share, basic and diluted - - - -
Loss per common share, basic and
diluted $ (0.17) $ (0.16) $ (0.13) $ (0.22)
</TABLE>
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------
Dec. 28, Mar. 29, Jun. 28, Sep. 27,
1996 1997 1997 1997
--------------------------------------------------------
(dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenue $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 share, basic and diluted $(0.11) $(0.12) $ (0.17) $ (0.24)
Earnings from discontinued operations
per common share, basic and diluted $ 0.01 $ 0.21 $ 0.25 $ 0.21
Earnings (loss) per common share,
basic and diluted $(0.10) $ 0.09 $ 0.08 $ (0.03)
</TABLE>
F-26
<PAGE>
EXECUTION COPY
--------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
between:
BEI MEDICAL SYSTEMS COMPANY, INC.,
a Delaware corporation
and
COOPERSURGICAL ACQUISITION CORP.,
a Delaware corporation
______________________
Dated as of October 1, 1999
______________________
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1 SALE OF ASSETS; RELATED TRANSACTIONS; DEFINITIONS............ 1
1.1 Sale Of Assets.................................................. 1
1.2 Instruments of Conveyance and Transfer and Assumption........... 2
1.3 Further Assurances.............................................. 2
1.4 Assignments of Contracts and Rights............................. 2
1.5 Power of Attorney; Right of Endorsement......................... 2
1.6 Liabilities Being Assumed....................................... 3
1.7 Liabilities Not Being Assumed................................... 3
1.8 Purchase Price.................................................. 4
1.9 Delivery of Estimated Inventory and Net Receivables Statement... 4
1.10 Purchase Price Adjustment....................................... 4
1.11 Sales Taxes..................................................... 6
1.12 Closing......................................................... 7
1.13 Definitions..................................................... 7
Section 2 REPRESENTATIONS AND WARRANTIES OF THE SELLER................. 7
2.1 Organization and Qualification; Subsidiaries.................... 7
2.2 Authority Relative to this Agreement; Vote Required............. 7
2.3 No Conflict; Required Filings and Consents...................... 8
2.4 Compliance; Permits............................................. 9
2.5 SEC Filings; Financial Statements............................... 9
2.6 Absence of Certain Changes or Events............................ 10
2.7 No Undisclosed Liabilities...................................... 11
2.8 Contracts....................................................... 11
2.9 Title to Property............................................... 12
2.10 Brokers......................................................... 13
2.11 Intellectual Property Rights.................................... 13
2.12 Litigation...................................................... 14
2.13 Opinion of Financial Advisor.................................... 14
2.14 Accounts and Notes Receivable................................... 14
2.15 Suppliers, Consultants and Vendors.............................. 15
2.16 Customers....................................................... 15
2.17 Conflicts of Interest........................................... 15
2.18 Tax Matters..................................................... 15
2.19 FDA and Certain Other Compliances............................... 16
2.20 Insurance....................................................... 18
2.21 Environmental Matters........................................... 18
2.22 Sufficiency of Assets........................................... 18
2.23 Disclosure...................................................... 18
Section 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.............. 19
3.1 Due Organization................................................ 19
3.2 Authority; Binding Nature Of Agreements......................... 19
3.3 Non-Contravention; Consents..................................... 19
3.4 Brokers......................................................... 20
Section 4 PRE-CLOSING COVENANTS........................................ 20
4.1 Access And Investigation........................................ 20
4.2 Operation of Business........................................... 21
4.3 Filings and Consents............................................ 22
4.4 Notification of Certain Changes; Supplements to Schedules....... 22
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.5 Public Announcements........................................... 23
4.6 Reasonable Efforts............................................. 23
4.7 Exchange Proceeds.............................................. 23
4.8 Allocation of Purchase Price................................... 23
4.9 Exclusivity.................................................... 24
4.10 Special Payment to Purchaser Based Upon Another Transaction.... 25
4.11 Stockholders' Meeting.......................................... 25
4.12 Subsidiary Approval............................................ 25
4.13 Insurance...................................................... 25
Section 5 CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIOn TO CLOSE.. 26
5.1 Accuracy Of Representations.................................... 26
5.2 Performance Of Obligations..................................... 26
5.3 No Proceedings................................................. 26
5.4 No Prohibition................................................. 26
5.5 Stockholder and Board of Directors Approval.................... 26
5.6 Opinion of the Seller's Counsel................................ 27
5.7 Consents and Approvals......................................... 27
5.8 Related Documents.............................................. 27
5.9 Seller Certificates............................................ 27
5.10 Release of Encumbrance......................................... 28
5.11 Integrated Video Systems....................................... 28
Section 6 CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATION TO CLOSE..... 28
6.1 Accuracy Of Representations.................................... 28
6.2 Performance Of Obligations..................................... 29
6.3 No Proceedings................................................. 29
6.4 No Prohibition................................................. 29
6.5 Stockholder Approval........................................... 29
6.6 Opinion of the Purchaser's Counsel............................. 29
6.7 Consents and Approvals......................................... 29
6.8 Related Documents.............................................. 30
6.9 Purchaser's Certificates....................................... 30
6.10 Termination of Royalty Obligation.............................. 30
Section 7 INDEMNIFICATION.............................................. 30
7.1 Generally...................................................... 30
7.2 Assertion of Claims............................................ 32
7.3 Notice and Defense of Third Party Claims....................... 32
7.4 Survival of Representations and Warranties..................... 34
7.5 Limitations on Indemnification................................. 34
7.6 Attorneys' Fees................................................ 35
Section 8 TERMINATION.................................................. 35
8.1 Termination Events............................................. 35
8.2 Termination Procedures......................................... 36
8.3 Effect Of Termination.......................................... 36
8.4 Nonexclusivity Of Termination Rights........................... 37
Section 9 POST CLOSING COVENANTS....................................... 37
9.1 Access to Records.............................................. 37
9.2 Use of Seller's Labels, etc.................................... 37
9.3 Physical Transfer of Purchased Assets.......................... 38
9.4 Collection of Accounts Receivable.............................. 38
9.5 Collection of Invoices representing Evaluation Inventory, etc.. 39
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 10 MISCELLANEOUS PROVISIONS.................................... 39
10.1 Further Assurances............................................. 39
10.2 Fees And Expenses.............................................. 39
10.3 Notices........................................................ 40
10.4 Headings....................................................... 41
10.5 Counterparts................................................... 41
10.6 Governing Law.................................................. 41
10.7 Successors And Assigns; Parties In Interest.................... 41
10.8 Remedies Cumulative; Specific Performance...................... 41
10.9 Waiver......................................................... 42
10.10 Amendments..................................................... 42
10.11 Severability................................................... 42
10.12 Entire Agreement; Confidential Disclosure Agreement............ 42
10.13 Knowledge...................................................... 42
10.14 Construction................................................... 43
</TABLE>
iii
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A: - Form of Bill of Sale
Exhibit B: - Certain Definitions
Exhibit C: - Statement of Allocation
Exhibit D: - Form of Opinion of Counsel for the Seller
Exhibit E: - Form of Transition Agreement
Exhibit F: - Form of Non-Competition Agreement with the Seller
Exhibit G: - Form of Non-Competition Agreement with Richard W. Turner
Exhibit H: - Form of Opinion of Counsel for the Purchaser
Schedule 1.1: - List of Purchased Assets
Schedule 1.6: - List of Assumed Liabilities
Schedule 1.7: - List of Excluded Liabilities
Schedule 1.8(a): - Sales Shortfall Calculation
Schedule 1.10(a): - Inventory Valuation Rules
Schedule 5.7: - Consents and Approvals
SELLER DISCLOSURE SCHEDULE
Section 1.1 - List of Purchased Assets
Section 1.6 - List of Assumed Liabilities
Section 1.7 - List of Excluded Liabilities
Section 1.8 - Sales Shortfall Calculation
Section 1.10 - Inventory Valuation Rights
Section 1.11 - Sales Taxes
Section 2.1 - Good Standing and Qualification
Section 2.3 - No Conflict; Required Filing and Consents
Section 2.4 - Compliance; Permits
Section 2.5 - SEC Filings; Financial Statements
Section 2.6 - Absence of Certain Changes or Events
Section 2.7 - Undisclosed Liabilities
Section 2.8 - Contracts
Section 2.9 - Title to Property
Section 2.10 - Brokers
Section 2.11 - Intellectual Property Rights
Section 2.14 - Accounts and Notes Receivable
Section 2.15 - Suppliers, Consultants and Vendors
Section 2.16 - Customers
Section 2.17 - Conflicts of Interest
Section 2.18 - Tax Matters
Section 2.19 - FDA and Other Compliances
Section 2.20 - Insurance
Section 2.21 - Environmental Matters
iv
<PAGE>
DEFINED TERMS INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Term Location
---- --------
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Accountant's Determination Section 1.10(c)
- -------------------------------------------------------------------------------------------------------------
Acquisition Expenses Section 4.9
- -------------------------------------------------------------------------------------------------------------
Agreement Exhibit B
- -------------------------------------------------------------------------------------------------------------
Affiliate Exhibit B
- -------------------------------------------------------------------------------------------------------------
Another Transaction Section 4.9(a)
- -------------------------------------------------------------------------------------------------------------
Approvals Section 2.1
- -------------------------------------------------------------------------------------------------------------
Assumed Contracts Section 1.6
- -------------------------------------------------------------------------------------------------------------
Assumed Liabilities Section 1.6
- -------------------------------------------------------------------------------------------------------------
Bill of Sale Section 1.2
- -------------------------------------------------------------------------------------------------------------
Blocked Jurisdiction Section 7.5(b)
- -------------------------------------------------------------------------------------------------------------
Business Recital B
- -------------------------------------------------------------------------------------------------------------
CERCLA Exhibit B
- -------------------------------------------------------------------------------------------------------------
CERCLIS Exhibit B
- -------------------------------------------------------------------------------------------------------------
CGMP Section 2.19(c)(i)
- -------------------------------------------------------------------------------------------------------------
Control Exhibit B
- -------------------------------------------------------------------------------------------------------------
Claim Section 9.4(e)
- -------------------------------------------------------------------------------------------------------------
Closing Section 1.12
- -------------------------------------------------------------------------------------------------------------
Closing Date Section 1.12
- -------------------------------------------------------------------------------------------------------------
Code Section 2.18(a)
- -------------------------------------------------------------------------------------------------------------
Compliance Claim Section 7.5(b)
- -------------------------------------------------------------------------------------------------------------
Consent Exhibit B
- -------------------------------------------------------------------------------------------------------------
Debtor Section 9.4(e)
- -------------------------------------------------------------------------------------------------------------
Disputed Receivable Section 9.4(e)
- -------------------------------------------------------------------------------------------------------------
DGCL Section 2.2
- -------------------------------------------------------------------------------------------------------------
Encumbrance Exhibit B
- -------------------------------------------------------------------------------------------------------------
Environmental, Health and Safety Laws Exhibit B
- -------------------------------------------------------------------------------------------------------------
Examination Period Section 1.10(b)
- -------------------------------------------------------------------------------------------------------------
Exchange Proceeds Section 4.7
- -------------------------------------------------------------------------------------------------------------
Estimated Inventory Section 1.9(a)
- -------------------------------------------------------------------------------------------------------------
Estimated Inventory and Net Receivables Holdback Amount Section 1.9(b)
- -------------------------------------------------------------------------------------------------------------
Estimated Inventory and Net Receivables Statement Section 1.9(a)
- -------------------------------------------------------------------------------------------------------------
Estimated Net Receivables Section 1.9(a)
- -------------------------------------------------------------------------------------------------------------
Excluded Assets Section 1.1
- -------------------------------------------------------------------------------------------------------------
Excluded Liabilities Section 1.7
- -------------------------------------------------------------------------------------------------------------
FDA Section 2.19(a)
- -------------------------------------------------------------------------------------------------------------
GAAP Exhibit B
- -------------------------------------------------------------------------------------------------------------
Governmental Entity Exhibit B
- -------------------------------------------------------------------------------------------------------------
Hazardous Materials Exhibit B
- -------------------------------------------------------------------------------------------------------------
HTA Recital A
- -------------------------------------------------------------------------------------------------------------
Indemnified Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Indemnifying Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Inventory Section 1.10(a)
- -------------------------------------------------------------------------------------------------------------
Inventory Statement Section 1.10(a)
- -------------------------------------------------------------------------------------------------------------
Law Exhibit B
- -------------------------------------------------------------------------------------------------------------
Liabilities Exhibit B
- -------------------------------------------------------------------------------------------------------------
Losses Exhibit B
- -------------------------------------------------------------------------------------------------------------
Lost Sales Amount Section 7.5(b)
- -------------------------------------------------------------------------------------------------------------
Knowledge Section 10.13
- -------------------------------------------------------------------------------------------------------------
Material Adverse Effect Exhibit B
- -------------------------------------------------------------------------------------------------------------
MDRs Section 2.19(c)(iv)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
Net Receivables Section 1.10(a)(ii)
- -------------------------------------------------------------------------------------------------------------
Non-Competition Agreements Section 5.8(ii)
- -------------------------------------------------------------------------------------------------------------
Objection Notice Section 1.10(c)
- -------------------------------------------------------------------------------------------------------------
Orders Exhibit B
- -------------------------------------------------------------------------------------------------------------
Permitted Encumbrances Exhibit B
- -------------------------------------------------------------------------------------------------------------
Permits Exhibit B
- -------------------------------------------------------------------------------------------------------------
Person Exhibit B
- -------------------------------------------------------------------------------------------------------------
Physical Inventory Section 1.10(a)
- -------------------------------------------------------------------------------------------------------------
Pre-Closing Period Section 4.1
- -------------------------------------------------------------------------------------------------------------
Proceedings Section 2.12
- -------------------------------------------------------------------------------------------------------------
Products Exhibit B
- -------------------------------------------------------------------------------------------------------------
Proprietary Matter Section 2.11(a)(i)
- -------------------------------------------------------------------------------------------------------------
Purchase Price Section 1.8(c)
- -------------------------------------------------------------------------------------------------------------
Purchased Assets Section 1.1
- -------------------------------------------------------------------------------------------------------------
Purchaser Preamble
- -------------------------------------------------------------------------------------------------------------
Purchaser Indemnified Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Purchaser Indemnifying Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Purchaser Losses Exhibit B
- -------------------------------------------------------------------------------------------------------------
Related Document, Documents Section 5.8
- -------------------------------------------------------------------------------------------------------------
Receivable Section 9.4(e)
- -------------------------------------------------------------------------------------------------------------
Representatives Exhibit B
- -------------------------------------------------------------------------------------------------------------
Requesting Party Section 9.1
- -------------------------------------------------------------------------------------------------------------
Sale Exhibit B
- -------------------------------------------------------------------------------------------------------------
Sales Shortfall Exhibit B
- -------------------------------------------------------------------------------------------------------------
Seller Preamble
- -------------------------------------------------------------------------------------------------------------
Seller Disclosure Schedule Section 2
- -------------------------------------------------------------------------------------------------------------
Seller Indemnified Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Seller Indemnifying Persons Exhibit B
- -------------------------------------------------------------------------------------------------------------
Seller Losses Exhibit B
- -------------------------------------------------------------------------------------------------------------
Seller Permits Section 2.4(b)
- -------------------------------------------------------------------------------------------------------------
Seller SEC Reports Section 2.5(a)
- -------------------------------------------------------------------------------------------------------------
Settlement Agreement Section 1.10(c)
- -------------------------------------------------------------------------------------------------------------
Special Tax Losses Exhibit B
- -------------------------------------------------------------------------------------------------------------
Statement of Allocation Section 4.8
- -------------------------------------------------------------------------------------------------------------
Statements Section 1.10(b)
- -------------------------------------------------------------------------------------------------------------
Stockholders Meeting Section 8.1 (d)
- -------------------------------------------------------------------------------------------------------------
Subsidiaries Section 1.1
- -------------------------------------------------------------------------------------------------------------
Survival Date Section 7.4
- -------------------------------------------------------------------------------------------------------------
Tax Return Exhibit B
- -------------------------------------------------------------------------------------------------------------
Taxes Exhibit B
- -------------------------------------------------------------------------------------------------------------
Third Party Claim Section 7.3
- -------------------------------------------------------------------------------------------------------------
Transaction Taxes Section 1.11
- -------------------------------------------------------------------------------------------------------------
Transition Agreement Section 5.8 (i)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ii
<PAGE>
THIS ASSET PURCHASE
AGREEMENT is entered into as
of October 1, 1999, by and
between: BEI MEDICAL SYSTEMS
COMPANY, INC., a Delaware
corporation (the "Seller"),
------
and COOPERSURGICAL
ACQUISITION CORP., a
Delaware corporation (the
"Purchaser").
----------
RECITALS
A. The Seller and its subsidiaries are engaged in the business
of developing, manufacturing, marketing and servicing a broad array of advanced
systems and devices for diagnostic and therapeutic procedures in the medical
fields of gastroenterology and gynecology. The Seller also produces a variety of
products for use in various medical and surgical procedures that are sold by it
under original equipment manufacture labeling arrangements. The Seller is
currently focusing its development and commercialization efforts on its new
Hydro ThermAblator ("HTA") product and related accessories for treatment of
---
excessive uterine bleeding through endometrial ablation.
B. The Seller desires to sell its non-HTA business (hereinafter
called the "Business")
C. The Seller and its subsidiaries desire to sell to the
Purchaser, and the Purchaser desires to purchase from the Seller and its
subsidiaries, certain of the assets of the Seller and its subsidiaries, subject
to the Purchaser's assumption of certain specified liabilities of the Seller, in
each case related to the Business, on the terms and subject to the conditions
contained in this Agreement.
ACCORDINGLY, in consideration of the premises and the mutual
representations hereinafter set forth, the parties hereto hereby agree as set
forth below.
Section 1 SALE OF ASSETS; RELATED TRANSACTIONS; DEFINITIONS.
1.1 Sale Of Assets.
The Seller shall cause to be sold, assigned, transferred, conveyed and
delivered to the Purchaser, free and clear of all Encumbrances, and the
Purchaser shall purchase from the Seller and its subsidiaries (the
"Subsidiaries") which own or have rights to the assets that are identified on
------------
Schedule 1.1 (which assets are collectively referred to in this Agreement as the
"Purchased Assets"), at the Closing (as defined in Section 1.5), all of the
----------------
Seller's and the Subsidiaries' right, title and interest in, to and under the
Purchased Assets which exist at the Closing, on the terms and subject to the
conditions set forth in this Agreement. The Seller shall not sell, assign,
transfer, convey or deliver to the Purchaser at the Closing and shall
specifically retain any asset of the Seller that is not identified on Schedule
1.1 (which assets are collectively referred to in this Agreement as the
"Excluded Assets").
---------------
<PAGE>
1.2 Instruments of Conveyance and Transfer and Assumption.
At the Closing, the Seller and the Subsidiaries shall execute and deliver
to the Purchaser, and the Purchaser shall execute and deliver to the Seller, a
bill of sale, assignment and assumption agreement, substantially in the form of
Exhibit A attached hereto (the "Bill of Sale"), and such other deeds,
- --------- ------------
endorsements, assignments and other good and sufficient instruments of
conveyance and transfer as shall be necessary or desirable to transfer, convey
and assign to the Purchaser good title to the Purchased Assets free and clear of
any and all Encumbrances. The Seller shall take all reasonable legal steps that
may be necessary to put the Purchaser in possession and operating control of the
Purchased Assets.
1.3 Further Assurances.
The Seller shall promptly pay or deliver to the Purchaser any Purchased
Asset which may be received by the Seller or a Subsidiary after the Closing. The
Seller shall at its expense, at any time and from time to time after the
Closing, upon the reasonable request of the Purchaser, do, execute, acknowledge
and deliver, and cause to be done, executed, acknowledged or delivered, all such
further acts, deeds, assignments, transfers, conveyances, powers of attorney or
assurances as may be reasonably required to transfer, assign, convey, grant and
confirm to the Purchaser, or to aid and assist in the collection of or reducing
to possession by the Purchaser, the Purchased Assets, or to vest in the
Purchaser good title to the Purchased Assets as herein provided.
1.4 Assignments of Contracts and Rights.
Anything contained in this Agreement to the contrary notwithstanding,
this Agreement shall not constitute an agreement or an attempted agreement to
transfer, sublease or assign any contract (or any claim or right or any benefit
arising thereunder or resulting therefrom) if the attempted transfer, sublease
or assignment thereof, without the consent of any other party thereto, would
constitute a breach thereof or in any way adversely affect the rights of the
Purchaser thereunder. The Seller shall use commercially reasonable efforts to
obtain the consent of the other party to any contract to the transfer, sublease
or assignment thereof to the Purchaser in all cases in which such consent is
required for the transfer, sublease or assignment of any such contract. If any
such consent is not obtained and the Closing occurs, the Seller shall provide
for the Purchaser the benefits of such contract, including (a) adherence to
reasonable procedures established by the Purchaser for the immediate transfer to
the Purchaser of any payments or other funds received by the Seller thereunder
and (b) enforcement for the benefit of the Purchaser of any and all rights of
the Seller thereunder against the other party or parties thereto arising out of
the breach or cancellation thereof by such other party or parties or otherwise.
1.5 Power of Attorney; Right of Endorsement.
Effective as of the Closing, the Seller and each Subsidiary hereby
constitute and appoint the Purchaser as the true and lawful attorney of the
Seller and each Subsidiary, with full power of substitution, in the name of the
Seller and each Subsidiary, on behalf of and for the benefit of the Purchaser,
solely (a) to collect all Purchased Assets, (b) to endorse, without recourse,
checks, notes and other instruments attributable to the Purchased Assets and the
Assumed Liabilities (as
2
<PAGE>
defined in Section 1.6), (c) to institute and prosecute all proceedings which
the Purchaser may reasonably deem proper in order to collect, assert or enforce
any claim, right or title in, to or under or otherwise attributable to the
Purchased Assets and the Assumed Liabilities, (d) to defend and compromise all
actions, suits or proceedings with respect to any of the Purchased Assets or the
Assumed Liabilities and (e) to do all such acts and things with respect to the
Purchased Assets or the Assumed Liabilities as the Purchaser may reasonably deem
advisable. The foregoing powers are coupled with an interest and shall not be
revocable by the Seller or any Subsidiary, directly or indirectly, by the
dissolution of the Seller or any Subsidiary or in any other manner. The
Purchaser shall retain for its own account any amounts collected pursuant to the
foregoing powers with respect to the Purchased Assets, and the Seller and each
Subsidiary shall promptly pay to the Purchaser any amounts it receives after the
Closing with respect to the Purchased Assets.
1.6 Liabilities Being Assumed.
Upon the terms and subject to the conditions of this Agreement, the
Purchaser shall assume the following and only the following liabilities and
obligations of the Seller (a) all liabilities and obligations (excluding those
arising from a breach by the Seller or any Subsidiary of any Assumed Contract)
accruing from and after Closing pursuant to the contracts identified on Schedule
1.1 (the "Assumed Contracts") and (b) effective as of the Closing, and from and
-----------------
after the Closing, the Purchaser shall pay or assume, perform and discharge when
due the liabilities of Seller related to the Business which are identified on
Schedule 1.6 (collectively, the "Assumed Liabilities"). Anything contained in
-------------------
this Agreement to the contrary notwithstanding, in no case shall the Assumed
Liabilities described on Schedule 1.6 or any liabilities associated with the
Assumed Contracts (excluding any royalty payments accruing from and after the
Closing and the cost of performance by the Purchaser after the Closing under
those Assumed Contracts specifically identified in Schedule 1.6 which relate to
sales of Products or acquisition of inventory by the Purchaser after the
Closing) exceed $350,000. To reach $350,000, the Assumed Liabilities shall be
assumed by the Purchaser in the following order of priority: first, to the
extent of any trade accounts payable up to $350,000; second, up to $25,000 of
warranty obligations up to the difference between $350,000 and the lesser amount
of trade accounts payable so assumed; third, to the extent of the amount at
Closing of any accrued sales return obligations up to the difference between
$350,000 and the sum less than $350,000 of the amount of trade accounts payable
and warranty obligations so assumed; and last, the amount at Closing of any
accrued royalty obligations, up to any remaining difference between $350,000 and
the sum less than $350,000 of the amount of trade accounts payable, warranty
obligations and sales return obligations so assumed.
1.7 Liabilities Not Being Assumed.
Anything contained in this Agreement to the contrary notwithstanding, the
Purchaser is not assuming any Liabilities of the Seller other than the Assumed
Liabilities, whether or not relating to the Purchased Assets or the Business,
all of which Liabilities shall at and after the Closing remain the exclusive
responsibility and obligation of the Seller. Without limiting the generality of
the foregoing, the Purchaser is not assuming any of the Liabilities identified
on Schedule 1.7 (collectively, the "Excluded Liabilities") .
--------------------
3
<PAGE>
1.8 Purchase Price.
Subject to Section 1.10, as the aggregate consideration for the sale of
the Purchased Assets to the Purchaser:
(a) at the Closing, the Purchaser shall pay to the Seller, by wire
transfer of immediately available funds, $11,206,600, minus an amount equal to
-----
(i) the Sales Shortfall described on Schedule 1.8(a), if any, and (ii) the
Estimated Inventory and Receivables Holdback Amount as defined in Section 1.9,
if any; and
(b) at the Closing, the Purchaser shall assume the Assumed
Liabilities.
(c) The "Purchase Price" means $11,206,600, as adjusted pursuant to
--------------
Section 1.10, less the Sales Shortfall plus the amount of the Assumed
---- ----
Liabilities.
1.9 Delivery of Estimated Inventory and Net Receivables Statement.
(a) The Seller, in consultation with the Purchaser, shall prepare and
deliver to the Purchaser as soon as practicable, and in no case less than three
Business Days prior to the Closing Date, a statement (the "Estimated Inventory
-------------------
and Net Receivables Statement") setting forth (i) their good faith estimate of
- -----------------------------
the value at Closing of the Inventory (the "Estimated Inventory") and the Net
-------------------
Receivables (the "Estimated Net Receivables"). The Estimated Inventory and
-------------------------
Estimated Net Receivables shall be determined in accordance with the guidelines
set forth in Section 1.10(a) and 1.10(b), respectively.
(b) The "Estimated Inventory and Net Receivables Holdback Amount"
-------------------------------------------------------
means the amount, if any, by which the Estimated Inventory plus Estimated Net
Receivables, as reflected on the Estimated Inventory and Receivables Statement
is, in the aggregate, less than $3,600,000.
1.10 Purchase Price Adjustment.
(a) Preparation of Statements.
-------------------------
(i) As of the Closing, a physical inventory ("Physical
--------
Inventory") will be taken of all the inventory of the Seller and each
---------
Subsidiary included in the Purchased Assets (the "Inventory") at which
---------
Representatives of be present, in a manner to be agreed upon by the
Seller and the Purchaser and to be performed by the Seller. Promptly
after completion of the Physical Inventory, the Seller shall prepare and
deliver to the Purchaser within 30 days of Closing a written statement
which sets forth the value of the Inventory as of the Closing based on
the Physical Inventory (the "Inventory Statement"). The value of the
-------------------
Inventory shall be determined in accordance with GAAP, as modified in
accordance with the methodology set forth on Schedule 1.10(a).
(ii) The Seller shall also prepare and deliver to the
Purchaser with the Inventory Statement a written statement which sets
forth the value as of the Closing of the Net Receivables and the Assumed
Liabilities for each category set forth in Schedule 1.6. "Net
---
Receivables" means the Seller's accounts receivable included in the
-----------
Purchased
4
<PAGE>
Assets as of the Closing (determined in accordance with GAAP) minus the
Seller's reserve for doubtful accounts receivable (such reserve to be
calculated in accordance with GAAP based on the historical experience of
the Seller). The value of the Assumed Liabilities shall be determined in
accordance with GAAP, adjusted in accordance with the methodology set
forth in Schedule 1.6.
(b) Review of the Statements. Promptly after the Inventory and other
------------------------
statements referred to in Section 1.10(a) (collectively, the "Statements") are
----------
delivered to the Purchaser pursuant to Section 1.10(a), the Purchaser shall
conduct an examination of the Statements. The Seller shall give the Purchaser
and its Representatives timely and reasonable access to such of the Seller's
working papers, documents, financial information and other information used in
the preparation of the Statements as the Purchaser reasonably deems necessary or
desirable in connection with such examination. The Purchaser shall complete its
examination of the Statements during the Examination Period. The "Examination
-----------
Period" shall commence upon delivery by the Seller to the Purchaser of the
- ------
Statements and end on the earliest of (i) thirty (30) days after such delivery,
(ii) the date the Purchaser delivers an Objection Notice to the Seller and (iii)
the date the Purchaser notifies the Seller that the Purchaser accepts the
Statements. The Statements as prepared by the Seller and examined by the
Purchaser shall be conclusive and binding on the parties hereto for purposes of
this Agreement, subject to the resolution of any disputes in accordance with
Section 1.10(c).
(c) Disputes. The Purchaser may object during the Examination Period
--------
by providing the Seller a written notice describing in reasonable detail the
Purchaser's objections to any item or valuation on the Statements (an "Objection
---------
Notice"). The Purchaser's failure to deliver an Objection Notice to the Seller
- ------
within thirty (30) days after the Seller's delivery of the Statement to the
Purchaser shall constitute the Purchaser's binding acceptance of the Statements
and all matters identified therein. If the Seller and the Purchaser fail to
resolve any objection described on an Objection Notice within ten (10) days
after the date the Objection Notice is delivered to the Seller, then, at the
request of either party, the Seller and the Purchaser shall meet in an attempt
to resolve an objection described on the Objection Notice and reach a written
agreement (the "Settlement Agreement"). If the parties enter into a Settlement
--------------------
Agreement, the Statements shall be deemed to be as agreed therein. If the
parties are unable to resolve the objection described on the Objection Notice
within twenty (20) days after receipt by Seller of such Objection Notice, then
the Seller and the Purchaser shall select an independent accounting firm of
recognized national standing (or, if the parties cannot agree upon a selection,
they shall select such accounting firm by lot from among the five largest
accounting firms in the United States) which shall resolve such objection as
promptly as possible. The accounting firm selected shall not at the time of
selection be performing services for either the Purchaser or the Seller. A
decision by the independent accounting firm as to the resolution of such
objection shall be (absent an agreement of the parties regarding an error that
is manifest) conclusive and binding upon the parties for purposes of this
Agreement (the "Accountant's Determination"). The Accountant's Determination
--------------------------
shall be (1) in writing, (2) made in accordance with GAAP as modified by the
standards provided for in this Agreement for the Statements and (3)
nonappealable and incontestable by the Seller and the Purchaser and each of
their respective Affiliates and successors and not subject to collateral attack
for any reason. All fees and costs payable to the independent accounting firm
referred to in this Section shall be borne by the Purchaser and the Seller
equally.
5
<PAGE>
(d) Payments. (i) If the value of the Inventory and the Net
--------
Receivables is in the aggregate greater than $3,750,000, then the Purchaser
shall pay to the Seller an amount equal to the amount by which the value of the
Inventory and the Net Receivables exceeds $3,750,000, plus the Estimated
Inventory and Receivables Holdback Amount. If such value of the Inventory and
the Net Receivables is in the aggregate less than $3,600,000, then the Seller
shall pay to the Purchaser an amount equal to the amount by which $3,600,000
exceeds the value of the Inventory and the Net Receivables, minus the Estimated
-----
Inventory and Receivables Holdback Amount up to the amount of such excess and
the Purchaser shall pay to the Seller any excess of the Estimated Inventory and
Receivables Holdback Amount over the amount by which $3,600,000 exceeds the
value of the Inventory and Net Receivables, if any. If such value of the
Inventory and the Net Receivables is in the aggregate equal to or less than
$3,750,000 and equal to or greater than $3,600,000, then the Purchaser shall pay
to the Seller an amount equal to the Estimated Inventory and Receivables
Holdback Amount.
(ii) If the value of the Assumed Liabilities is less than
$350,000, then the Purchaser shall pay to the Seller an amount equal
to the amount by which the value of the Assumed Liabilities is less
than $350,000 .
(iii) Each value referred to subparagraphs (i) and (ii) above
shall be as determined in the Statements or, in the case of a dispute,
as determined in a Settlement Agreement or in the Accountant's
Determination.
(iv) All payments to be made pursuant to this Section 1.10(d)
shall be made by wire transfer of immediately available funds.
(e) Schedule of Payments. Any payments required to be made pursuant
--------------------
to Section 1.10(d) shall be made as follows: (i) if the Purchaser shall not have
delivered an Objection Notice to the Seller in accordance with the provisions of
Section 1.10(c), then the payment required to be made pursuant to Section
1.10(d) shall be made no later than five (5) days after the end of the
Examination Period, and (ii) if the Purchaser shall have delivered an Objection
Notice to the Seller in accordance with the provisions of Section 1.10(c), then
payment of any undisputed amounts shall be paid no later than five (5) days
after the end of the Examination Period, and the payment required to be made
pursuant to Section 1.10(d) with respect to any disputed amounts shall be made
within five (5) days after the resolution of the dispute, whether by the
Settlement Agreement or upon the Accountant's Determination as provided in
Section 1.10(c).
1.11 Sales Taxes.
The parties shall each bear one-half of any sales taxes, use taxes,
transfer taxes, documentary charges, recording fees or similar taxes, charges or
fees that may become payable in connection with the sale of the Purchased Assets
to the Purchaser (the "Transaction Taxes"). If one of the parties pays less
-----------------
than one-half of the total Transaction Taxes, such party shall pay to the other
party a sum equal to the difference between one-half of the total Transaction
Taxes and the amount of Transaction Taxes so paid by such party. Each party
shall timely pay the amount of Transaction Taxes it is obligated to pay to the
appropriate Governmental Entity, and shall thereafter send evidence to the other
party that such Transaction Taxes have been paid.
6
<PAGE>
1.12 Closing.
The closing of the sale of the Purchased Assets to the Purchaser, and the
transactions contemplated herein, (the "Closing") shall take place at Cooley
-------
Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, CA 94111, no later
than two days after the date that all closing conditions set forth in Sections 5
and 6 have been satisfied or waived or on such other date to which the parties
mutually agree (the "Closing Date").
------------
1.13 Definitions.
Certain capitalized terms used and not defined in this Agreement have the
meanings given to them in Exhibit B attached hereto.
---------
Section 2 REPRESENTATIONS AND WARRANTIES OF THE SELLER.
The Seller represents and warrants, to and for the benefit of the
Purchaser that, except as set forth in the Disclosure Schedule delivered by the
Seller to the Purchaser on the date hereof (the "Seller Disclosure Schedule"):
--------------------------
2.1 Organization and Qualification; Subsidiaries.
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. The Seller and each Subsidiary has all the
requisite corporate power and authority and is in possession of all franchises,
grants, authorizations, licenses, permits, easements, consents, certificates,
approvals and orders ("Approvals") necessary to own, lease and operate its
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Purchased Assets and to carry on its business as it is now being conducted. The
Seller and each Subsidiary is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in all the jurisdictions
listed on Section 2.1 of the Seller Disclosure Schedule, which constitute
jurisdictions where the character of the properties owned, leased or operated by
it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and in
good standing that would not have a Material Adverse Effect. The Purchaser has
been furnished with true, correct and complete copies of the Certificate of
Incorporation and By-laws (or comparable charter documents) of the Seller and
each Subsidiary. Except as set forth in Section 2.1(a) of the Seller Disclosure
Schedule, neither the Seller nor any Subsidiary has (a) engaged within the last
five (5) years in any business or activity other than the Business or (b) used
within the last five (5) years any trade name or assumed name other than its
corporate name set forth in the this Agreement (including the Seller Disclosure
Schedule). A true and complete list of all of the Seller's direct and indirect
subsidiaries, together with the jurisdiction of incorporation of each
subsidiary, is set forth in Section 2.1(b) of the Seller Disclosure Schedule.
Except as set forth in Section 2.1(b) of the Seller Disclosure Schedule, the
Seller does not own or hold, directly or indirectly, any equity interest or debt
obligation (excluding accounts receivable arising in the ordinary course of the
Business, consistent with past practice) of any other Person that relates to the
Business.
2.2 Authority Relative to this Agreement; Vote Required.
(a) The Seller and each Subsidiary has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and each Related Document
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to which it is or will be a party and (subject only, with respect to the Sale,
to the approval and adoption of this Agreement and approval of the Sale by the
holders of at least a majority of the outstanding shares of the Seller and
Subsidiary common stock entitled to vote in accordance with the Delaware General
Corporation Law ("DGCL") and the Seller's and each Subsidiary's Certificate of
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Incorporation and By-Laws) to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and each Related
Document to which it is or will be a party by the Seller and each Subsidiary and
the consummation by the Seller and each Subsidiary of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of the Seller and each Subsidiary, and no
other corporate proceedings on the part of the Seller or any Subsidiary are
necessary to authorize this Agreement and each Related Document to which it is
or will be a party or to consummate the transactions so contemplated hereby and
thereby (other than the approval and adoption of this Agreement and the approval
of the Sale by the holders of at least a majority of the outstanding shares of
Seller and Subsidiary common stock entitled to vote in accordance with the DGCL
and the Seller's and each Subsidiary's Certificate of Incorporation and
By-Laws). As of the date hereof, the Board of Directors of the Seller has
determined that the Sale, upon the terms and subject to the conditions of this
Agreement, is advisable to and in the best interests of the Seller and its
stockholders. This Agreement and each Related Document to which it is or will be
a party has been, or upon the execution thereof will be, duly and validly
executed and delivered by the Seller and each Subsidiary party thereto.
(b) Assuming the due authorization, execution and delivery by the
Purchaser, this Agreement and each Related Document to which it is or will be a
party constitutes or will constitute a legal, valid and binding obligation of
the Seller and each Subsidiary party thereto, enforceable against the Seller and
each Subsidiary in accordance with its terms, except as such enforceability may
be limited by any applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights generally,
and except as the availability of equitable remedies may be limited by the
application of general principles of equity (regardless of whether such
equitable principles are applied in a proceeding at law or in equity).
(c) The approvals of the holders of a majority of the outstanding
shares of the Seller common stock and the common stock of each Subsidiary are
the only votes of the holders of any class or series of the Seller's and each
Subsidiary's capital stock necessary to approve the Sale and this Agreement.
2.3 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 2.3 of the Seller Disclosure
Schedule, the execution and delivery of this Agreement and each Related Document
to which it is or will be a party by the Seller and each Subsidiary party
thereto does not, and the performance of this Agreement and each Related
Document to which it is or will be a party by the Seller and such Subsidiary,
and of the transactions contemplated hereby and thereby, will not:
(i) conflict with or violate (with or without notice or lapse
of time or both) the Certificate of Incorporation or By-Laws of the
Seller or such Subsidiary,
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(ii) conflict with or violate (with or without notice or lapse
of time or both) any Law applicable to the Seller or any such Subsidiary
or by which its or any of their respective properties is bound or
affected, or
(iii) result in any violation or breach of or constitute a
default (or an event that with notice or lapse of time or both would
become a default) under, or impair the Seller's or any such Subsidiary's
rights or alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on
any of the properties or assets of the Seller or any of its subsidiaries
pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which the Seller or any of its subsidiaries is a party or by which the
Seller or any of its subsidiaries or its or any of their respective
properties is bound or affected,
(b) The execution and delivery of this Agreement and each Related
Document by the Seller and each Subsidiary party thereto does not, and
the performance of this Agreement and each Related Document to which it
is or will be a party by the Seller and each such Subsidiary will not,
require the Seller or any Subsidiary to obtain any consent, approval,
authorization or permit of, or to file with or notify, any Governmental
Entity.
2.4 Compliance; Permits.
(a) Except as disclosed in Section 2.4 of the Seller Disclosure
Schedule, neither the Seller nor any Subsidiary is in conflict with, or in
default or violation of, (i) any Law applicable to the Seller or any Subsidiary
or by which its or any of the Purchased Assets are bound or affected or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Seller or any
Subsidiary is a party or by which the Seller or any Subsidiary or any of its or
their respective properties is bound or affected, except for any such conflicts,
defaults or violations which would not reasonably be expected to have a Material
Adverse Effect.
(b) Except as disclosed in Section 2.4 of the Seller Disclosure
Schedule, the Seller and each Subsidiary hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
Governmental Entities which are material to their respective operation of the
Business as it is currently being conducted, or the current use or ownership of
the Purchased Assets (collectively, the "Seller Permits"). The Seller and each
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Subsidiary is in compliance with the terms of the Seller Permits.
2.5 SEC Filings; Financial Statements.
(a) Except as disclosed in Section 2.5 of the Seller Disclosure
Schedule, all forms, reports, statements and other documents required to be
filed by the Seller with the SEC since September 28, 1997 (excluding the
exhibits filed therewith) (the "Seller SEC Reports") (i) were prepared in all
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material respects in accordance with the applicable requirements of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, as the case may be, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a
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material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements (including, in each case,
any related notes or schedules thereto) contained in the Seller SEC Reports were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated therein or in the notes thereto or,
in the case of unaudited interim financial statements, as permitted by Form 10-Q
of the SEC), and fairly presented in all material respects the consolidated
financial position of the Seller and its consolidated subsidiaries as at the
respective dates thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments.
2.6 Absence of Certain Changes or Events.
Except as contemplated by this Agreement, or as set forth in Section 2.6 of
the Seller Disclosure Schedule, during the period from July 3, 1999 to the date
of this Agreement, none of the following have occurred:
(a) any change, event or condition (or any development involving a
prospective change, event or condition) shall have occurred or be threatened
which has, or is reasonably likely to have, a Material Adverse Effect;
(b) any change in tax or accounting methods, principles or practices
by the Seller or any Subsidiary affecting the Purchased Assets, the Business or
its Liabilities, except as required by any change in GAAP or change in Law;
(c) any material revaluation by the Seller or any Subsidiary of any
of the Purchased Assets, including without limitation, writing off notes or
accounts receivable;
(d) any damage, destruction or loss that has had or is reasonably
likely to have a Material Adverse Effect on the Purchased Assets;
(e) any cancellation of any material debts or waiver or release of
any material right or claim of the Seller or any Subsidiary relating to the
Business or the Purchased Assets;
(f) entering into or executing any arrangement, agreement or
understanding involving an amount exceeding $20,000 relating to the Business to
which the Seller or any Subsidiary is a party which cannot be terminated by it
on notice of 30 days or less without cost or penalty;
(g) any adoption of a plan of liquidation or resolutions providing
for the liquidation, dissolution, merger, consolidation or other reorganization
of the Seller or any Subsidiary other than as contemplated by this Agreement;
(h) any delay or failure to repay when due any material obligation of
the Seller or any Subsidiary that relates to the Business or the Purchased
Assets;
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(i) any general uniform increase in the compensation of employees
(including, without limitation, any increase pursuant to any bonus, pension,
profit-sharing or other plan or commitment) of the Seller or any Subsidiary, or
any increase in any such compensation payable to any officer, director or key
employee;
(j) any change in the manner in which products or services of the
Business are marketed (including, without limitation, any change in prices) or
sold, any change in the manner in which the Seller extends discounts or credits
to customers or any change in the manner or terms by which the Seller collects
its accounts receivable or otherwise deals with customers;
(k) any acquisition or disposition of the Purchased Assets, including
Proprietary Matter, other than the purchase of raw materials or the sale of
inventories for fair value in the ordinary course of business consistent with
past practice;
(l) any forward purchase commitments or sales commitment for the
Business not disclosed in Section 2.8 of the Seller Disclosure Schedule;
(m) any changes in the practices and policies of the Seller with
respect to the collection of accounts receivable, payment of accounts payable or
the ordering or shipping of products related to the Business;
(n) any other transactions relating to the Business or the Purchased
Assets other than in the ordinary course of business consistent with past
practice; or
(o) any agreement by the Seller or any Subsidiary to do any of the
things described in the preceding clauses (a) through (n) other than as
expressly provided for herein.
2.7 No Undisclosed Liabilities.
Except as indicated in Section 2.7 of the Seller Disclosure Schedule or the
Seller SEC Reports filed prior to the date hereof, neither the Seller nor any
Subsidiary has any Liabilities (including all Liabilities for Taxes) which would
be required to be disclosed in financial statements, including the footnotes
thereto, prepared in accordance with GAAP, and which are not adequately
reflected or reserved against in the Seller's balance sheet as of July 3, 1999,
including the footnotes thereto, except such as have arisen in the ordinary
course of business consistent with past practice since such date.
2.8 Contracts.
Other than contracts or agreements which may be terminated by the Seller on
notice of 30 days or less or which involve annual payments of less than $6,000,
Section 2.8 of the Seller Disclosure Schedule lists all contracts and agreements
to which: (a) the Seller or any Subsidiary is a party, (b) that are currently in
force and (c) that relate to the Purchased Assets or the Business, including:
(i) contracts that restrict the Business;
(ii) distribution agreements;
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(iii) supply agreements;
(iv) service agreements;
(v) indemnification or guaranty agreements pursuant to
which the Seller or any Subsidiary may incur a Liability;
(vi) agreements pertaining to the purchase or sale of any
assets or businesses entered into outside the ordinary course of business,
(vii) joint marketing or development agreements;
(viii) agreements pursuant to which the Seller or any
Subsidiary may draw funds as borrowed money and any related security
agreements;
(ix) license agreements (other than commercial shrink-wrap
licenses), whether the Seller or any Subsidiary is a licensee or licensor;
and
(x) other agreements requiring the Seller or any Subsidiary
to expend in excess of $50,000 in the aggregate for all such agreements
after the date hereof.
All such contracts and agreements are duly and validly executed by the Seller or
by one or more of its Subsidiaries, as applicable, and, to the Seller's
knowledge, by all other parties thereto, are in full force and effect as of the
date of this Agreement and, to the Seller's knowledge, will be in full force and
effect on the Closing Date. No event has occurred which, after notice or the
passage of time or both, would constitute a default by the Seller or any
Subsidiary under any such contract. To the Seller's knowledge, all such
contracts and agreements will continue, after the Closing Date, to be
enforceable in accordance with their respective terms against the Seller or the
Subsidiary party thereto until their respective expiration dates. The Seller and
each Subsidiary party thereto has performed all of the obligations under such
contracts required to be performed by it to date, and there exists no default,
or any event which upon the giving of notice or the passage of time, or both,
would give rise to a default in the performance by the Seller and each such
Subsidiary or, to the Seller's knowledge, any other party to any such contracts
of their respective obligations thereunder. The Purchaser has been furnished
with true, complete and correct copies of all written contracts and Section 2.8
of the Seller Disclosure Schedule (including by incorporated reference) contains
summary descriptions of all oral items listed on Section 2.8 of the Seller
Disclosure Schedule (including by incorporated reference).
2.9 Title to Property.
Except as set forth in Section 2.9 of the Seller Disclosure Schedule, the
Seller and its Subsidiaries, as applicable, have good and defensible title to
the Purchased Assets, free and clear of all Encumbrances, except Permitted
Encumbrances; and all leases pursuant to which the Seller or any Subsidiary
leases a Purchased Asset from others are in full force and effect as of the date
of this Agreement in accordance with their respective terms, and neither the
Seller nor any Subsidiary is currently in default under any of such leases nor,
to the Seller's knowledge, is any other party in default under any of such
leases and, to the Seller's knowledge, there is not under any of such leases any
existing event of default (or event which with notice or lapse of time, or
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both, would constitute an event of default). Section 2.9 of the Seller
Disclosure Schedule identifies each item of tangible personal property included
in the Purchased Assets and specifies the premises of the Seller or its
Subsidiaries on which such item is located.
2.10 Brokers.
Except as set forth in Section 2.10 of the Seller Disclosure Schedule, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Seller. To the
extent the Seller has agreed to pay any brokerage commission, finder's fee or
similar commission or fee in connection with any of the transactions
contemplated by this Agreement, it will be solely responsible for the payment of
such commission or fee.
2.11 Intellectual Property Rights.
(a) Section 2.11 of the Seller Disclosure Schedule contains summary
information (including where applicable the federal registration number and the
date of registration or application for registration and the name in which
registration was applied for) concerning:
(i) trade secrets, patents, registered copyrights,
trademarks, trade names and service marks, and all currently pending
applications for any thereof relating to the Purchased Assets, owned,
licensed or otherwise used by the Seller and/or any Subsidiary
(collectively, "Proprietary Matter"); and
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(ii) any licenses or options to obtain rights or licenses
granted by the Seller or any Subsidiary to others covering any Proprietary
Matter, other than implied licenses to customers of the Seller or any
Subsidiary for Proprietary Matter embedded in a Product sold by the Seller
or any Subsidiary to such customers.
(b) Except in each case as set forth on Section 2.11 of the Seller
Disclosure Schedule:
(i) the Seller owns, or has the right to use all the
Proprietary Matter and to sell, license and dispose of, and has the right
to bring actions for the infringement of all owned and exclusively licensed
Proprietary Matter, and such Proprietary Matter constitutes all
intellectual property rights necessary or required for the conduct of the
Business, and such rights to use, sell, license, dispose of and bring
actions are exclusive with respect to Proprietary Matter owned by the
Seller;
(ii) there are no royalties, honoraria, fees or other
payments payable by the Seller to any Person by reason of the ownership,
use, license, sale or disposition of the Proprietary Matter;
(iii) no activity, service or procedure currently conducted
or proposed to be conducted by the Seller or any Subsidiary and related to
the Business violates or shall violate any contract, instrument, license,
commitment, lease or similar document of the Seller or any Subsidiary with
any third Person relating to any intellectual property rights,
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or infringes any trade secrets, patents, copyrights, trademarks, trade
names, or service marks or other intellectual property rights of any other
Person;
(iv) the Seller has taken the steps described on Section
2.11 of the Seller Disclosure Schedule designed to safeguard and maintain
(i) the secrecy and confidentiality of confidential or proprietary
information related to the Business and (ii) the proprietary rights of the
Seller and each Subsidiary in all of its Proprietary Matter;
(v) in the conduct of the Business, neither the Seller nor
any Subsidiary has infringed upon, misappropriated or otherwise come into
conflict with any intellectual property rights of any Person or committed
any acts of unfair competition, and neither the Seller nor any Subsidiary
has received from any Person in the past five years any notice, charge,
complaint, claim or assertion thereof; and
(vi) in the conduct of the Business, neither the Seller nor
any Subsidiary has sent to any Person in the past five years, or otherwise
communicated to any Person, any notice, charge, complaint, claim or other
assertion of any present, impending or threatened infringement by or
misappropriation of, or other conflict with, any intellectual property
rights of the Seller or any Subsidiary by such other Person or any acts of
unfair competition by such other Person, nor, to the Knowledge of the
Seller, is any such infringement, misappropriation, conflict or act of
unfair competition occurring or threatened.
2.12 Litigation.
There are no actions, suits or proceedings ("Proceedings") relating to the
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Business or the Purchased Assets pending or, to the Seller's knowledge,
threatened in writing against the Seller or any Subsidiary, whether at law or in
equity, whether civil or criminal in nature or before or by any Governmental
Entity, nor is the Seller or any Subsidiary subject to any order, judgment,
writ, injunction or decree relating to the Business or the Purchased Assets.
2.13 Opinion of Financial Advisor.
The Seller has been advised by its financial advisor, Ewing Monroe Bemiss &
Co., that in its opinion, as of the date hereof, the Sale is fair from a
financial point of view to the holders of shares of the Seller's common stock.
2.14 Accounts and Notes Receivable.
Except as set forth on Section 2.14 of the Seller Disclosure Schedule and
except for allowances for bad debt reflected on the Seller's balance sheet as of
July 3, 1999, all accounts receivable and notes receivable relating to the
Business owing to the Seller or any Subsidiary as of the date hereof constitute,
and all such accounts receivable and notes receivable owing to the Seller or any
Subsidiary as of the Closing shall constitute, valid and enforceable claims
arising from bona fide transactions in the ordinary course of business, and, to
the Seller's knowledge, there are no asserted claims, refusals to pay or other
rights of set-off against any thereof. Section 2.14 of the Seller Disclosure
Schedule, sets forth an aging schedule of the accounts receivable related to the
Business.
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2.15 Suppliers, Consultants and Vendors.
Except in the ordinary course of business, no material supplier, consultant
or vendor to the Seller or any Subsidiary in connection with the Business has
canceled or otherwise terminated, or, to the Seller's knowledge, threatened in
writing to cancel or otherwise terminate, its relationship with the Seller or
any Subsidiary or has decreased, limited or otherwise modified, or to the
Seller's knowledge, threatened to decrease, limit or otherwise modify, the
services, supplies or materials it provides to the Seller or any Subsidiary.
2.16 Customers.
Except as set forth in Section 2.16 of the Seller Disclosure Schedule, no
customer of the Seller or any Subsidiary in connection with the Business, to
which or whom more than $50,000 of annual sales were made in either of fiscal
years 1999 or 1998, has notified the Seller or any Subsidiary that it intends to
terminate or materially curtail its relationship and dealings with the Seller or
any Subsidiary.
2.17 Conflicts of Interest.
Except as set forth on Schedule 2.17 of the Seller Disclosure Schedule,
neither the Seller or any Subsidiary, nor any officer, employee, agent or other
Person acting on behalf of the Seller or any Subsidiary has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any Governmental Entity or other Person who was, is, or may be in
a position to help or hinder the Business (or assist in connection with any
actual or proposed transaction) that (a) might subject the Seller to any damage
or penalty in any proceeding, (b) if not given in the past, would have resulted
in a Material Adverse Effect, or (c) if not continued in the future, could
reasonably be expected to result in a Material Adverse Effect. There is not now,
and there has never been, any employment by the Seller or any Subsidiary of, or
beneficial ownership in the Seller or any Subsidiary by, any governmental or
political official in any jurisdiction in which the Seller or any Subsidiary has
conducted or proposes to conduct the Business.
2.18 Tax Matters.
(a) Except as set forth on Section 2.18 of the Seller Disclosure
Schedule, the Seller and each other Person included in any consolidated or
combined Tax Return and part of an affiliated group, within the meaning of
Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), of
----
which the Seller is a common parent:
(i) has timely paid or caused to be paid all Taxes required
to be paid by it through the date hereof and as of the Closing Date
(including any Taxes shown due on any Tax Return);
(ii) has filed or caused to be filed in a timely and proper
manner (within any applicable extension periods) all Tax Returns required
to be filed by it with the appropriate governmental entities in all
jurisdictions in which such Tax Returns are required to be filed; and
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(iii) has not requested or caused to be requested any
extension of time within which to file any Tax Return, which Tax Return has
not since been filed.
(b) The Seller has previously made available to the Purchaser true,
correct and complete copies of all Tax Returns filed by or on behalf of the
Seller and each Subsidiary for all completed Tax years of such Company that
remain open for audit or review by the relevant Taxing authority. All such Tax
Returns were true, complete and correct in all material respects.
(c) Except as set forth in Section 2.18(c) of the Seller Disclosure
Schedule:
(i) the Seller has not been notified by the Internal
Revenue Service or any other taxing authority that any issues have been
raised (and no such issues are currently pending) by the Internal Revenue
Service or any other taxing authority in connection with any Tax Return of
the Seller and each Subsidiary, there are no pending Tax audits and no
waivers of statutes of limitations have been given or requested with
respect to the Seller or any Subsidiary; no Tax Liens have been filed
against the Seller or any Subsidiary and remain undischarged, other than
for Taxes not yet due and payable; and no unresolved deficiencies or
additions to Taxes have been proposed, asserted or assessed against the
Seller or any Subsidiary;
(ii) the Seller is not, and has not ever been, a party to
any Tax sharing agreement with any Person;
(iii) the Seller is not a foreign Person within the meaning
of Treasury Regulation Section 1.1445-2(b), and the Purchaser has been
furnished with a true and accurate certificate from the Seller so stating
which complies in all respects Treasury Regulation with Section 1.1445-
2(b)(2).
2.19 FDA and Certain Other Compliances.
(a) Except as set forth on Section 2.19 of the Seller Disclosure
Schedule, the Seller and each Subsidiary is in substantial compliance, in all
material respects, with all Laws administered or issued by the United States
Food and Drug Administration (the "FDA") and any other Governmental Entities in
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foreign jurisdictions performing functions similar to those performed by the
FDA. All Products, where required by Laws applicable thereto, are being
manufactured and marketed under a valid Section 510(k) clearance letter or PMA
issued by the FDA and Section 2.19 of the Seller Disclosure Schedule lists each
such 510(k) clearance letter and PMA and includes a copy thereof. Such Section
also lists those of the Products which are being marketed without a valid
Section 510(k) clearance letter or PMA issued by the FDA, whether or not
required by the FDA, and sets forth the reason why each such Product is being
marketed without such clearance or approval.
(b) Except as set forth on Section 2.19 of the Seller Disclosure
Schedule:
(i) no false information or significant omission has been
made in any products application or products-related submission to the FDA
or any other Governmental Entity, or otherwise relating to any of the
Products by or on behalf of the Seller and each Subsidiary.
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(ii) any PMA or 510(k) documents and related documents for
each of the Products of the Seller and each Subsidiary are in compliance,
in all material respects, with applicable Laws administered or promulgated
by the FDA and there is no reason to believe that the FDA is considering
limiting, suspending, or revoking such approvals/clearances or changing the
marketing classification or labeling of any such Products.
(iii) all preclinical and clinical studies, if any, have been
conducted by the Seller in accordance with recognized good clinical and
good laboratory practices in all material respects, and are in compliance
with applicable Laws administered or promulgated by the FDA or any other
Governmental Entity regarding preclinical and clinical studies; and
(iv) the Seller has obtained all regulatory approvals from
any Governmental Entities required for the Products that are necessary to
the Seller's and the Subsidiaries' conduct of the Business.
(c) (i) Section 2.19 of the Seller Disclosure Schedule sets forth an
accurate list of written information regarding internal audits concerning
whether the Seller and the Subsidiaries comply with current good manufacturing
practices including FDA Quality Systems Regulations ("QSR") and ISO 9001
standards ("CGMP") and all written reports or written information regarding CGMP
----
audits conducted for the Seller or any Subsidiary by an outside auditor.
(ii) The Seller and each Subsidiary is in substantial
compliance with the QSR and any other applicable CGMP regulations of each
Governmental Entity including, the inspection of incoming components and in
process product equipment validation and maintenance, complaint file
requirements, process validation, document retention, change controls, and
master file and device history file documentation.
(iii) The Seller has signed up-to-date written policies that
reflect its actual CGMP procedures.
(iv) The Seller has, in a timely manner, filed all required
medical device reports ("MDRs") for deaths, serious injuries, and
----
reportable malfunctions. A list of such reports and the Seller's written
policy regarding MDR reporting is attached as part of Section 2.19 of the
Schedule.
(v) The Seller has no knowledge of any acts that furnish a
reasonable basis for a Warning Letter, Section 305 Notice, or other similar
communications from the FDA or any other Governmental Entity, and there
have been no recalls, field notifications, safety alerts (whether voluntary
or otherwise) or seizures requested or threatened, related to the Seller's
Products.
(vi) The Seller has established a Corporate Compliance
Program which is described as part of Section 2.19 of the Schedule.
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(d) Section 2.19 of the Seller Disclosure Schedule sets forth each
foreign jurisdiction in which the Seller or any Subsidiary is directly or
indirectly marketing or selling Products.
2.20 Insurance.
Section 2.20 of the Seller Disclosure Schedule contains a true and
complete list of all policies of liability, theft, fidelity, life, fire, product
liability, workmen's compensation, health and other forms of insurance held by
the Seller and any Subsidiary (specifying the insurer, amount of coverage, type
of insurance, policy number and any pending claims thereunder).
2.21 Environmental Matters.
(a) Neither the Seller nor any Subsidiary nor, to the Seller's
knowledge, any of their past property or operations, is subject to or the
subject of, any Proceeding, Order, settlement, or other Contract arising under
any Environmental, Health and Safety Laws, nor, to the Seller's knowledge, has
any investigation been commenced or is any Proceeding threatened against the
Seller or any Subsidiary under any Environmental, Health and Safety Laws with
regard to the Business or the Purchased Assets.
(b) Except as set forth on Section 2.21 of the Seller Disclosure
Schedule, neither the Seller nor any Subsidiary has received any written or oral
notice, report or other information that it is potentially responsible under any
Environmental, Health and Safety Laws for response costs or natural resource
damages, as those terms are defined under the Environmental, Health and Safety
Laws, at any location and, to the Seller's knowledge, neither the Seller nor any
Subsidiary has transported or disposed of, or allowed or arranged for any third
Person to transport to or dispose of, any Hazardous Materials at any location
included on the National Priorities List, as defined under CERCLA, or any
location proposed for inclusion on that List, or any location included on the
CERCLIS database prepared under CERCLA or on any analogous list prepared by any
Governmental Entity.
2.22 Sufficiency of Assets.
The sale of the Purchased Assets by the Seller to the Purchaser pursuant to
this Agreement will effectively convey to, or provide the license to (in the
case of the "BEI" trademark), the Purchaser the entire Business of, and all of
the tangible and intangible property used in the conduct of the Business by the
Seller and the Subsidiaries (whether owned, leased or held under license by the
Seller or by the Subsidiaries) and necessary or desirable to, the conduct of the
Business as conducted by the Seller and the Subsidiaries; provided, however,
that the Seller believes that all of the contracts listed on Section 2.8 of the
Seller Disclosure Schedule are necessary or desirable to the conduct of the
Business, but the Purchaser has elected to include in the Assumed Contracts only
those contracts listed on Annex C to Schedule 1.1 of this Agreement.
2.23 Disclosure.
This Agreement, including the Seller Disclosure Schedule, attachments or
Exhibits hereto, does not contain any untrue statement of a material fact or
omit a material fact necessary
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to make the statements contained herein or therein, taken as a whole, in light
of the circumstances in which they were made, not misleading.
Section 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser represents and warrants, to and for the benefit of the
Seller, as follows:
3.1 Due Organization.
The Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Purchaser is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary.
3.2 Authority; Binding Nature Of Agreements.
The Purchaser has all necessary corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each Related
Document to which it is or will be a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and each Related Document to which it is or will be a party by the Purchaser and
the consummation by the Purchaser of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of the Purchaser, and no other corporate proceedings on the part of
the Purchaser are necessary to authorize this Agreement and each Related
Document to which it is or will be a party or to consummate the transactions so
contemplated hereby and thereby. As of the date hereof, the Board of Directors
of the Purchaser has approved the Sale. This Agreement and each Related Document
to which it is or will be a party has been, or upon the Purchaser's execution
thereof will be, duly and validly executed and delivered by the Purchaser.
Assuming the due authorization, execution and delivery by the Seller and each
Subsidiary party thereto, each of this Agreement and each Related Document to
which it is or will be a party constitutes a legal, valid and binding obligation
of the Purchaser, enforceable against the Purchaser in accordance with its
terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and except as the
availability of equitable remedies may be limited by the application of general
principles of equity (regardless of whether such equitable principles are
applied in a proceeding at law or in equity).
3.3 Non-Contravention; Consents.
(a) The execution and delivery of this Agreement and each Related
Document to which it is or will be a party by the Purchaser does not, and the
performance of this Agreement and each Related Document to which it is or will
be a party by the Purchaser, and the transactions contemplated hereby and
thereby, will not,
(i) conflict with or violate (with or without notice or
lapse of time or both) the Certificate of Incorporation or By-Laws of the
Purchaser,
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(ii) conflict with or violate (with or without notice or
lapse of time or both) any Law applicable to the Purchaser or by which its
properties are bound or affected, or
(iii) result in any violation or breach of or constitute a
default (or an event that with notice or lapse of time or both would become
a default) under, or impair the Purchaser's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Purchaser pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which the Purchaser is a party or by which the Purchaser or
any of its properties is bound or affected.
(b) The execution and delivery of this Agreement and each Related
Document to which it is or will be a party by the Purchaser does not, and the
performance of this Agreement and each Related Document to which it is or will
be a party by the Purchaser will not, require the Purchaser to obtain any
consent, approval, authorization or permit of, or to file with or notify, any
Governmental Entity.
3.4 Brokers.
To the extent that the Purchaser has agreed to pay any brokerage
commission, finder's fee or similar commission or fee in connection with any of
the transactions contemplated by this Agreement, it will be solely responsible
for the payment of such commission or fee.
Section 4 PRE-CLOSING COVENANTS
4.1 Access And Investigation
The Seller shall ensure that, during normal business hours during the
period between the date hereof and the Closing Date or the date of termination
of this Agreement pursuant to Section 8 (the "Pre-Closing Period"), the Seller
------------------
and its Representatives provide the Purchaser and its Representatives with
reasonable access to the Seller's Representatives, the Seller's vendors (but not
its customers except as provided below), the Purchased Assets and to the
Seller's locations where the Business is conducted, and to all existing books,
records, tax returns, work papers and other documents and information relating
to the Purchased Assets and the Business; provided, however, that (a) the
Purchaser shall not contact, and the Purchaser shall ensure that none of its
Representatives contacts, any Representative of the Seller or any vendor without
the prior authorization of Richard Turner, President and Chief Executive Officer
of the Seller, or Thomas W. Fry, Vice President, Finance and Administration of
the Seller, and (b) the Purchaser shall take reasonable precautions to ensure
that neither it nor any of its Representatives interferes with or otherwise
disrupts the business or operations of the Seller while exercising rights
provided under this Section 4.1. The Purchaser shall hold, and will cause its
Representatives to hold, any and all information received from the Seller or its
Representatives, in confidence, in accordance with the Confidential Disclosure
Agreement dated June 21, 1999. Neither Mr. Fry nor Mr. Turner shall
unreasonably withhold consent to the Purchaser's request for any such contact.
Contacts by the Purchaser with vendors and suppliers shall be made jointly with
the Seller by telephone or other means determined by the Purchaser.
Notwithstanding the foregoing, (x) if the
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Purchaser requests Richard Turner or Thomas Fry to authorize the Purchaser to
contact any Representative or vendor of the Seller and the Purchaser does not
receive a response within two business days from the date the request was made,
then the Seller shall be deemed to have consented to the contact requested and
(y) without consent of Mr. Fry or Mr. Turner, the Purchaser may contact during
business hours pursuant to this Section 4.1 the following Persons: SurgiTech,
Inc. and Bates, Fujinon, Inc., PENTAX Precision Instrument Corporation and ERBE
USA, Inc., and Larry Doll, Anthony Manna and Paul Dube, the Seller's MIS
Manager. Contacts to the foregoing customers and suppliers shall be made jointly
with the Seller by telephone or other means determined by the Purchaser. If the
Purchaser, based on such investigations and contacts after the date of this
Agreement with Fujinon, Inc., PENTAX Precision Instrument Corporation and ERBE
USA, Inc., customers of the Seller, reasonably believes that one or more of such
customers do not intend after the Closing to continue to buy Products from the
Purchaser, then, for purposes of calculating the Sales Shortfall, the sales of
Products to such customer or customers shall not be counted. If within 12 months
of the Closing any such customer for which sales were excluded from the
calculation of the Sales Shortfall pursuant to the preceding sentence buys any
Products from the Purchaser, then the Purchaser shall pay to the Seller by wire
transfer of immediately available funds an amount equal to the amount by which
the Purchase Price was reduced as a result of the exclusion from the Sales
Shortfall calculation of sales to such customer.
4.2 Operation of Business
The Seller shall ensure that during the Pre-Closing Period:
(a) the Seller and each Subsidiary conducts its respective operations
as they relate to the Purchased Assets and the Business in the ordinary course
of business and consistent with the manner such operations have been conducted
prior to the date of this Agreement;
(b) with respect to the Purchased Assets and the Business, the Seller
and its Subsidiaries use commercially reasonable efforts to (i) preserve intact
its current business organization, (ii) keep available the services of its
current officers and employees, (iii) maintain its relations and good will with
its and each Subsidiary's suppliers, customers, landlords, creditors, licensors,
licensees, employees, independent contractors and other Persons having business
relationships with the Seller and its Subsidiaries, and (iv) repair, restore or
replace any Purchased Assets that are destroyed or damaged;
(c) neither the Seller nor any Subsidiary enters into or permits any
of the Purchased Assets to become bound by any contract relating to the
Purchased Assets except in the ordinary course of business consistent with past
practice;
(d) neither the Seller nor any Subsidiary sells or otherwise disposes
of, or permits any Encumbrance, other than a Permitted Encumbrance, to be
imposed upon, any Proprietary Matter or any other Purchased Asset;
(e) neither the Seller nor any Subsidiary enters into any transaction
or takes any other action that might reasonably be expected to cause or
constitute a breach of any representation or warranty made by the Seller in this
Agreement or a Related Document;
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(f) neither the Seller nor any Subsidiary pays accounts payable or
collects accounts receivable related to the Business, other than in the ordinary
course of business consistent with past practice and does not delay or postpone
the payment of such accounts payable and other Liabilities related to the
Business or accelerate the collection of such accounts receivable;
(g) neither the Seller nor any Subsidiary shall change its pricing or
commission policies or sales incentive programs involving the Business without
the prior written consent of the Purchaser;
(h) neither the Seller nor any Subsidiary shall change its practices
or policies with respect to the ordering or shipping of Products; and
(i) neither the Seller nor any Subsidiary agrees, commits or offers
(in writing or otherwise) to take any of the actions described in clauses "(a)"
through "(h)" of this Section 4.2.
4.3 Filings and Consents.
Each of the Seller and the Purchaser shall ensure that: (a) all filings,
notices and Consents required to be made, given and obtained by it in order to
consummate the Sale are made, given and obtained on a timely basis; and (b)
during the Pre-Closing Period, all documents required to be available and all
actions required to be taken in connection with any filing, notice or Consent
that the Purchaser or the Seller is required to make, give or obtain are made
available or taken.
4.4 Notification of Certain Changes; Supplements to Schedules.
(a) The Seller shall give prompt notice to the Purchaser, and the
Purchaser shall give prompt notice to the Seller, of (i) the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty contained in this Agreement or
any Related Document to be materially untrue or inaccurate such that the
conditions set forth in Sections 5.1 or 6.1 would not be satisfied as a result,
or (ii) any failure of the Seller or the Purchaser, as the case may be,
materially to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder such that the conditions set forth in
Sections 5.2 or 6.2 would not be satisfied as a result; provided, however, that
the delivery of any notice pursuant to this Section 4.4 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
(b) From time to time prior to the Closing, the Seller will
supplement or amend with reasonable frequency the information contained in the
Schedules hereto with respect to any matter hereafter arising, which, if
existing or occurring at the date of this Agreement, would have been required to
be set forth or described in any Schedule hereto. Any supplement or amendment
delivered pursuant to this Section 4.4(b) shall in no event be the basis for any
claim that any representation or warranty is inaccurate or has been breached for
purposes of Section 5.1 or Section 7; provided, however, if the matters
-------- -------
described by any such supplement or amendment constitute a Material Adverse
Effect, the Purchaser shall not be obligated, pursuant to Section 5.1, to
purchase the Purchased Assets and may terminate this Agreement pursuant to
Section 8.1(f).
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4.5 Public Announcements.
The Purchaser and the Seller will consult with each other before issuing
and, to the extent reasonably practicable, give each other the opportunity to
review and comment upon, any press release or other public statements with
respect to the transactions contemplated by this Agreement or any Related
Document and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
Law, court process or by obligations pursuant to any listing agreement with any
national securities exchange or national securities quotation system. The
initial press release to be issued with respect to the Sale shall be in the form
heretofore agreed to by the parties.
4.6 Reasonable Efforts.
(a) During the Pre-Closing Period, the Seller shall use its
commercially reasonable efforts to cause the conditions set forth in Section 5
to be satisfied. The Purchaser shall, at the Seller's request, make its
personnel available to talk and provide information to parties to the Assumed
Contracts in connection with seeking from such parties the consents,
certificates and approvals provided for in Section 5.7 of this Agreement.
(b) During the Pre-Closing Period, the Purchaser shall use its
commercially reasonable efforts to cause the conditions set forth in Section 6
to be satisfied.
4.7 Exchange Proceeds.
If during the Pre-Closing Period the Seller or any Subsidiary receives any
proceeds in consideration for the exchange of any of its assets that constitute
Purchased Assets, whether from the sale of any such Purchased Assets (other than
sales of inventory in the ordinary course of business consistent with past
practice) and from insurance proceeds payable on account of any loss or casualty
to such Purchased Assets, any proceeds from the taking of such Purchased Assets
pursuant to the power of eminent domain, or any other proceeds from whatever
source relating to the disposition of such Purchased Assets (the "Exchange
--------
Proceeds"), the Seller shall promptly notify the Purchaser of such receipt of
- --------
Exchange Proceeds and shall consult with the Purchaser with respect to the
application of any such Exchange Proceeds.
4.8 Allocation of Purchase Price.
The Purchase Price shall be allocated to the Purchased Assets in accordance
with the allocation set forth in Exhibit C (the "Statement of Allocation"). At
--------- -----------------------
the Closing, the Seller shall:
(a) complete and execute a Form 8594 Asset Acquisition Statement
Under Section 1060 of the Code, consistent with the Statement of Allocation; and
(b) deliver a copy of such form to the Purchaser; and
file a copy of such form with its respective tax returns, as the case may, for
the period which includes the Closing Date.
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4.9 Exclusivity.
(a) The Seller acknowledges that substantial time of the Purchaser
and substantial out-of-pocket expenses (including attorneys' and accountants'
fees and expenses) have been and will continue to be expended and incurred in
connection with conducting legal, business and financial due diligence
investigations of the Business, drafting and negotiating this Agreement and the
Related Documents and other related expenses (collectively,
"Acquisition Expenses"). Until the Closing Date (unless this Agreement is
--------------------
sooner terminated), the Seller shall not, and shall use its best efforts to not
permit any of the Representatives of the Seller or any Subsidiary to: (i) unless
following consultation with outside legal counsel, the Seller's Board of
Directors determines in good faith that it is required to do so in order to
discharge properly its fiduciary duties, enter into any written or oral
agreement or understanding with any Person (other than the Purchaser) regarding
Another Transaction (as defined below); (ii) unless following consultation with
outside legal counsel, the Seller's Board of Directors determines in good faith
that it is required to do so in order to discharge properly its fiduciary
duties, enter into or continue any negotiations or discussions with any Person
(other than the Purchaser) regarding the possibility of Another Transaction; or
(iii) unless following consultation with outside legal counsel, the Seller's
Board of Directors determines in good faith that it is required to do so in
order to discharge properly its fiduciary duties, provide any non-public
financial or other confidential or proprietary information regarding the
Business or the Purchased Assets (including this Agreement and any other
materials containing the Purchaser's proposed terms and any other financial
information, projections or proposals regarding the Business or the Purchased
Assets) to any Person (other than to the Purchaser or its Representatives) who
the Seller knows, or has reason to believe, would have any interest in
participating in Another Transaction. Nothing contained in this Section 4.9
shall prevent the Seller's Board of Directors from taking and disclosing to its
stockholders a position with regard to a tender offer or exchange offer
contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Securities
Exchange Act of 1934, as amended, and making such disclosure to the stockholders
as may be required under applicable Law; provided, that the Board of Directors
shall not recommend that such stockholders tender their shares of Seller common
stock in connection with such tender or exchange offer unless the Board of
Directors determines in good faith, after consultation with outside legal
counsel, that making such recommendation is required in order to discharge
properly its fiduciary duties. As used herein, the term "Another Transaction"
-------------------
means (A) the sale of the Business or any of the Purchased Assets, other than
the sale of inventories in the ordinary course consistent with past practice, or
(B) the sale (whether by sale of stock, merger, consolidation or otherwise) of
more than 50% of the voting securities of the Seller. The Seller represents that
it is not a party to, or bound by, any agreement with respect to Another
Transaction other than this Agreement.
(b) The Seller shall disclose to the Purchaser the terms of Another
Transaction that the Seller negotiates or discusses, as permitted under this
Section 4.9, with any Person other than the Purchaser (including the identity of
such Person).
(c) Each party recognizes and acknowledges that a breach of this
Section 4.9 will cause irreparable and material loss and damage for the
Purchaser, which cannot be adequately compensated for in damages by an action at
law. Therefore, the Seller agrees that the Purchaser shall be entitled, in
addition to any other remedies and damages available, to the equitable
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remedies of injunction and specific performance with respect to the Seller's
obligations hereunder.
4.10 Special Payment to Purchaser Based Upon Another Transaction.
In the event that the Seller's Board of Directors determines in good faith,
after consultation with outside legal counsel, that it is required, in order to
discharge properly its fiduciary duties, to consider the unsolicited offer of a
Person (other than the Purchaser or any of its affiliates or Representatives) to
enter into Another Transaction, the Seller may terminate this Agreement pursuant
to Section 8 under circumstances not involving a breach by the Seller of the
provisions of this Agreement solely for the purpose of entering into Another
Transaction with such person. At the time and as a condition to such termination
by the Seller of this Agreement, the Seller shall pay $300,000 to the Purchaser
and, conditioned upon there not having been a breach by the Seller of the
provisions of this Agreement including without limitation the provisions of
Section 4.9, such payments shall fully satisfy the Seller's obligations to the
Purchaser under this Agreement.
4.11 Stockholders' Meeting.
On or before November 22, 1999, the Seller shall have caused to be convened
a meeting of the Seller's stockholders (in compliance in all respects with
provisions of applicable corporate law and the Certificate of Incorporation and
By-laws of the Seller) at which meeting the stockholders shall consider whether
to approve the Sale and authorize the Seller to execute this Agreement and the
Related Documents and to consummate the transactions contemplated hereby and
thereby. The Seller shall deliver to the Purchaser for review drafts and final
versions of proxy material to be distributed to the Seller's stockholders in
connection with such meeting.
4.12 Subsidiary Approval.
Immediately upon approval of the Sale by the Seller's stockholders, the
Seller shall cause the Boards of Directors of each Subsidiary to approve and the
Seller or any applicable Subsidiary, as sole stockholder, of each Subsidiary,
shall approve the Sale and the consummation of the transactions contemplated by
this Agreement and each Related Document.
4.13 Insurance.
The Seller shall, at its election, obtain by the Closing Date extended
reporting period coverage for its Product Liability Policy and Umbrella Policy
set forth in Section 2.20 of the Seller Disclosure Schedule or keep in effect
the coverage currently provided under such policies so that the Seller, and the
Purchaser as an additional insured, will be entitled to make and collect for a
period of three years after the Closing claims which arise out of events
involving the Seller or any Subsidiary that occurred, or products that were sold
or services that were performed by the Seller or any Subsidiary, prior to the
Closing and that are covered by such insurance policies.
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Section 5 CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION TO CLOSE.
The Purchaser's obligation to purchase the Purchased Assets and to take the
other actions required to be taken by the Purchaser at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Purchaser, in whole or in part, in
writing):
5.1 Accuracy Of Representations.
The representations and warranties of the Seller contained in this
Agreement and the Related Documents (without giving effect to any qualification
contained therein as to materiality, including, without limitation, the phrases
"material," "in all material respects" and "Material Adverse Effect"), shall be
true and correct in all respects on and as of the Closing Date, except (i) for
changes contemplated by this Agreement, (ii) for those representations and
warranties which address matters only as of a particular date (which shall have
been true and correct as of such date) and (iii) where the failure or failures
of such representations and warranties to be so true and correct, individually
or in the aggregate, has not resulted in a Material Adverse Effect.
5.2 Performance Of Obligations.
The Seller shall have performed or complied in all material respects with
all agreements and covenants required by this Agreement and the Related
Documents to be performed or complied with by it on or prior to the Closing
Date, except where the failure to perform or comply with such agreements and
covenants has not resulted in or would not reasonably be expected to result in a
Material Adverse Effect.
5.3 No Proceedings.
There shall not have been commenced and be pending against the Purchaser
any Proceeding (a) involving any material challenge to, or seeking material
damages or other material relief in connection with, the Sale or (b) that is
reasonably likely to have the effect of preventing, delaying, making illegal or
otherwise interfering with the Sale.
5.4 No Prohibition.
No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Sale shall be in
effect; and there shall not be any action taken, or any Law enacted, entered or
enforced which makes the consummation of the Sale illegal.
5.5 Stockholder and Board of Directors Approval.
This Agreement and the Sale shall have been approved by the requisite vote
of the stockholders of the Seller and by its Board of Directors.
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5.6 Opinion of the Seller's Counsel.
The Purchaser shall have received an opinion of Cooley Godward LLP, counsel
for the Seller, dated the Closing Date and covering the matters set forth on
Exhibit D attached hereto.
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5.7 Consents and Approvals.
The Purchaser shall have received duly executed copies of (i) all consents,
certificates and approvals required for or in connection with the execution and
delivery by the Seller and each Subsidiary of this Agreement and each Related
Document to which it is a party and the consummation of the transactions
contemplated hereby and thereby, (ii) consents to or notices of, as appropriate,
the assignment to the Purchaser of all the Assumed Contracts identified on Annex
C to Schedule 1.1 hereto from or to each party to such contracts other than the
Seller and (iii) consents and waivers set forth on Schedule 5.7 hereto.
5.8 Related Documents.
Each of the documents set forth below (each, a "Related Document," and
----------------
collectively, the "Related Documents") shall have been executed and delivered by
-----------------
the parties thereto:
(i) Transition Agreement. The Seller shall have executed
--------------------
and delivered a transition agreement with the Purchaser substantially in
the form of Exhibit E attached hereto (the "Transition Agreement").
--------- --------------------
(ii) Non-Competition Agreements. The Seller and Richard W.
--------------------------
Turner shall each have executed and delivered a non-competition agreement
with the Purchaser, substantially in the form of Exhibit F and Exhibit G,
--------- ---------
respectively, attached hereto (the "Non-Competition Agreements").
--------------------------
(iii) Bill of Sale, Assignment and Assumption Agreement. The
-------------------------------------------------
Seller each Subsidiary shall have executed and delivered the Bill of Sale.
5.9 Seller Certificates.
Each of the following certificates shall have been executed and/or
delivered, as the case may be, by the Person who or which is the subject
thereof:
(i) a certificate of the secretary of the Seller, dated as
of the Closing Date, certifying (i) that true and complete copies of the
Seller's Certificate of Incorporation and By-Laws as in effect on the
Closing Date are attached thereto, (ii) as to the incumbency and
genuineness of the signatures of each officer of the Seller executing this
Agreement and the Related Documents on behalf of the Seller; and (iii) the
genuineness of the resolutions (attached thereto) of the board of directors
or similar governing body of the Seller authorizing the execution, delivery
and performance of this Agreement and the Related Documents to which the
Seller is a party and the consummation of the transactions contemplated
hereby and thereby;
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(ii) certificates dated as of the Closing Date of the
secretaries of state of the states in which the Seller and each Subsidiary
is organized and qualified to do business, certifying as to the good
standing and non-delinquent tax status of the Seller and each Subsidiary;
(iii) a certificate signed by an officer of the Seller and
each Subsidiary, dated as of the Closing Date, and certifying as to (A) the
accuracy of the representations and warranties of the Seller contained
herein, as contemplated by Section 5.1, and (B) the performance of the
covenants of the Company contained herein, as contemplated in Section 5.2;
and
(iv) a certificate of a principal executive officer of the
Seller, dated as of the Closing Date, certifying that such company is not a
foreign person within the meaning of Section 1445 of the Code.
5.10 Release of Encumbrance.
The Purchaser shall have received from the Seller (i) evidence that the
Seller's lender, Transamerica Business Credit Corporation, has consented to the
Sale and released its Encumbrance on the Purchased Assets and (ii) a waiver from
BEI Technologies, Inc. of any obligation the Seller may have under the
provisions of Section V(A) of the Assumption of Liabilities and Indemnity
Agreement by and between BEI Technologies, Inc. and BEI Electronics, Inc. (the
Seller's predecessor) to cause the Purchaser to assume the Seller's
indemnification obligations under such agreement in the case of a sale of the
properties and assets of the Seller substantially as an entirety.
5.11 Integrated Video Systems.
The Purchaser shall have received from the Seller an irrevocable purchase
order to purchase from the Purchaser 24 Integrated Video Systems at a price
equal to the Seller's standard costs at which such Systems were valued under
Section 1.10. Such Systems shall be delivered by the Purchaser to the Seller at
a rate of 2 systems per month for 12 months, commencing in the month in which
the Closing occurs.
Section 6 CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATION TO CLOSE.
The Seller's obligation to sell the Purchased Assets and to take the other
actions required to be taken by the Seller at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by the Seller, in whole or in part, in writing):
6.1 Accuracy Of Representations.
The representations and warranties of the Purchaser contained in this
Agreement and the Related Documents (without giving effect to any qualification
contained therein as to materiality, including, without limitation, the phrases
"material," "in all material respects," and "Material Adverse Effect"), shall be
true and correct in all respects on and as of the Closing Date, except
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(i) for changes contemplated by this Agreement, (ii) for those representations
and warranties which address matters only as of a particular date (which shall
have been true and correct as of such date) and (iii) where the failure or
failures of such representatives and warranties to be so true and correct,
individually or in the aggregate, has not resulted in a material adverse effect
on the business or financial condition of the consolidated group of the
Purchaser, taken as a whole.
6.2 Performance Of Obligations.
The Purchaser shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement and the Related
Documents to be performed or complied with by it on or prior to the Closing
Date, except where the failure to perform or comply with such agreements and
covenants has not resulted in or would not reasonably be expected to result in a
material adverse effect on the business or financial condition of the
consolidated group of the Purchaser, taken as a whole.
6.3 No Proceedings.
There shall not have been commenced and be pending against the Seller any
Proceeding (a) involving any material challenge to, or seeking material damages
or other material relief in connection with, the Sale or (b) that is reasonably
likely to have the effect of preventing, delaying, making illegal or otherwise
interfering with the Sale.
6.4 No Prohibition.
No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Sale shall be in
effect; and there shall not be any action taken, or any Law enacted, entered or
enforced which makes the consummation of the Sale illegal.
6.5 Stockholder Approval.
This Agreement and the Sale shall have been approved by the requisite vote
of the stockholders of the Seller.
6.6 Opinion of the Purchaser's Counsel.
The Seller shall have received an opinion of O'Sullivan Graev & Karabell,
LLP, counsel for the Purchaser, dated the Closing Date and covering the matters
set forth on Exhibit H attached hereto.
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6.7 Consents and Approvals.
The Seller shall have received duly executed copies of all consents and
approvals required for or in connection with the execution and delivery by the
Seller and each Subsidiary of this Agreement and each of the Related Documents
to which each of them is a party and the consummation of the transactions
contemplated hereby and thereby, in form and substance reasonably satisfactory
to the Seller and its counsel.
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6.8 Related Documents.
Each of the Related Documents to which the Purchaser is a party shall have
been executed and/or delivered by the Purchaser and the transactions
contemplated thereby to be completed at or prior to the Closing shall have been
substantially consummated or effected, as the case may be, in accordance with
the terms thereof.
6.9 Purchaser's Certificates.
Each of the following certificates shall have been executed and/or
delivered, as the case may be, by the Person who or which is the subject
thereof:
(i) a certificate of the secretary of the Purchaser, dated
as of the Closing Date, certifying (i) that true and complete copies of the
Purchaser's Certificate of Incorporation and By-Laws as in effect on the
Closing Date are attached thereto, (ii) as to the incumbency and
genuineness of the signatures of each officer of the Purchaser executing
this Agreement and the Related Documents on behalf of the Purchaser; and
(iii) the genuineness of the resolutions (attached thereto) of the board of
directors or similar governing body of the Purchaser authorizing the
execution, delivery and performance of this Agreement and the Related
Documents to which the Purchaser is a party and the consummation of the
transactions contemplated hereby and thereby;
(ii) certificates dated as of the Closing Date of the
secretaries of state of the states in which the Purchaser is organized and
qualified to do business, certifying as to the good standing and non-
delinquent tax status of the Purchaser; and
(iii) a certificate signed by an officer of the Purchaser,
dated as of the Closing Date, and certifying as to (A) the accuracy of the
representations and warranties of the Purchaser contained herein, as
contemplated by Section 6.1, and (B) the performance of the covenants of
the Company contained herein, as contemplated in Section 6.2.
6.10 Termination of Royalty Obligation.
The royalty obligations of the Seller to the Purchaser pursuant to the
Settlement Agreement by and between CooperSurgical, Inc., a Delaware
corporation, Richard W. Turner, an individual, the Seller, Meditron Devices,
Inc., a Delaware corporation, XYLOG Corporation, a New Jersey corporation,
Zinnanti Surgical Instruments, Inc., a California corporation, and Donald L.
Tuttle, an individual, dated as of July 9, 1998, shall have been terminated.
Section 7 INDEMNIFICATION.
7.1 Generally.
(a) The Seller shall indemnify the Purchaser Indemnified Persons for,
and hold each of them harmless from and against, any and all Purchaser Losses to
the extent incurred or suffered by any Purchaser Indemnified Persons as a result
of or based upon the following:
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(i) the inaccuracy or breach of any representation or
warranty of the Seller or any Subsidiary contained in this Agreement or any
Related Document or in any certificate delivered by the Seller or any
Subsidiary in connection herewith or therewith at or before the Closing (or
any facts or circumstances constituting any such inaccuracy or breach);
(ii) the breach of any agreement or covenant of the Seller
or any Subsidiary contained in this Agreement or any Related Document;
(iii) the Excluded Assets;
(iv) the Excluded Liabilities;
(v) notwithstanding the disclosure of any such Liability in
this Agreement, on any Schedule, or otherwise, all Liabilities (contingent
or otherwise and including Liability for response costs, personal injury,
property damage or natural resource damage), other than the Assumed
Liabilities, which arise out of events involving the Seller or any
Subsidiary that occurred, or products sold or services performed by the
Seller or any Subsidiary prior to the Closing (notwithstanding that the
date on which such Liability arose or became manifest is after the
Closing), including the assertion of any claim, demand or Liability against
the Purchaser arising from or in connection with (x) any action or inaction
of the Seller or any of its stockholders in connection with the action of
any such stockholders required to approve the Sale, (y) the assertion
against the Purchaser by any such stockholder of any claim with respect to
any actions or the transactions of or involving the Seller prior to or at
Closing (including the actions and transactions contemplated by this
Agreement), or (z) Environmental, Health and Safety Laws, including those
relating to the handling, treatment, storage, disposal, release or
threatened release of Hazardous Substances at, onto or from any real
property, or any offsite waste treatment or storage disposal facility
associated with the Business, except for any such Liabilities the facts or
circumstances underlying which are caused solely by the operation of the
Business after the Closing Date.
(vi) non-compliance by the Seller with any applicable "bulk
sales laws"; and
(vii) any and all Special Tax Losses.
(b) The Purchaser shall indemnify the Seller Indemnified Persons for,
and hold each of them harmless from and against, any and all Seller Losses to
the extent arising from or in connection with any of the following:
(i) the inaccuracy or breach of any representation or
warranty of the Purchaser contained in this Agreement or any Related
Document or any certificate delivered by the Purchaser in connection
herewith or therewith at or before the Closing (or any facts or
circumstances constituting any such inaccuracy or breach);
(ii) the breach of any agreement or covenant of the
Purchaser contained in this Agreement or any Related Document;
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(iii) any Seller Losses arising from the Purchaser's
ownership and operation of the Purchased Assets from and after the Closing
Date (but excluding any Seller Losses as a result of any transaction
between the Purchaser and the Seller after the Closing Date not
contemplated by this Agreement); and
(iv) the Assumed Liabilities.
7.2 Assertion of Claims.
No claim shall be brought under Section 7.1 hereof unless the Indemnified
Persons, or any of them, give the Indemnifying Persons (a) written notice prior
to the applicable Survival Date of the existence of any such claim, specifying
the nature and basis of such claim and the amount thereof, to the extent known
or (b) written notice prior to such Survival Date pursuant to Section 7.3 of any
Third Party Claim, the existence of which might give rise to such a claim. Upon
the giving of such written notice as aforesaid, the Indemnified Persons, or any
of them, shall have the right to thereafter commence legal proceedings for the
enforcement of their rights under Section 7.1.
7.3 Notice and Defense of Third Party Claims.
The Liabilities of an Indemnifying Person with respect to Losses resulting
from the assertion of any Liability by third parties (each, a
"Third Party Claim") shall be subject to the terms and conditions set forth
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below.
(a) The Indemnified Persons shall promptly give written notice (and
in any event prior to any applicable Survival Date) to the Indemnifying Persons
of any Third Party Claim which might give rise to any Loss by the Indemnified
Persons, stating the nature and basis of such Third Party Claim, and the amount
thereof to the extent known; provided, however, that no delay on the part of
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the Indemnified Persons in notifying any Indemnifying Persons shall relieve the
Indemnifying Persons from any Liability hereunder unless (and then solely to the
extent that) the Indemnifying Person thereby is prejudiced by the delay. Such
notice shall be accompanied by copies of all relevant documentation with respect
to such Third Party Claim, including any summons, complaint or other pleading
which may have been served, any written demand or any other document or
instrument.
(b) If the Indemnifying Persons shall acknowledge in a writing
delivered to the Indemnified Persons that such Third Party Claim is properly
subject to their indemnification obligations hereunder, then the Indemnifying
Persons shall have the right to assume the defense of any Third Party Claim at
their own expense and by their own counsel, which counsel shall be reasonably
satisfactory to the Indemnified Persons; provided, however, that the
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Indemnifying Persons shall not have the right to assume the defense of any Third
Party Claim, notwithstanding the giving of such written acknowledgment, if (i)
the Indemnified Persons shall have been advised by counsel that there are one or
more legal or equitable defenses available to them which are different from or
in addition to those available to the Indemnifying Persons, and, in the
reasonable opinion of the Indemnified Persons, counsel for the Indemnifying
Persons could not adequately represent the interests of the Indemnified Persons
because such interests could be in conflict with those of the Indemnifying
Persons, (ii) such action or proceeding involves, or could
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reasonably be expected to have a material effect on, any material matter beyond
the scope of the indemnification obligation of the Indemnifying Persons or (iii)
the Indemnifying Persons shall not have assumed the defense of the Third Party
Claim in a timely fashion.
(c) If the Indemnifying Persons shall assume the defense of a Third
Party Claim (under circumstances in which the proviso to Section 7.3(b) is not
applicable), the Indemnifying Persons shall not be responsible for any legal or
other defense costs subsequently incurred by the Indemnified Persons in
connection with the defense thereof. If the Indemnifying Persons do not exercise
their right to assume the defense of a Third Party Claim by giving the written
acknowledgment referred to in Section 7.3(b), or are otherwise restricted from
so assuming by the proviso to Section 7.3(b), the Indemnifying Persons shall
nevertheless be entitled to participate in such defense with their own counsel
and at their own expense. If the defense of a Third Party Claim is assumed by
the Indemnified Persons pursuant to clause (i) or (ii) of the proviso to Section
7.3(b), the Indemnified Persons shall proceed diligently to defend such Third
Party Claim with counsel reasonably satisfactory to the Indemnifying Persons,
but shall not be entitled to settle such Third Party Claim without the prior
written consent of the Indemnifying Persons, which consent shall not be
unreasonably withheld or delayed.
(d) If the Indemnifying Persons exercise their right to assume the
defense of a Third Party Claim pursuant to Section 7.3(b), (i) the Indemnified
Persons shall be entitled to participate in such defense with their own counsel
at their own expense and (ii) the Indemnifying Persons shall not make any
settlement of any claims without the written consent of the Indemnified Persons,
which consent shall not be unreasonably withheld or delayed, unless the terms of
such settlement requires no more than the payment of money and the Indemnifying
Persons pay the money required by such settlement.
(e) If the Indemnifying Persons assume the defense of a Third Party
Claim, the Indemnified Persons shall cooperate fully as reasonably requested by
the Indemnifying Persons in the defense of such Third Party Claim, and shall
make available to the Indemnifying Persons all books, records and other
materials that are under the direct or indirect control of any Indemnified
Person and that the Indemnifying Persons reasonably consider necessary or
desirable for the defense of such Third Party Claims.
(f) Except as hereinafter provided in this paragraph and
notwithstanding anything to the contrary contained in this Agreement (i) the
Purchaser Indemnified Persons shall use commercially reasonable efforts to seek
recovery from their insurance providers with respect to any Losses for which
indemnity or reimbursement may be sought under Section 7 and for which insurance
may be available, and (ii) all Losses shall be net of any insurance proceeds or
other amounts actually recovered by or on behalf of the Purchaser Indemnified
Persons; provided, that, the provisions of this paragraph shall not require the
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Purchaser to seek recovery from its insurance providers for Losses relating to
product liability or Environmental, Health and Safety Laws.
(g) To the extent that any Indemnifying Person makes any
indemnification payment to any Indemnified Person, the Indemnifying Person shall
be entitled to exercise, and shall be subrogated to, any rights and remedies
(including rights of indemnity, rights of contribution and other rights of
recovery) that the Indemnified Party may have against any other
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Person with respect to any Losses for which such indemnification payment is
made. The Indemnified Person shall take such actions as the Indemnifying Person
may reasonably request for the purpose of enabling the Indemnifying Person to
perfect or exercise the Indemnifying Person's right of subrogation hereunder.
7.4 Survival of Representations and Warranties.
Subject to the further provisions of this Section 7.4, the representations
and warranties of the Parties contained in this Agreement or in any certificate
or other writing delivered in connection with this Agreement shall survive the
Closing Date until January 31, 2001; provided, however, that the representations
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and warranties of the Seller contained in Sections 2.2, 2.5, 2.9, 2.10, 2.11,
2.19 and 2.22 shall survive the Closing Date for the period representing their
respective statute of limitations. The representations and warranties of the
Purchaser contained in Sections 3.2 and 3.4 shall survive the Closing
indefinitely. The covenants and other agreements of each of the Seller and the
Purchaser contained in this Agreement shall survive the Closing Date until they
are otherwise terminated by their terms. For convenience of reference, the date
upon which any representation or warranty contained herein shall terminate, if
any, is referred to herein as the "Survival Date".
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7.5 Limitations on Indemnification.
(a) From and after the Closing, the Purchaser Indemnified Persons
shall not have the right to be indemnified for breaches of representations and
warranties of the Seller and any Subsidiary pursuant to Section 7.1(a)(i) and
the Seller Indemnified Persons shall not have the right to be indemnified for
breaches of representations and warranties of the Purchaser pursuant to Section
7.1(b)(i) unless and until the Indemnified Persons (or any of them) shall have
incurred on a cumulative basis aggregate Losses in an amount exceeding $125,000;
provided, however, that in no event shall the limitations set forth in this
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Section 7.5 apply with respect to any willful or knowing breach of such
representations or warranties. Once aggregate Losses exceed $125,000, the
Purchaser Indemnified Persons and the Seller Indemnified Persons shall be
entitled to indemnification for the amount of all Losses, including the amount
of Losses less than $125,000.
(b) In the event that the Purchaser claims Purchaser Losses as a
result of or based upon the inaccuracy or breach of a representation or warranty
of the Seller or any Subsidiary contained in either subparagraph (b) of Section
2.4 or contained in Section 2.19 (the "Compliance Claim"), the Purchaser shall
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provide written notice to the Seller of the Compliance Claim pursuant to Section
7.2. The Seller may elect to address the Compliance Claim pursuant to Section
7.3 as if it were a Third Party Claim by providing written notice to the
Purchaser of such election within 10 days of the delivery of the Purchaser's
notice to the Seller of the Compliance Claim. If the Seller does not provide
written notice to the Purchaser of such election within such 10 day period, the
Purchaser may address the Compliance Claim. In any event, the Seller's
indemnification obligations under any Compliance Claim shall be limited to FDA
consultants' fees and fines and costs imposed by any Governmental Entity. In
addition, in the event that the Purchaser makes such a Compliance Claim, and
Losses under such Compliance Claim include those resulting from an Order of a
Governmental Entity which has the effect of preventing the Purchaser from
selling a Product for 90 days or more in any country (a "Blocked
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Jurisdiction"), the Seller shall promptly pay to the Purchaser after the
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Closing by wire transfer of immediately available funds the Lost Sales Amount.
"Lost Sales Amount" means the Blocked Product Sales Amount divided by 9
-----------------
multiplied by 12. "Blocked Product Sales Amount" means that portion of the
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Product Sales Amount determined under Schedule 1.8(a) for a Product that is the
subject of such Order, which portion is derived from sales in each Blocked
Jurisdiction.
(c) Absent fraud or willful misconduct, no party hereto shall be
entitled to recover special or punitive damages with respect to any breach of
any representation or warranty or non-performance of any obligation under this
Agreement (or otherwise relating to the transactions contemplated hereby), and
under no circumstances shall such damages be considered Losses under this
Section 7. Neither the Purchaser Indemnified Persons nor the Seller Indemnified
Persons may recover Losses under this Agreement which in the aggregate exceed
the amount of the Purchase Price.
(d) Absent fraud or willful misconduct of the Seller, from and after
the Closing, recourse of the Purchaser Indemnified Persons pursuant to this
Section 7 shall be the sole and exclusive remedy of the Purchaser Indemnified
Persons for any Claims under this Agreement and the Related Documents or
relating to any transactions contemplated hereby or thereby.
7.6 Attorneys' Fees.
Any legal action or other legal proceeding relating to any of this
Agreement or any Related Document or the enforcement of any provision of any of
this Agreement or any Related Document may be brought by an Indemnified Person
against an Indemnifying Person, and may be contested by such Indemnifying
Person. In that event, if the court or arbitrator in such proceeding determines
that the Indemnifying Person is not obligated under this Agreement or any
Related Document to indemnify the Indemnified Person for all or any part of the
amount claimed by the Indemnified Person in such proceeding, then the
Indemnifying Person shall be entitled to recover a portion of the reasonable
attorneys' fees, costs and disbursements incurred by the Indemnifying Person in
contesting the claim of the Indemnified Person against the Indemnifying Person
in such proceeding (in addition to any other relief to which it may be entitled)
based upon the extent to which the Indemnifying Person was successful in
contesting the amount claimed by the Indemnified Person. This provision shall
not limit in any way Losses to which an Indemnified Person is entitled under the
provisions of this Section 7.
Section 8 TERMINATION.
8.1 Termination Events.
This Agreement may be terminated prior to the Closing:
(a) by the Purchaser if the Closing has not taken place on or before
November 30, 1999 (other than as a result of any failure on the part of the
Purchaser to comply with or perform its covenants and obligations under this
Agreement);
(b) by the Seller if the Closing has not taken place on or before
November 30, 1999 (other than as a result of any failure on the part of the
Seller to comply with or perform any covenant or obligation set forth in this
Agreement);
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(c) by the Seller or the Purchaser, if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other action having the effect of
permanently restraining, enjoining or otherwise prohibiting the Sale;
(d) by the Purchaser or the Seller, if, at a duly held meeting of the
stockholders of the Seller (including any adjournment thereof) (the
"Stockholders Meeting") held for the purpose of voting on the Sale and this
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Agreement: (A) the holders of the Seller common stock shall have taken a final
vote on a proposal to approve the Sale and this Agreement and (B) the approval
of the Sale and this Agreement by the holders of a majority of the outstanding
shares of the Seller common stock outstanding on the record date for the
Stockholders Meeting shall not have been obtained;
(e) by the Seller, if the Purchaser has willfully breached this
Agreement, and as a result of such breach, the conditions set forth in Sections
6.1 or 6.2 would not then be satisfied and which breach the Purchaser fails to
cure within ten (10) business days after notice thereof from the Seller;
provided, however, that as long as the Purchaser continues to exercise
reasonable best efforts to cure such breach, the Seller may not terminate this
Agreement on account of such breach;
(f) by the Purchaser, if (i) the matters contained in a supplement or
amendment of any section of the Seller Disclosure Schedule by the Seller
constitute a Material Adverse Effect or (ii) the Seller has willfully breached
this Agreement, and as a result of such breach, the conditions set forth in
Sections 5.1 or 5.2 would not then be satisfied and which breach the Seller
fails to cure within ten (10) business days after notice thereof from the
Purchaser; provided, however, that as long as the Seller continues to exercise
reasonable best efforts to cure such breach, the Purchaser may not terminate
this Agreement on account of such breach; or
(g) by the mutual written consent of the Purchaser and the Seller.
8.2 Termination Procedures.
If the Purchaser wishes to terminate this Agreement pursuant to Section
8.1(a), Section 8.1(c), Section 8.1(d) or Section 8.1(f), the Purchaser shall
deliver to the Seller a written notice stating that the Purchaser is terminating
this Agreement and setting forth a brief description of the basis on which the
Purchaser is terminating this Agreement. If the Seller wishes to terminate this
Agreement pursuant to Section 8.1(b), Section 8.1(c), Section 8.1(d) or Section
8.1(e), the Seller shall deliver to the Purchaser a written notice stating that
the Seller is terminating this Agreement and setting forth a brief description
of the basis on which the Seller is terminating this Agreement.
8.3 Effect Of Termination.
If this Agreement is terminated pursuant to Section 8.1, all further
obligations of the parties under this Agreement shall terminate; provided,
however, that: (a) no party shall be relieved of any Liability arising from any
breach by such party of any provision of this Agreement; and (b) the parties
shall, in all events, remain bound by and continue to be subject to
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the provisions set forth in Section 10 (other than Sections 10.1) and (c) the
Seller shall remain obligated to make the payment to the Purchaser under Section
4.10, if applicable.
8.4 Nonexclusivity Of Termination Rights.
The termination rights provided in Section 8 shall not be deemed to be
exclusive. Accordingly, the exercise by any party of its right to terminate this
Agreement pursuant to Section 8 shall not be deemed to be an election of
remedies and shall not be deemed to prejudice, or to constitute or operate as a
waiver of, any other right or remedy that such party may be entitled to exercise
(whether under this Agreement, under any other contract or under any Law, at
common law, in equity or otherwise).
Section 9 POST CLOSING COVENANTS
9.1 Access to Records.
Each of the Purchaser and the Seller shall, for the longer of three years
after the Closing or the period required by applicable Law, give to the other
and the other's authorized Representatives, upon reasonable notice and during
normal business hours, access to the books and records being acquired by the
Purchaser or retained by the Seller, as the case may be, which in any way relate
to the Business. Each of the Purchaser and the Seller shall be entitled, at its
own expense, to make extracts and copies of such books and records and shall
cooperate in connection with accomplishing the same. Each of the Purchaser and
the Seller shall, during such period, preserve and maintain such books and
records held by them and shall not, subsequent to such period, destroy or cause
to be destroyed any such books or records without first obtaining the written
consent of the other or giving to the other the opportunity to take delivery of
the books and records to be destroyed. If the Purchaser or Seller, as the case
may be (a "Requesting Party"), promptly notifies the other Party that it desires
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or requires any of such books or records to be retained for any longer period,
such books and records shall be either retained by the party in possession of it
or be shipped promptly to the Requesting Party at the expense of the non-
Requesting Party.
9.2 Use of Seller's Labels, etc.
The Purchaser may, for a period of three hundred sixty-five (365) days from
the Closing Date, (i) sell or otherwise dispose of any products bearing as of
the Closing Date the Seller's name or marks, or (ii) use any cartons, labels,
forms, invoices or other printed matter bearing as of the Closing Date the
Seller's name or marks in connection with the sale or other disposition of the
products or otherwise in connection with the conduct of the Business. After such
365-day period, the Purchaser may continue using the materials referred to in
the immediately preceding clause (ii) if the Purchaser overlays its name or
marks on such materials so as to indicate clearly that the materials are those
of the Purchaser. The Seller shall have and retain sole ownership of the
trademark "BEI", including the goodwill pertaining or accruing thereto. The
Purchaser shall not do or suffer to be done any act or thing that would impair
the Seller's rights in the "BEI" trademark or damage the reputation for quality
inherent in the "BEI" trademark. The Purchaser shall indemnify and hold the
Seller harmless from any and all Liabilities suffered or paid as a result of any
and all claims, demands, suits, causes of action, proceedings, judgments and
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liabilities, including reasonable counsel fees, incurred or sustained by or
against the Seller with respect to or arising out of the Purchaser's use of the
Seller's names or marks on products, cartons, labels, forms, invoices or other
printed matter bearing the Seller's names or marks as contemplated by this
Section 9.2.
9.3 Physical Transfer of Purchased Assets.
At and from time to time after the Closing (but in no case later than the
end of the Transition Period as defined in the Transition Services Agreement),
the Seller shall assemble and prepare for delivery to the Purchaser, at a
location or locations designated by the Purchaser, the tangible Purchased Assets
specified by the Purchaser. Such designated Purchased Assets shall be delivered
F.O.B. Seller's location to a carrier designated by the Purchaser, or in the
absence of a designation by the Purchaser, to a carrier reasonably designated by
the Seller. Title and risk of loss of the designated Purchased Assets shall pass
to the Purchaser upon proper delivery by the Seller to the designated carrier.
9.4 Collection of Accounts Receivable.
(a) Upon the termination of the provision of the Seller's services to
collect the Receivables pursuant to the terms of the Transition Services
Agreement, the Purchaser shall use its reasonable efforts, exercised in good
faith, to collect all of the Receivables, the collection practices of the
Purchaser prior to the date hereof being deemed to be an acceptable standard.
(b) Unless otherwise designated by the Debtor, any payment from a
Debtor (other than a payment with respect to a Disputed Receivable) received
subsequent to the Closing shall, for purposes of this Agreement, be applied
against the Receivables of such Debtor other than Disputed Receivables, in the
order of the oldest amounts owing. Payments from Debtors with respect to
Disputed Receivables shall be applied against such Disputed Receivables. The
Seller and the Purchaser shall each timely notify the other of any Disputed
Receivable.
(c) On or promptly after the 180th day following the Closing Date
(but in no event later than 10 business days thereafter), the Purchaser shall
notify the Seller of all Receivables remaining uncollected as of such date,
which notice shall identify each such Receivable by name of Debtor.
(d) The Seller (i) guarantees to the Purchaser that the Receivables
will be collectible in the ordinary course of business and (ii) the Seller
shall, at the option of the Purchaser, pay to the Purchaser an amount equal to
the Net Receivables to the extent such Receivables have not been collected by
the date of the Purchaser's written exercise of such option, which shall not be
sooner than the 180th day following the Closing; provided, however, that the
Seller shall not be required to pay any amount to the Purchaser for any
Receivable for which the Debtor has claimed in writing a right of offset or
other defense to payment based on any act or omission of the Purchaser following
the Closing Date. If the Seller is requested to make a payment to the Purchaser
for a Receivable pursuant to this Section 9.4(d), the Purchaser shall, upon
receipt of such payment from the Seller, (i) assign, transfer, convey and
deliver to the Seller all of the Purchaser's right, title and interest to and
under such Receivable (including without limitation all documentation related to
such Receivable), free and clear of Encumbrances
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<PAGE>
due to the acts or omissions of the Purchaser and (ii) provide the Seller with
the Purchaser's existing collection history for such Receivable. Payment shall
be made by wire transfer in immediately available funds to an account designated
by the Purchaser. The Purchaser shall deliver monthly to the Seller all amounts
subsequently collected by the Purchaser on Receivables which the Seller have
paid to the Purchaser, up to the amount so paid.
(e) "Claim" means a claim, refusal to pay or other set-off against a
Receivable arising out of the goods or services to which the Receivable is
related.
"Debtor" means a debtor or an obligor of a Receivable.
"Disputed Receivable" means a Receivable as to which the Debtor
has communicated a Claim to the Seller or the Purchaser.
"Receivables" means the Seller's accounts receivable included in
the Purchased Assets as of the Closing excluding invoiced amounts relating to
Evaluation Inventory (valued as determined in accordance with GAAP).
9.5 Collection of Invoices representing Evaluation Inventory, etc
If, subsequent to and not later than one year after the Closing Date,
Evaluation Inventory which was valued for the Inventory Statement at zero is
returned to the Purchaser or if an invoice representing Evaluation Inventory
which was valued for the Inventory Statement at zero is paid, then the Purchaser
shall pay to the Seller 50% of the invoiced value of such inventory which is
returned to the Purchaser or 50% of the amount of the invoice paid for such
inventory, as the case may be.
Section 10 MISCELLANEOUS PROVISIONS.
10.1 Further Assurances.
From and after the Closing Date, the parties hereto and their
Representatives shall cooperate with each other, and shall execute and deliver
such documents and take such other actions as the other party may reasonably
request, for the purpose of evidencing the Sale and putting the Purchaser in
possession and control of all of the Assets.
10.2 Fees And Expenses.
Each party shall bear and pay its own respective legal, accounting and
broker fees, costs and expenses that have been incurred or that are in the
future incurred by, on behalf of or for the benefit of such party in connection
with: (i) the negotiation, preparation and review of any summary of terms or
similar document relating to the Sale; (ii) the negotiation, preparation and
review of this Agreement (including any disclosure schedule), and all bills of
sale, assignments, certificates, and other instruments and documents delivered
or to be delivered in connection with the Sale; (iii) the obtaining of any
Consent required to be obtained in connection with the Sale; (iv) the
investigation and review conducted by the Purchaser with respect to the business
of the Seller; (iv) the consummation of the Sale and (v) disputes under Section
1.9 of this Agreement.
39
<PAGE>
10.3 Notices.
Any notice or other communication required or permitted to be delivered to
any party under this Agreement shall be in writing and shall be deemed properly
delivered, given and received, if delivered during business hours on a business
day, when delivered (by hand, by registered mail, by courier or express delivery
service or by facsimile) to the address or facsimile telephone number set forth
beneath the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice given to
the other party hereto) or, if not delivered during business hours on a business
day, on the next succeeding business day:
if to the Seller: BEI Medical Systems Company, Inc.
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, NJ 07608
Facsimile: 210-727-4998
Attn.: Richard W. Turner, President and CEO
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Facsimile: (415) 951-3699
Attn.: Christopher A. Westover, Esq.
if to the Purchaser: Cooper Surgical Acquisition Corp.
CooperSurgical Acquisition Corp.
c/o The Cooper Companies, Inc.
6140 Stoneridge Mall Road, Suite 590
Pleasonton, CA 94588
Facsimile: (925) 460-3660
Attn.: Carol R. Kaufman, V.P., Legal Affairs
with a copy to:
CooperSurgical, Inc.
15 Forest Parkway
Shelton, CT 06484
Facsimile: (203) 925-0135
Attn.: Nicolas J. Pichotta, President
40
<PAGE>
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Facsimile: (212) 408-2420
Attn.: David I. Karabell, Esq.
10.4 Headings.
Headings contained in this Agreement are for convenience of reference only,
shall not be deemed to be a part of this Agreement and shall not be referred to
in connection with the construction or interpretation of this Agreement.
10.5 Counterparts.
This Agreement may be executed in several counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
10.6 Governing Law.
This Agreement shall be construed in accordance with, and governed in all
respects by, the internal laws of the State of Delaware (without giving effect
to principles of conflict of laws).
10.7 Successors And Assigns; Parties In Interest.
(a) This Agreement shall be binding upon and inure to the benefit of
the Seller, the Purchaser, and their respective successors and assigns.
(b) Neither party shall be permitted to assign any of its rights or
delegate any of its obligations under this Agreement without the prior written
consent of the other party, provided, that prior to the Closing, the Purchaser
--------
may assign its rights to any Affiliate and, after the Closing, the Purchaser or
any Affiliate purchasing the Purchased Assets may assign its rights and delegate
its duties to any other Person that assumes in writing the Purchaser's
Liabilities under this Agreement and the Related Documents; provided, however,
-------- -------
that the Purchaser shall remain secondarily liable for the performance of all
such Liabilities.
(c) No provision of this Agreement is intended to provide any rights
or remedies to any Person other than the parties to this Agreement and their
respective successors and assigns (if any). Without limiting the generality of
the foregoing, no creditor of the Seller shall have any rights under this
Agreement.
10.8 Remedies Cumulative; Specific Performance.
The rights and remedies of the parties hereto shall be cumulative (and not
alternative). The Seller agrees that in the event of any breach or threatened
breach by the Seller of any covenant, obligation or other provision set forth in
this Agreement, the Purchaser shall be entitled (in addition to any other remedy
that may be available to it) to (a) a decree or order of specific performance or
mandamus to enforce the observance and performance of such covenant, obligation
or other provision, and (b) an injunction restraining such breach or threatened
breach.
41
<PAGE>
10.9 Waiver
(a) No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.10 Amendments.
This Agreement may not be amended, modified, altered or supplemented other
than by means of a written instrument duly executed and delivered on behalf of
the Purchaser and the Seller.
10.11 Severability.
In the event that any provision of this Agreement, or the application of
any such provision to any Person or set of circumstances, shall be determined to
be invalid, unlawful, void or unenforceable to any extent, the remainder of this
Agreement, and the application of such provision to Persons or circumstances
other than those as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall continue to
be valid and enforceable to the fullest extent permitted by Law.
10.12 Entire Agreement; Confidential Disclosure Agreement.
This Agreement, the Related Documents and the Confidential Disclosure
Agreement dated June 21, 1999, set forth the entire understanding of the parties
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
such subject matter. Notwithstanding the foregoing provisions, the sixth
paragraph of the Confidential Disclosure Agreement dated June 21, 1999 shall
expire at the Closing to the extent applicable to those individuals employed by
the Seller or the Subsidiaries solely in connection with the Business
10.13 Knowledge.
For purposes of this Agreement, the Seller shall be deemed to have
"knowledge" of a particular fact or other matter if Richard Turner, President
---------
and Chief Executive Officer of the Seller, Thomas W. Fry, Vice President,
Finance and Administration of the Seller and Samuel Dickstein, Vice President -
New Business Development and Technology of the Seller, has actual knowledge of
such fact or other matter after exercising due diligence with respect thereto,
including making reasonable inquiries of the employees or Representatives of the
Seller and its
42
<PAGE>
subsidiaries who the Seller has determined in good faith may have any knowledge
concerning such fact or other matter.
10.14 Construction.
(a) For purposes of this Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the construction or
interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement
to "Sections" and "Exhibits" and "Annexes" and "Schedules" are intended to refer
to Sections, Exhibits, Annexes and Schedules to this Agreement.
43
<PAGE>
The parties to this Agreement have caused this Agreement to be
executed and delivered as of the date first set forth above.
BEI MEDICAL SYSTEMS COMPANY, INC., a Delaware
corporation
By: ____________________________________________
Name:
Title:
COOPERSURGICAL ACQUISITION CORP., a Delaware
corporation
By: ____________________________________________
Name:
Title:
<PAGE>
EXHIBIT A TO
ASSET PURCHASE
AGREEMENT
---------
BILL OF SALE, ASSIGNMENT
AND ASSUMPTION AGREEMENT dated as of
_________ __, 1999 (this "Agreement"), among
---------
BEI MEDICAL SYSTEMS COMPANY, INC., a
Delaware corporation (the "Seller"), MEDITRON
DEVICES, INC., a Delaware corporation,
XYLOG CORPORATION, a New Jersey
corporation, BEI MEDICAL SYSTEMS
INTERNATIONAL, INC., a Delaware
corporation, OVAMED CORPORATION, a
California corporation, CALCULUS
INSTRUMENTS COMPANY, INC., a New
Jersey corporation, ZINNANTI SURGICAL
INSTRUMENTS, INC., a California corporation
(each, a "Subsidiary"), and COOPERSURGICAL
----------
ACQUISITION CORP., a Delaware corporation
(the "Purchaser").
---------
Reference is made to the Asset Purchase Agreement dated as of
September __, 1999 (the "Purchase Agreement") between the Purchaser and the
------------------
Seller.
Pursuant to the terms of the Purchase Agreement, the Seller has agreed
to sell, and the Purchaser has agreed to purchase, substantially all of the
assets of the Seller, subject to the Purchaser's assumption of certain
liabilities of the Seller, related to the Business.
ACCORDINGLY, in consideration of the mutual covenants and obligations
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
Section 1. Defined Terms.
-------------
Capitalized terms used and not otherwise defined herein shall have the
respective meanings ascribed thereto in the Purchase Agreement.
Section 2. Sale of Assets.
--------------
On and subject to the terms and conditions of the Purchase Agreement,
the Seller and each Subsidiary hereby sells, transfers, assigns, conveys and
delivers to the Purchaser all right, title and interest in and to the Purchased
Assets, free and clear of all Encumbrances. The Purchaser hereby accepts title
to the Purchased Assets.
<PAGE>
Section 3. Assumed Liabilities.
-------------------
On and subject to the terms and conditions of the Purchase Agreement,
the Purchaser hereby assumes and agrees to discharge and/or perform, when due in
accordance with the terms thereof, the Assumed Liabilities.
Section 4. Governing Law.
-------------
This agreement will be governed by and construed in accordance with
the domestic laws of the State of Delaware, without giving effect to any choice
of law or conflicting provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the laws of any jurisdiction other than the
State of Delaware to be applied.
Section 5. Purchase Agreement.
------------------
The Purchase Agreement is hereby incorporated herein by reference and
shall control in the event of any conflict with this Agreement. Nothing
contained in this Agreement is intended to provide any rights to the Purchaser
or the Seller and each Subsidiary beyond those rights expressly provided to the
Purchaser or the Seller and each Subsidiary in the Purchase Agreement.
* * * * *
IN WITNESS WHEREOF, each of the undersigned has caused this Bill of
Sale, Assignment and Assumption Agreement to be executed on its behalf as of the
date first written above.
B COMPANY
By:___________________________________
Name:
Title:
BEI MEDICAL SYSTEMS COMPANY, INC.
By:___________________________________
Name:
Title:
XYLOG CORPORATION
By:___________________________________
Name:
Title:
<PAGE>
BEI MEDICAL SYSTEMS INTERNATIONAL, INC.
By:___________________________________
Name:
Title:
OVAMED CORPORATION
By:___________________________________
Name:
Title:
CALCULUS INSTRUMENTS COMPANY, INC.
By:___________________________________
Name:
Title:
ZINNANTI SURGICAL INSTRUMENTS, INC.
By:___________________________________
Name:
Title:
COOPERSURGICAL ACQUISITION CORP.
By:___________________________________
Name:
Title:
<PAGE>
EXHIBIT B TO
ASSET PURCHASE
AGREEMENT
---------
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit B):
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, Controls, or is
Controlled by, or is under common Control with, such Person.
"Agreement" means the Asset Purchase Agreement to which this Exhibit B
is attached (including the Seller Disclosure Schedule), as it may be amended
from time to time.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act, as amended.
"CERCLIS" means the Comprehensive Environmental Response,
Compensation, and Liability Information System.
"Consent" means any approval, consent, ratification, permission,
waiver or authorization (including any Approval as defined in Section 2.1).
"Control" means, with respect to any Person, the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Encumbrance" means and includes security interests, mortgages, liens,
pledges, charges, easements, reservations, restrictions, rights of way,
servitudes, options, rights of first refusal, community property interests,
equitable interests, restrictions of any kind and all other encumbrances,
whether or not relating to the extension of credit or the borrowing of money.
"Environmental, Health and Safety Laws" means all Laws, Permits and
Contracts with Governmental Entities relating to or addressing pollution or
protection of the environment, public health and safety, or employee health and
safety, including, but not limited to, the Solid Waste Disposal Act, as amended,
42 U.S.C. (S)(S)6901, et seq., the Clean Air Act, as amended, 42 U.S.C.
(S)(S)7401 et seq., the Federal Water Pollution Control Act, as amended, 33
U.S.C. (S)(S)1251 et seq., the Emergency Planning and Community Right-to-Know
Act, as amended, 42 U.S.C. (S)(S)11001 et seq., CERCLA, 42 U.S.C. (S)(S)9601 et
seq., the Hazardous Materials Transportation Uniform Safety Act, as amended, 49
U.S.C. (S)1804 et seq., the Occupational Safety and Health Act of 1970, as
amended, the regulations promulgated thereunder, and any similar Laws and other
requirements having the force or effect of Law, and all Orders issued or
promulgated thereunder, and all related common law theories.
<PAGE>
"Evaluation Inventory" means Products which have been invoiced and
shipped to customers for evaluation purposes, which the customer can decide to
either purchase or return to the Seller for a full credit.
"GAAP" means generally accepted accounting principles in the United
States.
"Governmental Entity" means any government and any governmental
authority or instrumentality, whether federal, state, local or foreign and
whether legislative, executive, judicial or otherwise.
"Hazardous Materials" means any hazardous or toxic chemicals,
materials or substances, pollutants, contaminants, or crude oil or any fraction
thereof (as such terms are defined under any Environmental, Health and Safety
Law).
"Indemnified Persons" means the Seller Indemnified Persons and/or the
Purchaser Indemnified Persons, as the case may be.
"Indemnifying Persons" means the Seller Indemnifying Persons and/or
the Purchaser Indemnifying Persons, as the case may be.
"Law" means any applicable foreign, federal, state or local law,
statute, treaty, rule, directive, regulation, order, judgment, writ, injunction,
decree, ordinances and similar provisions having the force or effect of law or
an Order of any Governmental Entity (including all Environmental, Health and
Safety Laws).
"Liabilities" means any liability or obligation of any nature, whether
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due,
regardless of when asserted.
"Losses" means any and all losses, claims, shortages, damages,
expenses (including reasonable attorneys' and accountants' and other
professionals' fees and expenses and litigation expenses), assessments, taxes
(including interest or penalties thereon) and insurance premium increases
arising from or in connection with any such matter that is the subject of
indemnification under Section 7, in each instance after deduction of the amount
of any insurance proceeds recovered and net of any tax benefit actually realized
as a result of the Loss by the Indemnified Person in the year in which the claim
for indemnification for such Loss was made pursuant to this Agreement or, in the
case of a corporation, net of any tax benefit actually realized in such year by
a member of an affiliated group of such corporation within the meaning of
Section 1504 of the Code.
"Material Adverse Effect" means a material adverse effect on (i) the
financial condition, business or results of operations of the Business taken as
a whole, (ii) on the Purchased Assets taken as a whole or (iii) on the ability
of the Seller or any Subsidiary to perform its obligations under or to
consummate the Sale, provided, however, that in no event shall any of the
following constitute a Material Adverse Effect: (x) any effects, changes,
events, circumstances or conditions generally affecting the industry in which
the Seller or any Subsidiary operates or arising from changes in general
business or economic conditions (including litigation, delays in customer
orders, a reduction in sales, a disruption in business
<PAGE>
relationships or a loss of employees); and (y) any effects, changes, events,
circumstances or conditions resulting from compliance by the Seller or any
Subsidiary with the terms of, or the taking of any action contemplated or
permitted by, this Agreement or any Related Document. Notwithstanding the
foregoing, for purposes of Section 4.4(b) and Section 8.1(f)(i), Material
Adverse Effect shall not include the matters specified in subparagraph (i) of
this definition so long as the Closing occurs on or before November 15, 1999. If
the Closing occurs thereafter, the definition of Material Adverse Effect shall
remain unchanged.
"Orders" means judgments, writs, decrees, compliance agreements,
injunctions or judicial or administrative orders and determinations of any
Governmental Entity or arbitrator.
"Permits" means any and all permits, licenses, concessions,
authorizations, registrations, franchises, approvals, consents, certificates,
variances and similar rights obtained, or required to be obtained, from a
Governmental Entity.
"Permitted Encumbrances" means (i) Encumbrances for Taxes not yet due
and payable or being contested in good faith by appropriate proceedings and for
which there are adequate reserves on the books, (ii) workers or unemployment
compensation liens arising in the ordinary course of business and (iii)
mechanic's, materialman's, supplier's, vendor's or similar liens arising in the
ordinary course of business securing amounts that are not delinquent.
"Person" means any individual or entity including any Governmental
Entity.
"Products" has the meaning ascribed to it on Schedule 1.1 hereto.
"Purchaser Indemnified Persons" means the Purchaser and its
Affiliates, their respective successors and assigns, and the respective
officers, directors and controlling parties of each of the foregoing; provided,
however, that any such Person who was, prior to the Closing Date, an officer,
director, employee, Affiliate, successor or assign of the Seller shall not in
such capacity be a Purchaser Indemnified Person with respect to a breach of this
Agreement or any Related Document based on facts or circumstances occurring, or
actions taken by such Person, at or prior to the Closing.
"Purchaser Indemnifying Persons" means the Purchaser and its
successors.
"Purchaser Losses" means any and all Losses sustained, suffered or
incurred by any Purchaser Indemnified Person arising from or in connection with
any such matter which is the subject of indemnification under Section 7.
"Representatives" means officers, directors, employees, agents,
attorneys, accountants and financial advisors of the Purchaser or the Seller or
any Subsidiary, as the case may be.
"Sale" means (i) the sale of the Assets by the Seller to the Purchaser
in accordance with this Agreement; (ii) the assumption of the Assumed
Liabilities by the Purchaser pursuant to the Bill of Sale; and (iii) the
performance by the Seller and the Purchaser of their respective obligations
under this Agreement and each Related Document, and the exercise by the Seller
and the Purchaser of their respective rights under this Agreement.
<PAGE>
"Sales Shortfall" has the meaning ascribed to it on Schedule 1.8(a)
hereto.
"Seller Indemnified Persons" means the Seller and its Affiliates,
their respective successors and assigns, and the respective officers, directors
and controlling parties of each of the foregoing.
"Seller Indemnifying Persons" means the Seller and its successors.
"Seller Losses" means any and all Losses sustained, suffered or
incurred by any Seller Indemnified Person arising from or in connection with any
matter which is the subject of indemnification under Section 7.
"Special Tax Losses" means any and all Losses sustained, suffered or
incurred by any Purchaser Indemnified Person arising from or in connection with
Taxes payable by the Seller or any Affiliate thereof with respect to any period
ending on or prior to the Closing Date (or the portion ending on the Closing
Date of any period that includes but does not end on the Closing Date) or the
inaccuracy or breach of the representations and warranties of the Seller
contained in Section 2.18.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Taxes" means, with respect to any Person, (i) all Income Taxes and
all gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties and other taxes, fees, assessments or charges of any kind whatsoever,
together with all interest and penalties, additions to tax and other additional
amounts imposed by any taxing authority (domestic or foreign) on such Person (if
any) and (ii) any Liability for the payment of any amount of the type described
in clause (i) above as a result of (A) being a "transferee" (within the meaning
----------
of Section 6901 of the Code or any other applicable Law) of another Person, (B)
being a member of an affiliated, combined or consolidated group or (C) a
contractual arrangement or otherwise
<PAGE>
EXHIBIT C TO
ASSET PURCHASE
AGREEMENT
---------
STATEMENT OF ALLOCATION
Purchase Price consists of $11,206,600 minus (a) the Sales Shortfall described
on Schedule 1.8 (a), if any, and (ii) the Estimated Inventory and Receivables
Holdback Amount plus (c) the amount of the Assumed Liabilities.
Class III.
- ---------
Receivables and Inventory
valued as provided in this
Agreement estimated at $3,600,000
Net fixed assets estimated at $ 100,000
----------
$3,700,000
==========
Class IV.
- --------
Trademarks $ 350,000
Patents $1,000,000
Customer Lists $1,500,000
Covenant not to compete $1,500,000
----------
$4,350,000
==========
Class V. Goodwill-Balance of Purchase Price
- -------
<PAGE>
EXHIBIT D TO
ASSET PURCHASE
AGREEMENT
---------
________________, 1999
CooperSurgical Acquisition Corp.
Re: Asset Purchase Agreement
Ladies and Gentlemen:
We have acted as counsel for BEI Medical Systems Company, Inc., a Delaware
corporation (the "Seller"), in connection with that certain Asset Purchase
Agreement (the "Purchase Agreement") dated as of September __, 1999, by and
between CooperSurgical Acquisition Corp., a Delaware corporation ("the
Purchaser") and the Seller. We are rendering this opinion pursuant to Section 5
of the Purchase Agreement. Capitalized terms used but not defined herein have
the respective meanings given to them in the Purchase Agreement. "Related
Documents" shall mean:
1. Noncompetition Agreement between the Purchaser and the Seller of even
date herewith.
2. Noncompetition Agreement between the Purchaser and Richard W. Turner
of even date herewith.
3. Transition Agreement between the Purchaser and the Seller of even date
herewith.
4. Bill of Sale and Assumption and Assignment Agreement by the Seller,
the Subsidiaries and the Purchaser.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Purchase Agreement by the various parties and originals, or
copies certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below. Where we render
an opinion concerning an item "of which we are aware" or our opinion otherwise
refers to our knowledge, it is based solely upon (i) an inquiry of attorneys
within this firm who perform legal services for the Seller, (ii) receipt of a
certificate executed by an officer of the Seller covering such matters, and
(iii) such other investigation, if any, that we specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by the Seller and each Subsidiary of the Purchase Agreement and the Related
Documents to which it is a party),
<PAGE>
where authorization, execution and delivery are prerequisites to the
effectiveness of such documents. We have also assumed: that Richard W. Turner
executing and delivering documents in his individual capacity had the legal
capacity to so execute and deliver; that you have received all documents you
were to receive under the Purchase Agreement and the Related Documents; that the
Purchase Agreement and the Related Documents to which you are a party are
obligations binding upon you; that the Purchaser has filed any required
California franchise or income tax returns and has paid any required California
franchise or income taxes; and that there are no extrinsic agreements or
understandings among the parties to the Purchase Agreement or the Related
Documents that would modify or interpret the terms of the Purchase Agreement or
the Related Documents or the respective rights or obligations of the parties
thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America, the General Corporation Law of the State of Delaware and the
laws of the State of California. We are not rendering any opinion as to
compliance with any antifraud law, rule or regulation relating to securities, or
to the sale or issuance thereof, or as to compliance with any antitrust law. We
note that the parties to the Purchase Agreement and certain of the Related
Documents have designated the laws of the State of Delaware or the State of New
York as the laws governing the Purchase Agreement and the Related Documents. Our
opinion in paragraph 3 below as to the legality, validity, binding effect and
enforceability of the Purchase Agreement and the Related Documents is premised
upon the result that would obtain if a California court were to apply the
internal laws of the State of California (notwithstanding the designation of the
laws of the State of Delaware or the State of New York) to the interpretation
and enforcement of the Purchase Agreement and the Related Documents. We express
no opinion as to whether the laws of any particular jurisdiction apply, and no
opinion to the extent that the laws of any jurisdiction other than those
identified above are applicable to the subject matter hereof. Further, we
express no opinion with respect to the enforceability or validity of any
noncompetition agreements or covenants entered into by the parties in connection
with the Purchase Agreement or the transactions contemplated thereby.
With regard to our opinion in paragraph 4 below with respect to material
breaches and defaults under any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
known to us, we have relied solely upon (i) inquiries of officers of the Seller,
(ii) a list supplied to us by the Seller, a copy of which is attached as Exhibit
A hereto, of any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which the
Seller or any Subsidiary is a party or by which the Seller or any Subsidiary is
bound (collectively, the "Material Agreements") and (iii) an examination of the
items on the aforementioned list; we have made no further investigation.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Seller is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. The Seller and each
Subsidiary has all the requisite corporate power and authority necessary to own,
lease and operate the Purchased Assets and to carry on its business as it is now
being conducted. The Seller and each Subsidiary are
<PAGE>
duly qualified or licensed as a foreign corporation to do business, and is in
good standing, in the respective jurisdictions listed on Exhibit B.
2. The Seller has the corporate right, power and authority to enter into
and to perform its obligations under the Purchase Agreement and each Related
Document to which it is a party and to consummate the transactions contemplated
thereby. The execution and delivery by the Seller of the Purchase Agreement and
each Related Document to which it is a party and the consummation of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of the Seller, and no other corporate proceedings
on the part of the Seller are necessary to authorize the Purchase Agreement and
each Related Document to which it is a party or to consummate the transactions
so contemplated thereby. Each Subsidiary has the corporate right, power and
authority to enter into and perform its respective obligations under each
Related Document to which it is respectively a party and to consummate the
transactions contemplated thereby. The execution and delivery by each Subsidiary
of the Related Documents to which it is respectively a party and the
consummation of the transactions contemplated thereby have been duly authorized
by all necessary corporate action on the part of each such Subsidiary, and no
other corporate proceedings on the part of any such Subsidiary are necessary to
authorize the Related Documents to which such Subsidiary is a party or to
consummate the transactions so contemplated thereby.
3. The Purchase Agreement and each Related Document to which the Seller
is a party constitute the legal, valid and binding obligations of the Seller,
enforceable against the Seller in accordance with their terms, subject to (a)
laws of general application relating to bankruptcy, insolvency, moratorium,
arrangement, reorganization and other similar laws affecting creditors' rights,
(b) general principles of equity, and (c) limitations on the availability of
equitable relief, including specific performance. Each Related Document to which
each Subsidiary is a party constitutes the legal, valid and binding obligation
of each of the respective Subsidiaries, enforceable against such Subsidiary in
accordance with its terms, subject to (a) laws of general application relating
to bankruptcy, insolvency, moratorium, arrangement, reorganization and other
similar laws affecting creditors' rights, (b) general principles of equity, and
(c) limitations on the availability of equitable relief, including specific
performance.
4. Except as set forth in Exhibit C, the execution and delivery of the
Purchase Agreement and each Related Document to which it is a party by the
Seller and each applicable Subsidiary does not, and the performance of the
Purchase Agreement and each Related Document to which it is a party by the
Seller and each applicable Subsidiary, and of the transactions contemplated
thereby, will not: (i) conflict with or violate (with or without notice or lapse
of time or both) the Certificate of Incorporation or By-Laws of the Seller or
such Subsidiary, (ii) conflict with, violate or cause a default under (with or
without notice or lapse of time or both) any federal laws of the United States
of America or the General Corporation Law of the State of Delaware applicable to
the Seller or any such Subsidiary or by which its or any of their respective
properties are bound or affected, or (iii) result in any material violation or
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under or impair the Seller's or such
Subsidiary's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
<PAGE>
cancellation of, or result in the creation of an Encumbrance on any of property
or assets of the Seller or any Subsidiary pursuant to, any Material Agreement
known to us.
5. The execution and delivery by the Seller of the Purchase Agreement and
each Related Document to which it is a party does not, and the performance by
the Seller of the Purchase Agreement and each Related Document to which it is a
party will not, require any consent, approval, authorization or permit of, or
filing with or notification to, any regulatory authority or governmental body in
the United States, except for such consents, approvals, authorizations, permits,
filings or notifications as have been made or obtained. The execution and
delivery by each Subsidiary of each Related Document to which it is a party does
not, and the performance by each Subsidiary of each Related Document to which it
is a party will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any regulatory authority or governmental body
in the United States, except for such consents, approvals, authorizations,
permits, filings or notifications as have been made or obtained.
6. To our knowledge, there are no actions, suits or proceedings
("proceedings") relating to the Business or the Purchased Assets pending or
threatened in writing against the Seller or any Subsidiary, whether at law or in
equity, whether civil or criminal in nature or before or by any regulatory
authority or governmental body in the United States, nor to our knowledge has
any order, judgment, writ, injunction or decree of a regulatory authority or
governmental body in the United States relating to the Business or the Purchased
Assets been entered against the Seller or any Subsidiary.
7. The Bill of Sale and Assumption and Assignment Agreement are
sufficient in form to transfer all right, title and interest held by the Seller
and the Subsidiaries.
This opinion is intended solely for your benefit and is not to be made available
to or be relied upon by any other Person without our prior written consent.
Sincerely,
Cooley Godward LLP
Christopher A. Westover
<PAGE>
EXHIBIT E TO
ASSET PURCHASE
AGREEMENT
---------
TRANSITION AGREEMENT
This Transition Agreement (the "Agreement") is entered into as of this ___
day of _________, 1999 by and among B Company, a Delaware corporation ("Seller")
and C Company, a Delaware corporation ("Buyer").
Recitals
Whereas, Seller and Buyer have entered into an asset purchase agreement
(the "Asset Purchase Agreement") dated September __, 1999 pursuant to which
Seller will sell, and Buyer will purchase, substantially all of the assets and
assume certain of the liabilities of Seller relating to the Business as defined
in the Asset Purchase Agreement; and
Whereas, in connection with Buyer's acquisition of the Business from Seller
(the "Acquisition"), Seller and Buyer desire to provide for certain transition
services, on an interim basis, as set forth herein.
Now, Therefore, in consideration of the foregoing premises and the mutual
covenants set forth below, and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
Agreement
1. Transition Services.
(a) During the term of this Agreement as set forth in Section 3 below (the
"Transition Period"), Seller shall continue to provide on behalf of Buyer the
products and services related to the Business in substantially the same manner
as such services were heretofore provided by Seller on its own behalf in
carrying on the Business, including the activity set forth on Annex A attached
hereto.
(b) Annex A constitutes part of this Agreement and may be amended from
time to time with the written consent of Seller and Buyer.
(c) Buyer shall pay the following amounts for the products and services
provided by Seller under this Agreement: (i) the cost of materials purchased by
Seller subsequent to the date of this Agreement to produce products pursuant to
a production plan mutually agreed upon by Seller and Buyer, which plan shall in
no event exceed Seller's manufacturing capacity as of the date of this Agreement
(the "Mutual Production Plan"), (ii) for each employee not engaged in production
or manufacturing and listed on Annex B, that percentage set forth on such annex
opposite the name of such employee under the column headed "Support Base
Business %" of the amount of weekly salary set forth on such annex opposite the
name of such employee under the column headed "Weekly Salary" plus an amount
equal to 28% of the result of the foregoing
<PAGE>
calculation, (iii) the amount of out-of-pocket expenditures for supplies and
services provided for the benefit of Buyer under this Agreement that are
approved by Buyer, which approval shall not be unreasonably withheld, (iv) the
cost of moving expenses for, and repairs and installation of, equipment owned by
Buyer, (v) as a labor component for each product delivered for Buyer hereunder,
an amount equal to the number of direct labor hours multiplied by direct labor
costs for each product as set forth on Schedule 1(c), which product is delivered
by Seller to or at the direction of Buyer pursuant to the Mutual Production
Plan, (vi) costs and expenses such as employment agency fees which are incurred
as a direct result of Seller's efforts to replace on a temporary basis any
employee performing transition services under this Agreement who voluntarily
terminates employment with Seller during the Transition Period, (vii) all
incremental costs approved by Buyer that are associated with customer
solicitation activity including, but not limited to: sales commissions, postage,
sales literature, freight, samples and other free goods, telephone and
communications, computer and office supplies, maintenance and repairs, outside
computer services and travel and entertainment expenses, (viii) all related pre-
approved collection charges and (ix) the commissions provided for in Annex A.
Seller shall send bills and/or invoices in connection with the foregoing items
at the end of each one-week period of the Transition Period. Buyer shall within
five days after receipt of such bills and/or invoices, pay to Seller the amounts
specified in such bills and/or invoices in full. Notwithstanding the foregoing,
although Seller shall bill all amounts to be paid pursuant to this subsection,
Buyer shall have no obligation to pay to Seller the first $245,000 for products
and services due under this Agreement and such amount will not be considered due
to Seller under this Agreement as Seller has agreed to provide the first
$245,000 of products and services delivered hereunder without cost to Buyer.
2. General Intent. Seller shall use its commercially reasonable best efforts
to provide all transition assistance which the Buyer may reasonably request
during the Transition Period. Seller shall use its commercially reasonable best
efforts to retain the employees required to produce the services set forth in
Annex A. Seller is not obligated to hire any new employees to replace those
employees who may leave the employment of the Seller during the Transition
Period; provided, however, that Seller shall use commercially reasonable efforts
to replace such employees with temporary personnel to the extent required for
Seller to perform its obligations under this Agreement. Because Seller is
performing the transition services for the benefit of Buyer, Seller shall
perform such services under the direction and control of Buyer, provided that
Buyer shall provide such direction and control through Seller's existing
management and supervisory channels. Buyer's personnel may be present on the
premises of Seller on which transition services are being performed to monitor
and control such services. Each party shall execute such further documents and
take such further actions as may be necessary to carry out the purposes of this
Agreement.
3. Term.
(a) Except as provided in Section 3(b), 3(c), and 3(d) below, the term of
this Agreement shall commence on the date of the closing of the Acquisition (the
"Closing Date") and shall continue for ninety (90) days; provided, however, that
either party may terminate this Agreement in the event of a material default by
the other party hereunder that is not cured within five (5) business days
following written notice of default by the non-defaulting party.
<PAGE>
(b) Notwithstanding Section 3(a), Buyer may elect to extend the term of
this Agreement on a month-to-month basis for up to three (3) months by providing
written notice at least thirty (30) days prior to the expiration of the then
applicable Transition Period of this Agreement specifying the products and
services attached hereto that Buyer requires that Seller continue to provide and
the duration for which such products and services shall be provided. During the
period of any such extension (i) products shall be provided at the costs
mutually agreed to pursuant to this Agreement, and (ii) services shall be
provided pursuant to the terms of this Agreement at the rate of one hundred
dollars ($100) per hour of Seller employee time and incidental costs incurred
for such services that are pre-approved by Buyer. If the mutually agreed upon
production schedule for a certain product has not been met by Seller during the
initial ninety (90) days of the Transition Period and such production schedule
contemplated that the products would be completed within such ninety (90) day
period, then the costs for completing such products shall be pursuant to the
costs applicable during such ninety (90) day period, as specified on Schedule
1(c), rather than pursuant to this Section 3(b).
(c) Notwithstanding Section 3(a), Seller, at the request of Buyer, from
time to time during and for up to fifteen (15) months following the date of this
Agreement will provide on reasonable notice reasonable consulting services with
respect to issues such as regulatory affairs, product details, engineering and
sales and marketing. Such services shall be provided during the term of
Transition Period for payment provided for in this Agreement and after the
Transition Period at the rate of one hundred twenty dollars ($120) per hour of
Seller employee time and incidental costs incurred for such services that are
pre-approved by Buyer.
(d) Buyer may, at any time and from time to time, terminate any product or
service to be provided by Seller under this Agreement by delivering to Seller a
"Buyer Termination Notice". Each Buyer Termination Notice shall specify the
product or service to be terminated and the date on which termination shall
occur (which shall be not less than fourteen (14) days from the delivery to
Seller of such notice). From and after each such date of termination, Buyer
shall have no further obligation under this Agreement to pay Seller the charges
specified in this Agreement for each such terminated service or product, except
for any product for which an order has already been placed by Buyer and for any
service or product provided prior to such date of termination.
4. Insurance.
(a) Buyer possesses those insurance policies, including product liability
insurance, which are necessary to fully insure the services to be conducted by
Seller against all risks normally insured against by a person or entity
conducting the same business as Buyer and the business to be conducted by Seller
pursuant to this Agreement, and such policies name Buyer as the insured. Such
insurance policies comply with any federal, state, local or foreign laws and
regulations applicable to the business and operations conducted by Buyer,
including the transactions contemplated by this Agreement.
(b) Buyer will continue to carry its existing insurance or reasonably
comparable coverage throughout the term of this Agreement. Upon the written
request of Seller, Buyer will provide copies of certificates of insurance as
evidence thereof.
<PAGE>
(c) Seller will continue to carry its existing insurance as disclosed in
Schedule 2.20 to, or as may be otherwise required by the Asset Purchase
Agreement, or reasonably comparable coverage throughout the term of this
Agreement.
(d) Seller's insurance shall cover loss or damage to property of Seller
located on Seller's facilities used to provide transition services and on such
facilities to the extent required by any lease therefor. Buyer's insurance shall
cover loss or damage to Buyer's property located on such facilities. Each party
shall request its insurers to waive subrogation against the other party for
Losses to property covered by such party's insurance as described in this
subsection 4(d).
5. Certain Seller Payments. Seller represents to Buyer that to induce each
employee of Seller listed on the Personnel Consolidation Plan attached hereto as
Annex B (the "Retained Employee") to remain as an employee of Seller during the
Transition Period, Seller has offered each such employee the stay bonus and
severance payment set forth opposite the name of such employee on such Plan.
Seller shall make the payments required to be made by it to each such employee
pursuant to such offer. Other than as set forth on Annex B, Seller shall have
no further obligation to provide any stay bonus, severance payment or other
compensation to the Retained Employees. If Buyer instructs Seller to attempt to
retain a specific Retained Employee beyond the Transition Period, Buyer shall be
solely responsible for any stay bonus, severance payment or other compensation
to be provided at the instruction of Buyer to any such Retained Employee in
order to retain such Retained Employee beyond the Transition Period, and Seller
shall not be obligated hereunder to provide any compensation to any such
Retained Employee beyond the Transition Period (including any extensions of such
Transition Period made pursuant to this Agreement) unless instructed to do so by
Buyer.
6. Indemnification.
(a) Indemnification by Buyer. As of the date of this Agreement and subject
to the other provisions of this Section 6, Buyer shall indemnify, defend (with
counsel reasonably acceptable to Seller), and hold Seller, and its respective
directors, officers, agents and employees (collectively, the "Seller Indemnified
Parties") harmless from and against, and will pay to the Seller Indemnified
Parties the amount of any and all losses, damages, liabilities, costs and
expenses, direct and indirect (including reasonable attorneys' and consultants'
fees) (collectively, the "Losses"), arising, directly or indirectly, from or in
connection with:
(i) any breach of any representation or warranty made by Buyer in
this Agreement;
(ii) any breach by Buyer of any covenant or obligation of Buyer in
this Agreement;
(iii) any suit or proceeding brought against any Seller Indemnified
Party arising out of Seller's performance or non-performance contemplated by
this Agreement except to the extent caused by the gross negligence or willful
misconduct of a Seller Indemnified Party or Seller's wrongful failure to render
the services or produce the products contemplated by this Agreement; or
<PAGE>
(iv) gross negligence or willful misconduct of Buyer.
(b) Indemnification by Seller. As of the Effective Date and subject to the
other provisions of this Section 6, Seller shall indemnify, defend and hold
Buyer, its shareholders, directors, officers, agents and employees
(collectively, the "Buyer Indemnified Parties") harmless from and against and
will pay to the Buyer Indemnified Parties the amount of any Losses, arising
directly or indirectly, from or in connection with:
(i) any breach of any representation or warranty made by Seller in
this Agreement;
(ii) any breach by Seller of any covenant or obligation of Seller in
this Agreement; or
(iii) gross negligence or willful misconduct of Seller or Seller's
wrongful failure to render the services or produce the products contemplated by
this Agreement.
Notwithstanding the above, Seller shall have no liability and shall not
indemnify Buyer for any Losses to the extent based on (A) the gross negligence
or willful misconduct of a Buyer Indemnified Party or (B) any delay or refusal
on the part of Buyer in providing any necessary pre-approvals or approvals under
this Agreement on a timely basis. In each instance where pre-approval or
approval is required under this Agreement, Seller shall request for pre-approval
or approval in advance of the time when Losses would be incurred if pre-approval
or approval were not obtained. Seller shall not be obligated to take any action
or pay any expense with respect to a matter requiring pre-approval or approval
until such pre-approval or approval has been provided by Buyer.
(c) Limitations on Indemnification by Seller. No Seller Indemnified Party
shall be liable, responsible or in anyway accountable to Buyer for, and Buyer
waives and releases any claims (including any claim by way of subrogation,
contractual or implied indemnity or otherwise) against, such Seller Indemnified
Party for Losses which at any time after the date hereof may be suffered or
sustained by any individual, including any individual employed by Buyer, who,
after the date of this Agreement, and with the permission of Seller, has entered
Seller's facilities used to provide transition services, or may at any time be
using or occupying or visiting such facilities or be in, on or about the same,
or in or about the common areas of such facilities or the sidewalks adjacent
thereto, except to the extent caused by the gross negligence or willful
misconduct of such Seller Indemnified Party.
(d) Indemnification Claims. If either party hereto (the "Claimant") wishes
to assert an indemnification claim against the other party hereto, the Claimant
shall deliver to the other party a written notice (a "Claim Notice") setting
forth:
(i) a detailed description of the facts and circumstances giving
rise to the claim; and
(ii) a reasonable estimate of the total amount of Losses incurred.
<PAGE>
(e) Defense of Third Party Actions.
(i) If either party hereto (the "Indemnitee") receives notice or
otherwise obtains knowledge of any action, hearing, arbitration, litigation,
suit or claim ("Proceeding") or any threatened Proceeding that may give rise to
an indemnification claim against the other party hereto (the "Indemnifying
Party"), then the Indemnitee shall promptly deliver to the Indemnifying Party a
written notice describing such Proceeding in reasonable detail. The failure to
give such written notice shall not relieve the Indemnifying Party of any
liability under this Section 6 with respect to such matter except to the extent
the Indemnifying Party shall have been materially prejudiced by such failure.
(ii) If any Proceeding referred to in Section 6(e)(i) is brought
against an Indemnitee and it gives notice to the Indemnifying Party of the
commencement of such Proceeding, the Indemnifying Party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless the
Indemnifying Party is also a party to such Proceeding and the Indemnitee
reasonably determines in good faith that joint representation would be
inappropriate), to assume the defense of such Proceeding with counsel reasonably
satisfactory to the Indemnitee and, after notice from the Indemnifying Party to
the Indemnitee of its election to assume the defense of such Proceeding, the
Indemnifying Party will not, as long as it diligently conducts such defense, be
liable to the Indemnitee under this Section 6(e) for any fees of other counsel
or any other expenses with respect to the defense of such Proceeding, in each
case subsequently incurred by the Indemnitee in connection with the defense of
such Proceeding. If the Indemnifying Party assumes the defense of a Proceeding,
(i) it will be conclusively established for purposes of this Agreement that the
claims made in that Proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be effected
by the Indemnifying Party without the Indemnitee's consent and the Indemnitee
will have no liability with respect to any compromise or settlement of such
claims effected without its consent. If notice is given to an Indemnifying Party
of the commencement of any Proceeding and the Indemnifying Party does not,
within ten (10) days after the Indemnitee's notice is given, give notice to the
Indemnitee of its election to assume the defense of such proceeding, the
Indemnitee shall have the right to control the defense of, and to compromise or
settle such Proceeding.
(f) Survival. All representations and warranties in this Agreement will
survive for a period of one year after termination of this Agreement. The right
to indemnification, payment of damages or other remedy based on the provisions
of this Section 6 shall survive the time at which it would otherwise terminate
pursuant to Section 3, if prior to such termination, the party seeking
indemnification shall have duly delivered a Claim Notice to the party against
whom such indemnity may be sought in conformity with all of the applicable
procedures set forth in this Section 6.
(g) If the Indemnifying Party exercises its right to assume the defense of
a Proceeding pursuant to Section 6(e), (i) the Indemnitee shall be entitled to
participate in such defense with its own counsel at its own expense and (ii) the
Indemnifying Party shall not make any settlement of any claims without the
written consent of the Indemnitee, which consent shall not be unreasonably
withheld or delayed, unless the terms of such settlement requires no more than
the payment of money and the Indemnifying Party pays such amount.
<PAGE>
(h) If the Indemnifying Party assumes the defense of a Proceeding, the
Indemnitee shall cooperate fully as reasonably requested by the Indemnifying
Party in the defense of such Proceeding, and shall make available to the
Indemnifying Party all books, records and other materials that are under the
direct or indirect control of the Indemnitee and that the Indemnifying Party
reasonably considers necessary or desirable for the defense of such Proceeding.
(i) Absent fraud or willful misconduct, no party hereto shall be entitled
to recover special or punitive damages with respect to any breach of any
representation or warranty or nonperformance of any obligation under this
Agreement.
(j) Notwithstanding anything to the contrary contained in this Agreement
(i) to the extent Losses hereunder also constitute Losses under the Asset
Purchase Agreement, then those provisions of the Asset Purchase Agreement
applicable to such Losses shall determine the rights and obligations of the
parties with respect thereto and the provisions of this Agreement shall not
apply, (ii) except as provided in the previous clause (i) of this subsection
6(j), Buyer's product liability insurance shall be applicable to sales of
products by Buyer which occur subsequent to the date of this Agreement and
Seller's product liability insurance shall not be applicable to such sales,
(iii) the Indemnitee shall use commercially reasonable efforts to seek recovery
from its insurance providers with respect to any Losses for which indemnity
(other than indemnity for product liability) may be sought against the
Indemnifying Party under this Section 6 and for which the Indemnitee's insurance
may be available and such Losses shall be net of any insurance proceeds or other
amounts actually recovered by or on behalf of Indemnitee.
(k) To the extent that any Indemnifying Party makes any indemnification
payment to any Indemnitee, the Indemnifying Party shall be entitled to exercise,
and shall be subrogated to, any rights and remedies (including rights of
indemnity, rights of contribution and other rights of recovery) that the
Indemnitee may have against any other Person with respect to any Losses to which
such indemnification payment is related. The Indemnitee shall take such actions
as the Indemnifying Party may reasonably request for the purpose of enabling the
Indemnifying Party to perfect or exercise its right of subrogation hereunder.
(l) Any legal action or other legal proceeding relating to this Agreement
or the enforcement of any provision of this Agreement may be brought by an
Indemnitee against an Indemnifying Person, and may be contested by such
Indemnifying Person. In that event, if the court or arbitrator in such
proceeding determines that the Indemnifying Person is not obligated under this
Agreement to indemnify the Indemnitee for all or any part of the amount claimed
by the Indemnitee in such proceeding, then the Indemnifying Person shall be
entitled to recover a portion of the reasonable attorneys' fees, costs and
disbursements incurred by the Indemnifying Person contesting the claim of the
Indemnitee against the Indemnifying Person in such proceeding (in addition to
any other relief to which it may be entitled) based upon the extent to which the
Indemnitee was successful in contesting the amount claimed by the Indemnifying
Person. This provision shall not limit in any way Losses to which an Indemnitee
is entitled under the provisions of this Agreement.
<PAGE>
7. General.
(a) This Agreement is made in accordance with and will be governed and
construed under the laws of the State of New York, excluding conflict of law
principles that would cause the law of another jurisdiction to apply.
(b) This Agreement is not assignable or transferable by either party in
whole or in part except with the written consent of Buyer, which consent shall
not be unreasonably withheld, provided, however, this Agreement may be assigned
by Buyer to an Affiliate of Buyer to which Buyer assigns its rights and duties
under the Asset Purchase Agreement. In the case of any permitted assignment or
transfer of or under this Agreement, this Agreement or the relevant provisions
thereof will be binding upon, and inure to the benefit of, the successors and
assigns of the parties hereto.
(c) All notices and other communications required or permitted to be given
under this Agreement will be in writing and will be effective if delivered
during business hours on a business day when delivered personally by facsimile
or sent by a nationally recognized commercial overnight carrier, or by
registered or certified mail, postage prepaid, and addressed to the party at its
address set forth on the signature page hereof, unless by such notice a
different person, address or number has been designated for giving notice
hereunder or, if not delivered during business hours on a business day, the next
succeeding business day.
(d) The parties hereto agree that under this Agreement, each party is an
independent contractor and not an agent or employee of the other party. In no
way will any party be liable to the other party, its employees or agents for any
losses, injury, damages or the like occasioned by such party's activities in
connection with this Agreement, except as expressly provided herein.
(e) This Agreement may be amended only with the written approval of each
party hereto. Any of the provisions of this Agreement may be waived, generally
or in a specific instance, with the written approval of the party giving such
waiver. The failure of either party to enforce any provision of this Agreement
will not be deemed a waiver of such provision or of the right of such party
thereafter to enforce such provision or any other provision.
(f) In the event that any provision of this Agreement will be
unenforceable or invalid under any applicable law or be so held by applicable
court decision, such unenforceability or invalidity will not render this
Agreement unenforceable or invalid as a whole and, in such event, such provision
will be changed and interpreted so as to best accomplish the objectives of such
unenforceable or invalid provision within the limits of applicable law or
applicable court decision.
(g) Except as expressly provided in this Agreement, the rights and
remedies provided in this Agreement will be cumulative and not exclusive of any
other rights and remedies provided by law or otherwise.
(h) No liability shall result from delay in performance or non-performance
caused by circumstances beyond the reasonable control of the party affected,
including, without limitation, the voluntary termination of employment with
Seller by any of Seller's employees, reassignment or termination of any
employees of Seller at the direction of Buyer, acts of God, acts of a public
<PAGE>
enemy, acts of the governments of any state or political subdivision or any
department or regulatory agency thereof or entity created thereby, quotas,
embargoes, acts of any person engaged in subversive activity or sabotage, fires,
floods, explosions, or other catastrophes, epidemics, or quarantine
restrictions, strikes or other labor stoppages, slowdowns or disputes, voluntary
or involuntary compliance with any law, or regulation of any governmental agency
or authority, lack of transportation facilities, or any other cause beyond the
control of the affected party, for that period commencing at the time notice of
such circumstances is given by the affected party and terminating at such time
as the impairment caused by such circumstances ends or would have ended had the
affected party taken reasonable steps to remedy such circumstances.
(i) Seller's total liability with respect to services provided under this
Agreement will under no circumstances exceed the total of all service fees
actually paid or due to Seller or credited to Buyer under this Agreement,
including up to $245,000 billed but not paid by Buyer pursuant to Section 1(c)
of this Agreement. Furthermore, and subject to the limitations set forth in this
Agreement, if Seller fails to deliver a product in accordance with the Mutual
Production Plan (other than as a result of or failure to act on the part of
Buyer) and is unable to adequately cure such failure to deliver, the maximum
liability of Seller to Buyer with respect thereto shall be an amount equal to
the difference between the average sales price for such product and the cost to
Buyer hereunder relating to producing such product; in no event, however, shall
Seller be liable to Buyer for loss of customers in connection with the failure
to deliver a product in accordance with the Mutual Production Plan.
(j) The section headings appearing in this Agreement are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or extent of such paragraph or in any way affect such paragraph.
(k) This Agreement may be executed in counterparts with the same force and
effect as if each of the signatories had executed the same instrument.
8. Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the construction or
interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
<PAGE>
In Witness Whereof, the parties hereto have executed this Agreement as of
the date first above set forth.
B Corporation C Corporation
By:__________________________ By:______________________
Name:________________________ Name:____________________
Title:_______________________ Title:___________________
Address: Address:
B Corporation Corporation
_____________________________ _________________________
_____________________________ _________________________
Attn:________________________ Attn:____________________
Facsimile Number: Facsimile Number:
with a copy to: with a copy to:
Cooley Godward llp O'Sullivan Graev & Karabell, LLP
One Maritime Plaza, 20th Floor 30 Rockefeller Plaza
San Francisco, CA 94111 New York, NY 10112
Attn: Christopher A. Westover, Esq. Attn: David I. Karabell, Esq.
Facsimile Number: (415) 951-3699 Facsimile Number: (212) 728-5950
<PAGE>
EXHIBIT F TO
ASSET PURCHASE
AGREEMENT
---------
NONCOMPETITION AGREEMENT dated __________
__, 1999, between COOPERSURGICAL ACQUISITION
CORP., a Delaware corporation (the "Company"), and
BEI MEDICAL SYSTEMS COMPANY, INC., a Delaware
corporation (the "Covenantor").
Reference is made to the Asset Purchase Agreement dated as of
September __, 1999, between the Company and the Covenantor (the "Asset Purchase
--------------
Agreement"). Pursuant to the Asset Purchase Agreement, the Company is acquiring
- ---------
substantially all of the assets, including the Products, of the Covenantor which
comprise the Business. This Agreement is being entered into pursuant to the
Asset Purchase Agreement.
In consideration of the Company purchasing the Purchased Assets under
the Asset Purchase Agreement and in order to prevent the Company from being
economically harmed by a loss of the goodwill associated with the Business, the
Covenantor has agreed not to compete with the Company under the conditions set
forth in this Agreement.
ACCORDINGLY, in consideration of the good and valuable consideration
which the parties hereto acknowledge, the parties hereto hereby agree as
follows:
Section 6. Certain Defined Terms.
---------------------
Capitalized terms used but not otherwise defined herein have the
meanings set forth in the Asset Purchase Agreement.
Section 7. Non-competition and Non-solicitation.
------------------------------------
(e) Subject to the second paragraph of Section 2(a), the Covenantor
agrees that, during the Non-Compete Period (as defined below), the Covenantor
shall not, directly or indirectly, own, manage, control, participate in, consult
with, render services for, whether as an agent, employee, consultant, advisor,
representative, stockholder, partner or joint venturer, or in any manner engage
in any business within any Restricted Territory (as defined below) competing
with the Products, including any improvements and replacements for the Products,
or competing with any other products or procedures which are used to perform the
same function as, or the same treatments and procedures performed by, the
Products or a business developing any product which is used to perform the same
function as, or the same treatments and procedures performed by, the Products.
As used in this Agreement, the term "Restricted Territory" means any of the
--------------------
following geographic areas (whether domestic or foreign) in which any Product,
process, good or service has been manufactured, provided, sold or offered or
promoted for sale by the Company or its Business Group or with respect to which
the Company or its Business Group have devoted substantial expense in
anticipation of launching into such geographic area a portion of the Business:
(i) any state in the continental United States; (ii) Alaska and Hawaii;
<PAGE>
(iii) any other territory or possession of the United States; (iv) each country
in the European Union("EU"); and (v) any country other than (x) the United
States or any state, territory, possession or political subdivision thereof and
(y) a country in the EU. As used in this Agreement, the term "Non-Compete
-----------
Period" means the period beginning on the date of this Agreement and ending on
- ------
the fifth anniversary of the date of this Agreement. As used in this Agreement,
the term "control" means the possession, directly or indirectly, of the power to
-------
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
Nothing in this Section 2 shall prohibit the Covenantor from (i)
engaging, directly or indirectly, as a partner, joint venturer or otherwise in
the development, manufacture, sales, marketing or service of the product known
as Hydro ThermAblator or HTA, or any improvement to such product (collectively,
"HTA") and, subject to the last two sentences of this paragraph, the
development, manufacture, marketing, sale or service of the products listed on
Exhibit A, or any improvement to or replacement for such products listed on
- ----------
Exhibit A (the "HTA Related Products") or (ii) being a passive owner of not more
- ---------
than (A) 4% of the outstanding capital stock of any class of a corporation (or
4% of the equity interest in any other Person), the securities of which are
publicly traded or (B) 1% of the outstanding capital stock of any class of a
corporation (or 1% of the equity interest in any other Person), the securities
of which are privately held, so long as the Covenantor has no active
participation in the business of such Person. The HTA Related Products may
only be marketed, sold or serviced, directly or through distribution channels,
(A) solely in connection with the sale or use of HTA by medical professionals,
(B) in a number reasonably necessary to facilitate the use by such medical
professionals of HTA and (C) to the medical professionals purchasing or using
HTA. Any marketing, sale or service of an HTA Related Product which does not
strictly comply with the immediately preceding sentence is a violation of the
Covenantor's obligations under this Agreement.
(a) During the Non-Compete Period, the Covenantor agrees that the
Covenantor shall not, directly or indirectly through another Person (i) solicit
any employee of the Company or its Business Group to leave the employ of the
Company or any of its Business Group, or in any way interfere with the
relationship between the Company or any of its Business Group, on the one hand,
and any employee thereof, on the other hand; provided, however, that the general
solicitation of third parties through the use of means generally available to
the public, including the placement of advertisements in the newspaper, shall
not be deemed to violate this clause (i), (ii) hire any individual who was an
employee of the Company or its Business Group until six months after such
individual's employment relationship with the Company or any of its Business
Group has been terminated or (iii) induce or attempt to induce any customer,
supplier, consultant, licensee or other business relation of the Company or any
of its Business Group to cease doing business with the Company or any of its
Business Group, or in any way interfere with the relationship between any such
customer, supplier, consultant, licensee or business relation, on the one hand,
and the Company or any of its Business Group, on the other hand; provided,
however, that the Covenantor shall not be deemed to interfere with the
relationships of the Company or its Business Group with a customer, supplier,
consultant, licensee or other business relation solely because, in compliance
with this Agreement, the Covenantor does business on a non-exclusive basis with
such a Person.
<PAGE>
Section 8. Option To Modify Non-Competition Covenant in Section 2 (a).
----------------------------------------------------------
(f) The Company hereby grants to the Covenantor the right and option
(the "Option"), exercisable by the Covenantor under the terms specified in this
Section 3, to modify the non-competition covenant in Section 2 (a) of this
Agreement. The Option may be exercised by the Covenantor strictly in the manner
provided in this Section 3 solely on the occurrence of the first Change of
Control or Joint Venture Arrangement which is consummated after the date of this
Agreement.
(g) The Covenantor may exercise the Option by delivering an election
notice (the "Election Notice") to the Company concurrently with paying to the
Company the sum of $250,000 by wire transfer of immediately available funds. The
Election Notice shall certify to the Company that there has occurred the first
Change of Control or Joint Venture Arrangement which has been consummated after
the date of this Agreement, shall specify that the Covenantor is exercising the
Option upon consummation of such Change of Control or Joint Venture Arrangement
and shall be accompanied by confirmation that there has been paid to the Company
by wire transfer of immediately available funds the sum of $250,000.
(h) Upon exercise by the Covenantor of the Option in the manner
provided in this Section 3, then, notwithstanding the provisions of Section 2
(a), from and after such Change of Control or Joint Venture Arrangement is
consummated, only the following activities by the Person that acquires control
of the Covenantor as a result of such Change of Control or engages with the
Covenantor in such Joint Venture Arrangement shall be deemed to violate the
provisions of Section 2 (a) of this Agreement: developing, manufacturing,
selling, marketing or servicing products which both Mimic and compete with the
Principal Products
(i) "Change of Control" means either (x) the sale of substantially
all of the Covenantor's assets to an unaffiliated third Person (other than sale
of such assets to the Company) or (y) a merger or consolidation or sale of
capital stock of the Covenantor (each, a "Transaction"), under circumstances in
which the holders of a majority of the voting power of the outstanding capital
stock of the Covenantor, immediately prior to the Transaction, own less than a
majority of the voting power of the outstanding capital stock of the Covenantor
or the surviving corporation or resulting corporation, as the case may be (the
"Surviving Person"), immediately following such Transaction. A Person is deemed
to have acquired control of the Covenantor as a result of the Change of Control
(x) if such Person owns, directly or indirectly, substantially all of such
assets sold by the Covenantor or (y) if such Person controls, directly or
indirectly, a majority of the voting power of the outstanding capital stock of
the Surviving Person or (z) if such Person is the Surviving Person. "Joint
Venture Arrangement" means an agreement between the Covenantor and a third
Person to carry on a joint business activity in the form of a joint venture,
partnership or other contractual arrangement, including without limitation any
license, supply or distribution arrangement.
"Principal Products" means the Products known as "Zumi", "Zui",
"Z-Clamp", "Nichols Pelvic Set" and "Miya Hook", and all variations of such
Products. A product is deemed to "Mimic" a Principal Product if a bona fide
credible argument can be made that such product infringes a patent or patents
which may at any time have been issued for such Principal Product, even if such
Principal Product is not at the time protected by a patent.
<PAGE>
Section 9. Confidentiality.
---------------
(j) The Covenantor will not disclose or use at any time, during the
Non-Compete Period, any Confidential Information of which the Covenantor is or
becomes aware, whether or not such information was developed by the Covenantor.
(k) As used in this Agreement, the term "Confidential Information"
------------------------
means information that is not in the public domain and that was used, developed
or obtained by the Covenantor in connection with the Business, including but not
limited (i) products or services, (ii) fees, costs and pricing structures, (iii)
designs, (iv) analyses, (v) drawings, photographs and reports, (vi) computer
software, including operating systems, applications and program listings, (vii)
flow charts, manuals and documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xi) customers and clients and customer or client lists, (xii) other
copyrightable works, (xiii) all production methods, processes, technology and
trade secrets, and (xiv) all similar and related information in whatever form.
(l) Notwithstanding the provisions of this Agreement to the
contrary, the Covenantor shall have no liability to the Company for disclosure
or use of Confidential Information if the Confidential Information:
(i) is known to the receiving party at the time of
disclosure by the Covenantor to the receiving party of such Confidential
Information other than as the result of a breach of this Section 4 by the
Covenantor;
(ii) becomes publicly known or is disclosed by the Company
other than as the result of a breach of this Section 4 by the Covenantor;
(iii) is received by the Covenantor after the date of this
Agreement from a third party that is not under an obligation of
confidentiality to the Company;
(iv) is required to be disclosed by law, court order, or
similar compulsion or in connection with any legal proceeding, provided
that such disclosure shall be limited to the extent so required and, except
to the extent prohibited by law, the Covenantor shall give the Company
notice of its intent to so disclose such Confidential Information and shall
reasonably cooperate with the Company in seeking suitable confidentiality
protections; or
(v) relates to HTA.
Section 10. Representations and Warranties.
------------------------------
(m) The Covenantor hereby represents and warrants to the Company that
(i) the execution, delivery and performance of this Agreement by the Covenantor
does not and will not conflict with, breach, violate or cause a default under
any agreement, contract or instrument to which the Covenantor is a party or any
judgment, order or decree to which the Covenantor is subject, (ii) the
Covenantor is not a party to or bound by any employment agreement, consulting
<PAGE>
agreement, non-compete agreement, confidentiality agreement or similar agreement
with any other Person that is inconsistent with the provisions of this Agreement
and (iii) upon the execution and delivery of this Agreement by the Company and
the Covenantor, this Agreement will be a valid and binding obligation of the
Covenantor.
(a) The Company hereby represents and warrants to the Covenantor that
(i) this Agreement has been duly authorized by all necessary corporate action on
the part of the Company, (ii) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate or
cause a default under any agreement, contract or instrument to which the Company
is a party or any judgment, order or decree to which the Company is subject, and
(iii) upon the execution and delivery of this Agreement by the Company and the
Covenantor, this Agreement will be a valid and binding obligation of the
Company.
Section 11. Enforcement.
-----------
(n) Because the relationship between the Company and the Covenantor
is unique and because the Covenantor has had access to Confidential Information,
the parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement. Therefore, in the event of a breach or threatened
breach by the Covenantor of this Agreement, the Company may apply to any court
of competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any violations of, the provisions hereof
(without posting a bond or other security) in addition to other rights and
remedies existing in its favor, including requiring the Covenantor to account
for and pay over to the Company all compensation, profits, moneys, accruals,
increments or other benefits derived or received as a direct result of any
transactions constituting a breach of the covenants contained therein.
(o) The prevailing party in any legal action arising out of or
relating to this Agreement shall be entitled to its reasonable attorneys' fees
and court costs.
Section 12. General Provisions.
------------------
(p) Severability. It is the desire and intent of the parties hereto
------------
that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(q) Complete Agreement. This Agreement and the Asset Purchase
------------------
Agreement constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or
<PAGE>
between the parties, written or oral, which may have related to the subject
matter hereof in any way.
(r) Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the Covenantor and the Company and their respective
successors, permitted assigns, personal representatives, heirs and estates, as
the case may be.
(s) Governing Law. This Agreement will be governed by and construed
-------------
in accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflicting provision or rule (whether of the
State of New York or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of New York to be applied. In furtherance of
the foregoing, the internal law of the State of New York will control the
interpretation and construction of this Agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(t) Jurisdiction and Venue.
----------------------
(i) THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMIT, FOR THEMSELVES AND THEIR PROPERTY, TO THE EXCLUSIVE
JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED
STATES OF AMERICA SITTING IN NEW YORK COUNTY, IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR FOR RECOGNITION OR
ENFORCEMENT OF ANY JUDGMENT, AND THE COMPANY AND THE COVENANTOR HEREBY
IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY
SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH NEW YORK
STATE COURT OR SUCH FEDERAL COURT, PROVIDED THAT, IN THE EVENT THAT ANY
SUCH FEDERAL COURT HAS JURISDICTION, THE PARTIES SHALL INSTITUTE ANY SUCH
ACTION OR PROCEEDING IN SUCH FEDERAL COURT AND NOT IN SUCH STATE COURT. THE
COMPANY AND THE COVENANTOR AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION
OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY
LAW.
(ii) THE COMPANY AND THE COVENANTOR IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT THEY MAY LEGALLY AND
EFFECTIVELY DO SO, ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT IN ANY NEW YORK STATE OR FEDERAL COURT SITTING
IN NEW YORK COUNTY. THE COMPANY AND THE COVENANTOR IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM
TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
<PAGE>
(u) Waiver of Jury Trial.
--------------------
THIS IS A COMPLEX BUSINESS TRANSACTION. THE PARTIES BELIEVE THAT IT
WOULD BE BETTER TO HAVE ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT RESOLVED BY A JUDGE WITHOUT A JURY. EACH OF THE
PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(v) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Covenantor, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(w) Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(x) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(y) Business Group. For purposes of this Agreement, the term
--------------
"Business Group" means, with respect to the Company, the Company's current and
--------------
future Affiliates including those Affiliates listed on Exhibit B, and, with
---------
respect to the Covenantor, the Covenantor's current and future Affiliates;
provided, however, that a future Affiliate of the Company shall not be
considered part of its "Business Group" unless and until the Company provides
notice to the Convenantor in writing that such Person is an Affiliate of the
Company.
(z) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
State of New York, the time period for taking action shall be automatically
extended to the business day immediately following such Saturday, Sunday or
holiday.
(aa) Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein shall survive the consummation of the
transactions contemplated hereby and by the Asset Purchase Agreement.
<PAGE>
(bb) Construction.
------------
(i) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the
feminine gender shall include the masculine and neuter genders; and the
neuter gender shall include the masculine and feminine genders.
(ii) Any rule of construction to the effect that ambiguities
are to be resolved against the drafting party shall not be applied in the
construction or interpretation of this Agreement.
(iii) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(cc) Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received, if delivered during business
hours on a business day, when delivered (by hand, by registered mail, by courier
or express delivery service or by facsimile) to the address or facsimile
telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other party hereto) or, if not delivered during
business hours on a business day, on the next succeeding business day:
(A) if to the Company, to:
CooperSurgical Acquisition Corp.
c/o CooperSurgical, Inc.
15 Forest Parkway
Shelton, Connecticut 06484
Attention: Nicholas J. Pichotta, President
Telecopier: (203) 925-135
with a copy to:
The Cooper Companies, Inc.
6140 Stoneridge Mall Road
Suite 590
Pleasanton, CA 94588
Attention: Carol R. Kaufman, V.P., Legal Affairs
Telecopier: (510) 460-3660
<PAGE>
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: David I. Karabell, Esq.
Telecopier: (212) 408-2400; and
(B) if to the Covenantor, to:
BEI Medical Systems Company, Inc.
100 Hollister Drive
Teterboro, NJ 07608
Attention: Richard W. Turner, President & CEO
Telecopier: (201) 727-4998
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Attention: Christopher A. Westover, Esq.
Telecopier: (415) 951-3699
* * * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Noncompetition Agreement as of the date first written above.
COOPERSURGICAL ACQUISITION CORP.
By: ________________________________
Name:
Title:
BEI MEDICAL SYSTEMS COMPANY, INC.
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT G TO
ASSET PURCHASE
AGREEMENT
---------
NONCOMPETITION AGREEMENT dated as of
______ __, 1999, among COOPERSURGICAL ACQUISITION
CORP., a Delaware corporation (the "Company"), and
-------
RICHARD W. TURNER, an individual ("Turner" or the
------
"Covenantor").
----------
Reference is made to the Asset Purchase Agreement (the "Asset Purchase
--------------
Agreement") dated as of October __, 1999, and the Non-Competition Agreement (the
- ---------
" B Non-Competition Agreement") dated as of the date hereof, each between the
- -------------------------
Company and B Company, a Delaware corporation ("B"). Pursuant to the Asset
-
Purchase Agreement, the Company is acquiring substantially all of the assets,
including the products listed on Exhibit A hereto (the "Turner Products"), of B
--------- ---------------
which comprise the Business. This Agreement is being entered into pursuant to
the Asset Purchase Agreement.
Turner has been an executive active in the business and affairs of B
and has personally developed numerous relationships and successful practices and
procedures which constitute the goodwill of the Business. In consideration of
the Company purchasing the Purchased Assets under the Asset Purchase Agreement
and in order to prevent the Company from being economically harmed by a loss of
the goodwill associated with the Business, Turner has agreed not to compete with
the Company under the conditions set forth in this Agreement.
ACCORDINGLY, in consideration of the good and valuable consideration
which the parties hereto acknowledge, the parties hereto hereby agree as
follows:
Section 13. Certain Defined Terms; Consideration.
------------------------------------
(dd) Capitalized terms used but not otherwise defined herein have the
meanings set forth in the Asset Purchase Agreement.
(a) The Covenantor has been employed by B under a letter agreement
dated January 24, 1999, a copy of which is attached as Exhibit B hereto (the
---------
"Turner Letter"), which gives Turner certain rights including, among others, an
-------------
option to be paid certain monies by B upon the occurrence of a sale of B prior
to January 31, 2000, and Turner has agreed to defer the exercise of those rights
pending the conclusion of a new employment agreement with B. In addition, B may
be paying additional amounts to Turner for the transaction contemplated by the
Asset Purchase Agreement.
Section 14. Non-competition and Non-solicitation.
------------------------------------
(ee) Subject to the second paragraph of Section 2(a), Covenantor
agrees that, during the Non-Compete Period (as defined below), the Covenantor
shall not, directly or indirectly, own, manage, control, participate in, consult
with, render services for, whether as an agent, employee, consultant, advisor,
representative, stockholder, partner or joint venturer, or in
<PAGE>
any manner engage in any business within any Restricted Territory (as defined
below) competing with the Turner Products, including any improvements and
replacements for the Turner Products, or competing with any other products or
procedures which are used to perform the same function as, or the same
treatments and procedures performed by the Turner Products ("Functionally
------------
Equivalent Products"), or a business developing Functionally Equivalent
- -------------------
Products. As used in this Agreement, the term "Restricted Territory" means any
of the following geographic areas (whether domestic or foreign) in which any
product, process, good or service has been manufactured, provided, sold or
offered or promoted for sale by the Company or its Business Group or with
respect to which the Company or its Business Group have devoted substantial
expense in anticipation of launching into such geographic area a portion of the
Business: (i) any state in the continental United States; (ii) Alaska and
Hawaii; (iii) any other territory or possession of the United States; (iv) each
country in the European Union ("EU"); and (v) any country other than (x) the
--
United States or any state, territory, possession or political subdivision
thereof, and (y) a country in the EU. As used in this Agreement, the term
"Non-Compete Period" means the period beginning on the date of this Agreement
------------------
and ending on the third anniversary of the date of this Agreement. As used in
this agreement, the term "control" means the possession, directly or indirectly,
-------
of the power to direct the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
Nothing in this Section 2 shall prohibit the Covenantor from (i)
engaging, directly or indirectly, as an owner, manager, controlling person,
participant, agent, employee, consultant, advisor, representative, stockholder,
partner, joint venturer or otherwise in the development, manufacture, sales,
marketing or service of the product known as Hydro ThermAblator or HTA, or any
improvement to or replacement for such product (collectively, "HTA") and,
---
subject to the immediately succeeding paragraph, the sale and service of the
products listed on Exhibit C, or any improvement to or replacement for such
----------
products listed on Exhibit C (the "HTA Related Products"), or (ii) being a
--------- --------------------
passive owner of not more than (A) 4% of the outstanding equity interests of any
class of a Person, the securities of which are publicly traded, or (B) 1% of the
outstanding equity interests of any class of a Person, the securities of which
are privately held, so long as the Covenantor has no active participation in the
business of such Person, or (iii) serving as an employee or consultant for any
Person, if (A) the sales of such Person to the gynecological, infertility and
family practice medical markets (collectively, the "Proscribed Markets"), or any
------------------
of such markets, do not exceed 25% of the total sales of such Person, and (B)
none of the activities of the Covenantor relate directly or indirectly to the
activities of such Person which, as to the Covenantor, are prohibited under
Section 2(a), or (iv) serving as an employee or consultant for any Person
selling products or services to the Proscribed Markets, or any of them, which
products or services do not include the Turner Products or Functionally
Equivalent Products.
The HTA Related Products may only be marketed, sold or serviced,
directly or through distribution channels, (A) solely in connection with the
sale or use of HTA by medical professionals, and (B) in a number reasonably
necessary to facilitate the use by such medical professionals of HTA, and (C) to
the medical professionals purchasing or using HTA. Any marketing, sale or
service of an HTA Related Product which does not strictly comply with the
immediately preceding sentence is a violation of the Covenantor's obligations
under this Agreement. Notwithstanding the first two sentences in this paragraph,
sales of HTA Related Products shall not be subject to the restrictions in such
sentences so long as such sales are made only by a Person described in clause
(iii) of the immediately preceding paragraph as part of the
<PAGE>
sales of such a Person to the Proscribed Markets, or any of them, which do not
exceed 25% of the total sales of such Person.
(ff) During the Non-Compete Period, the Covenantor agrees that the
Covenantor shall not directly or indirectly through another Person (i) solicit
any employee of the Company or its Business Group to leave the employ of the
Company or any of its Business Group, or in any way interfere with the
relationship between the Company or any of its Business Group, on the one hand,
and any employee thereof, on the other hand; provided, however, that the general
solicitation of third parties through the use of means generally available to
the public, including the placement of advertisements in the newspaper, shall
not be deemed to violate this clause (i), (ii) hire any individual who was an
employee of the Company or its Business Group until six months after such
individual's employment relationship with the Company or any of its Business
Group has been terminated or (iii) induce or attempt to induce any customer,
supplier, consultant, licensee or other business relation of the Company or any
of its Business Group to cease doing business with the Company or any of its
Business Group, or in any way interfere with the relationships between any such
customer, supplier, consultant, licensee or business relation, on the one hand,
and the Company or any of its Business Group, on the other hand; provided,
however, that the Covenantor shall not be deemed to interfere with the
relationship of the Company or its Business Group with a customer, supplier,
consultant, licensee or other business relation solely because, in compliance
with this Agreement, the Covenantor does business on a non-exclusive basis with
such Person.
(gg) Turner acknowledges that, in the course of his employment with B
and/or its Business Group (as defined below) and their predecessors, he has
become familiar with B's and its Business Group's and their predecessors' trade
secrets and with other Confidential Information (as defined below) concerning B,
its Business Group and their respective predecessors and that his services have
been of special, unique and extraordinary value to B and its Business Group.
(a) Turner understands that the foregoing restrictions may limit his
ability to earn a livelihood in a business similar to the Business. However,
Turner has been a manager and an executive for many years in different types of
businesses, some of which are similar and some of which are not similar to the
Business. Turner does not believe that the restrictions in this Agreement, given
Turner's education, skills, experience and ability, would prevent him from
earning a living.
Section 15. Option To Modify Non-Competition Covenant in Section 2 (a).
----------------------------------------------------------
(hh) Pursuant to the B Non-Competition Agreement, the Company granted
to B the right and option (the "Option"), exercisable by B under the terms
------
specified in Section 3 of the B Non-Competition Agreement, to modify the non-
competition covenant in Section 2(a) of the B Non-Competition Agreement. The
Option may be exercised by B strictly in the manner provided in Section 3 of the
B Non-Competition Agreement solely on the occurrence of the first Change of
Control or Joint Venture Arrangement (each as defined in the B Non-Competition
Agreement) which is consummated after the date of this Agreement.
(ii) In the event that B exercises the Option, then, so long as Turner
at the time of the exercise of the Option has been continually employed or
retained as a consultant by B, and continues without interruption to be so
employed or so retained as a consultant by B or the
<PAGE>
Person which acquires control of B as a result of the Change of Control or which
engages with B in the Joint Venture Arrangement upon which the exercise of the
Option is based, Turner may, solely as an employee or a consultant to such
Person, engage in the same activities that such Person may engage in pursuant to
section 3(c) of the B Non-Competition Agreement. If Turner is not so employed or
so retained as a consultant and commencing at any time as he does not continue
without interruption to be so employed or so retained as a consultant, then the
provisions of this Agreement shall remain in effect unmodified by this Section
3. A leave of absence for family or medical reasons will not be deemed an
interruption in continual employment or consulting by Turner for such Person.
Section 16. Confidentiality.
---------------
(jj) The Covenantor will not disclose or use at any time during the
Non-Compete Period any Confidential Information of which the Covenantor is or
becomes aware, whether or not such information was developed by the Covenantor.
(kk) As used in this Agreement, the term "Confidential Information"
------------------------
means information that is not in the public domain and that was used, developed
or obtained by the Covenantor in connection with the Business, including but not
limited to (i) information, observations and data obtained by Turner while
employed by B Company or any predecessors thereof concerning the Business, (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and business
methods, (xi) inventions, devices, new developments, methods and processes,
whether patentable or unpatentable and whether or not reduced to practice, (xii)
customers and clients and customer or client lists, (xiii) other copyrightable
works, (xiv) all production methods, processes, technology and trade secrets,
and (xv) all similar and related information in whatever form.
(ll) Notwithstanding the provisions of this Agreement to the contrary,
the Covenantor shall have no liability to the Company for disclosure or use of
Confidential Information if the Confidential Information:
(i) is known to the receiving party at the time of disclosure
by the Covenantor to the receiving party of such Confidential Information
other than as the result of a breach of this Section 4 by the Covenantor;
(ii) becomes publicly known or is disclosed by the Company other
than as the result of a breach of this Section 4 by the Covenantor;
(iii) is received by the Covenantor after the date of this
Agreement from a third party that is not under an obligation of
confidentiality to the Company;
(iv) is required to be disclosed by law, court order, or similar
compulsion or in connection with any legal proceeding, provided that such
disclosure shall be limited to the extent so required and, except to the
extent prohibited by law, the Covenantor shall give the Company notice of
its intent to so disclose such Confidential Information and shall
reasonably cooperate with the Company in seeking suitable confidentiality
protections;
<PAGE>
(v) relates to HTA; or
(vi) is independently developed by the Covenantor in connection
with matters unrelated to the Turner Products or Functionally Equivalent
Products without reference to or reliance upon Confidential Information;
provided, that such independent development can be reasonably proven by the
Covenantor by written records.
Section 17. Representations and Warranties.
------------------------------
(mm) The Covenantor hereby represents and warrants to the Company
that (i) the execution, delivery and performance of this Agreement by the
Covenantor does not and will not conflict with, breach, violate or cause a
default under any agreement, contract or instrument to which the Covenantor is a
party or any judgment, order or decree to which the Covenantor is subject, (ii)
the Covenantor is not a party to or bound by any employment agreement,
consulting agreement, non-compete agreement, confidentiality agreement or
similar agreement with any other Person that is inconsistent with the provisions
of this Agreement and (iii) upon the execution and delivery of this Agreement by
the Company and the Covenantor, this Agreement will be a valid and binding
obligation of the Covenantor.
(nn) The Company hereby represents and warrants to the Covenantor
that (i) this Agreement has been duly authorized by all necessary corporate
action on the part of the Company, (ii) the execution, delivery and performance
of this Agreement by the Company does not and will not conflict with, breach,
violate or cause a default under any agreement, contract or instrument to which
the Company is a party or any judgment, order or decree to which the Company is
subject, and (iii) upon the execution and delivery of this Agreement by the
Company and the Covenantor, this Agreement will be a valid and binding
obligation of the Company.
Section 18. Enforcement.
------------
(oo) Because the relationship between the Company and the Covenantor
is unique and because the Covenantor has had access to Confidential Information,
the parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement. Therefore, in the event of a breach or threatened
breach by the Covenantor of this Agreement, the Company may apply to any court
of competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any violations of, the provisions hereof
(without posting a bond or other security) in addition to other rights and
remedies existing in its favor, including requiring the Covenantor to account
for and pay over to the Company all compensation, profits, moneys, accruals,
increments or other benefits derived or received as a result of any transactions
constituting a breach of the covenants contained therein.
(pp) The prevailing party in any legal action arising out of or
relating to this Agreement shall be entitled to its reasonable attorneys' fees
and court costs.
Section 19. General Provisions.
------------------
(qq) Severability. It is the desire and intent of the parties hereto
-----------
that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
<PAGE>
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction .
(rr) Complete Agreement. This Agreement and the Asset Purchase
------------------
Agreement constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or between the parties, written
or oral, which may have related to the subject matter hereof in any way.
(ss) Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the Covenantor and the Company and their respective
successors, permitted assigns, personal representatives, heirs and estates, as
the case may be.
(tt) Governing Law. This Agreement will be governed by and construed
-------------
in accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflicting provision or rule (whether of the
State of New York or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of New York to be applied. In furtherance of
the foregoing, the internal law of the State of New York will control the
interpretation and construction of this Agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(uu) Jurisdiction and Venue.
----------------------
(i) THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMIT, FOR THEMSELVES AND THEIR PROPERTY, TO THE EXCLUSIVE
JURISDICTION OF ANY STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF
AMERICA SITTING IN NEW YORK COUNTY, IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR FOR RECOGNITION OR ENFORCEMENT OF ANY
JUDGMENT, AND THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH NEW YORK STATE COURT OR
SUCH FEDERAL COURT, PROVIDED THAT, IN THE EVENT THAT ANY SUCH FEDERAL COURT
HAS JURISDICTION, THE PARTIES SHALL INSTITUTE ANY SUCH ACTION OR PROCEEDING
IN SUCH FEDERAL COURT AND NOT IN SUCH STATE COURT. THE COMPANY AND THE
COVENANTOR AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING
SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON
THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY
<PAGE>
LAW; PROVIDED THAT, NOTWITHSTANDING THE FOREGOING, IF THE COVENANTOR IS A
DEFENDANT IN ANY SUCH ACTION OR PROCEEDING IN WHICH B IS NOT ALSO A
DEFENDANT, SUCH ACTION OR PROCEEDING SHALL INSTEAD BE BROUGHT AND
MAINTAINED IN ANY COURT IN THE STATE OR COUNTY IN WHICH THE COVENANTOR'S
PRINCIPAL RESIDENCE IS LOCATED OR IN WHICH THE COVENANTOR'S PRINCIPAL PLACE
OF BUSINESS IS LOCATED.
(ii) SUBJECT TO (e)(i), THE COMPANY AND THE COVENANTOR
IRREVOCABLY AND U NCONDITIONALLY WAIVE, TO THE FULLEST EXTENT THEY MAY
LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT IN ANY NEW YORK STATE OR FEDERAL COURT
SITTING IN NEW YORK COUNTY. THE COMPANY AND THE COVENANTOR IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT.
(iii) THE COVENANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY
MAIL IN THE COUNTY IN WHICH THE COVENANTOR'S PRINCIPAL RESIDENCE IS LOCATED
OR IN WHICH THE COVENANTOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AND
SUCH SERVICE SHALL BE DEEMED TO BE GOOD AND SUFFICIENT SERVICE FOR ALL
PURPOSES. THE COVENANTOR SHALL NOTIFY THE COMPANY PURSUANT TO THIS
AGREEMENT OF EACH OF HIS PRINCIPAL PLACE OF RESIDENCE AND PRINCIPAL PLACE
OF BUSINESS.
<PAGE>
EXHIBIT H TO
ASSET PURCHASE
AGREEMENT
---------
_____________ _____,1999
B Corp.
Ladies and Gentlemen:
We have acted as counsel to CooperSurgical Acquisition Corp., a
Delaware corporation ("Cooper"), in connection with (a) the Asset Purchase
Agreement (the "Asset Purchase Agreement") dated September __, 1999 between
------------------------
Cooper and B Corp., a Delaware corporation (the "Company"), (b) the Bill of
Sale, Assignment and Assumption Agreements each dated the date hereof between
Cooper and the Company and each Subsidiary, respectively (the "Bills of Sale"),
-------------
(c) the Transition Agreement dated the date hereof between Cooper and the
Company (the "Transition Agreement"), and (d) the two Non-Competition Agreements
--------------------
dated the date hereof between Cooper and each of the Company and Richard W.
Turner, respectively (the "Non-Competition Agreements", and together with the
--------------------------
Asset Purchase Agreement, the Bills of Sale and the Transition Agreement, the
"Transaction Documents"). Capitalized terms used but not otherwise defined
---------------------
herein have the meanings given them in the Asset Purchase Agreement. This
opinion is being delivered pursuant to Section 6.6 of the Asset Purchase
Agreement.
We have not adopted the Legal Opinion Accord (the "Accord") of the ABA
--- ------
Section of Business Law (1991) for purposes of this opinion letter. In rendering
the opinions expressed in this opinion letter, however, we have relied without
investigation on the assumptions set forth in Section 4 of the Accord.
In addition, as to matters of fact (including matters of fact set
forth in this opinion letter), we have relied (except to the extent that we have
actual knowledge of facts to the contrary) without investigation on (i) the
representations and warranties of the various parties set forth in the
Transaction Documents, (ii) certificates of officers of Cooper delivered at the
Closing and (iii) certificates of public officials.
Our opinions in this opinion letter are limited to the law of the
State of New York, the General Corporation Law of the State of Delaware and the
federal law of the United States of America. We do not express any opinion as to
any other law. Although we note that the Asset Purchase Agreement and the
Transition Agreement are, by their terms, governed by the laws of the State of
Delaware we have assumed, with your consent, for purposes of the opinions
expressed below that each such agreement is governed by and construed in
accordance with the laws of the State of New York without giving effect to
principles of conflicts of law. We do not express any opinion with respect to
any provisions of the Asset Purchase Agreement and the Transition Agreement
providing for the choice of the laws of the State of Delaware . Unless
explicitly addressed herein, we do not express any opinion as to any of the
legal issues set forth in Section 19 of the Accord.
<PAGE>
Based upon the foregoing, we are of the opinion that:
11. Cooper is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware.
12. Cooper has all necessary corporate power and authority to execute,
deliver, and perform its obligations under each Transaction Document to which it
is a party and to consummate the transactions contemplated thereby. The
execution and delivery by Cooper of each Transaction Document to which it is a
party and the consummation by Cooper of the transactions contemplated thereby
have been duly and validly authorized by all necessary corporate action on the
part of Cooper.
13. Cooper has duly and validly executed and delivered each Transaction
Document to which it is a party. Each Transaction Document to which Cooper is a
party constitutes a legal, valid and binding obligation of Cooper, enforceable
against Cooper in accordance with its terms.
14. The execution and delivery by Cooper of each Transaction Document to
which it is a party and its performance of its obligations thereunder will not
(i) conflict with or violate (with or without notice or lapse of time or both)
its Certificate of Incorporation or By-Laws, or (ii) conflict with or violate
(with or without notice or lapse of time or both) any Law applicable to it.
15. The execution and delivery by Cooper of each Transaction Document to
which it is a party does not, and the performance of its obligations thereunder
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Entity.
Our opinion is subject to the General Qualifications (as defined in
the Accord) and the opinions expressed in clause (ii) of paragraph 4 above and
in paragraph 5 above are based on our review of those Laws that, in our
experience, are normally applicable to transactions of the type contemplated by
the Transaction Documents.
This opinion letter has been rendered solely for your benefit in
connection with the execution and delivery of the Transaction Documents and the
transactions contemplated thereby. Accordingly, it is not to be relied upon by
any other Person, and is not to be used for any other purpose, without our prior
written consent.
Very truly yours,
<PAGE>
SCHEDULE 1.1
[OMITTED]
<PAGE>
SCHEDULE 1.6
Assumed Liabilities
-------------------
A) The Assumed Liabilities shall consist of and be assumed in the following
order:
1. First, to the extent of any trade accounts payable ("Trade Payables") up to
--------------
$350,000;
2. Second, up to $25,000 of warranty obligations ("Warranty Obligations") up
--------------------
to the difference between $350,000 and the lesser amount of Trade Payables
so assumed;
3. Third, to the extent of the amount at Closing of any accrued sales return
obligations ("Sales Return Obligations") up to the difference between
------------------------
$350,000 and the sum less than $350,000 of the amount of Trade Payables and
Warranty Obligations so assumed; and
4. Fourth, the amount at Closing of any accrued royalty obligations
("Royalty Obligations"), up to any remaining difference between $350,000
-------------------
and the sumless than $350,000 of the amount of Trade Payables, Warranty
Obligations and Sales Return Obligations so assumed.
Any part of the Liabilities referred to above which are not Assumed
Liabilities are Excluded Liabilities. The Seller shall pay such Excluded
Liabilities as part of its indemnification obligations to the Purchaser
Indemnified Persons under this Agreement. Since $25,000 of Warranty Obligations
is a negotiated number, the Seller shall pay to the Purchaser upon delivery of
the Statements pursuant to this Agreement an amount equal to all or any part of
the Warranty Obligations which are Excluded Liabilities, if any; provided,
however, that if the Seller pays such amounts to the Purchaser promptly when
due, such amounts shall not be counted towards the calculation of the Losses
under Section 7.5(a). The Seller shall pay to the Purchaser an amount equal to
all or any part of the Trade Payables, Sale Return Obligations and Royalty
Obligations which are Excluded Liabilities when the Purchaser incurs such
liabilities and makes a claim under Section 7 of this Agreement therefor.
B) The Assumed Liabilities shall also consist of approximately $11,000 owed by
the Seller to Venusa, Ltd. for tooling pursuant to the Letter Agreement
dated October 2, 1998 between the Seller and Venusa, Ltd. This Liability
shall be assumed by the Purchaser in addition to the Liabilities assumed by
the Purchaser under subsection (A).
<PAGE>
SCHEDULE 1.7
Excluded Liabilities
--------------------
The Purchaser is not assuming any of the following Excluded Liabilities:
(a) any Liability of the Seller or any Subsidiary under this
Agreement;
(b) any Liability of the Seller or any Subsidiary for expenses, Taxes
or fees incident to or arising out of the negotiation, preparation, approval or
authorization of this Agreement, the Related Documents or the consummation (or
preparation for the consummation) of the transactions contemplated hereby or
thereby (including all attorneys' and accountants' fees, and brokerage fees
incurred by or imposed upon the Seller or any Subsidiary);
(c) any Liability of the Seller or any Subsidiary for any
indebtedness;
(d) any Liability of the Seller or any Subsidiary under any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Seller or any
Subsidiary is a party or by which the Seller or any Subsidiary or its or any of
their respective properties is bound or affected other than Assumed Liabilities
specified in Schedule 1.6 and Liabilities assumed by the Purchaser in accordance
with Section 1.6 which accrue from and after the Closing pursuant to the Assumed
Contracts;
(e) any Liability relating to any Employee Benefit Plan;
(f) any Liability of the Seller or any Subsidiary for worker's
compensation; and
(g) any Liability of the Seller or any Subsidiary which relate to the
Excluded Assets;
The Seller and each Subsidiary shall pay, discharge and perform all
its respective Excluded Liabilities promptly when due.
<PAGE>
SCHEDULE 1.8(a)
Sales Shortfall Calculation
---------------------------
The Sales Shortfall shall be calculated as follows:
1. The amount of Included Sales for the period beginning on January 3,
1999 and ending on October 2, 1999 (each, a "Channel Sales Amount") shall be
--------------------
calculated for the following categories of buyers: (a) U.S. End User; (b) U.S.
Distributor; (c) Non-U.S. (except for OEM); and (d) OEM.
2. Each Channel Sales Amount shall then be multiplied by the sales
multiple specified on Annex A hereto under the column headed by the buyer
category for which such Channel Sales Amount was calculated, which appears
opposite the name of each Product. The product of each such modification is
called, a "Total Channel Sales Amount".
--------------------------
3. All Total Channel Sales Amounts for each Product shall be added
together to determine the "Product Sales Amount".
--------------------
4. All the Product Sales Amounts shall be added together to determine the
"9 Month Total Sales Amount" for all Products.
--------------------------
5. The 9 Month Total Sales Amount shall be annualized by dividing such
amount by 9, then multiplying the result of such calculation by 12, to determine
the "Total Annualized Sales Amount".
-----------------------------
6. The amount, if any, by which the Total Annualized Sales Amount is less
than $11,231,600 is the "Sales Shortfall". Such Sales Shortfall, if any, shall
---------------
be subtracted from the Purchase Price paid by the Purchaser to the Seller on the
Closing Date.
"Included Sales" means all sales for each Product which is sold in the
ordinary course of the Business, except (i) sales of OEM Industrial Products and
(ii) any sales of Products to Fujinon, Inc., PENTAX Precision Instrument
Corporation and ERBE USA, Inc. excluded pursuant to the last sentence of Section
4.1.
<PAGE>
ANNEX A
TO
SCHEDULE 1.8(a)
Product Sales Multiple Analysis
-------------------------------
<TABLE>
<CAPTION>
Non-United
States
United States United States (Except
Buyer Categories End User Distributor for OEM) OEM
- --------------------------------------------------------- ------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
LEEP Products:
- -------------
Electrodes 2.21 1.66 1.11 0.28
Procedure Kits 2.21 1.66 1.11 0.28
Other Disposable 2.21 1.66 1.11 0.28
------------- ------------- ---------- -------
Sub total - LEEP Disposables N/A N/A N/A N/A
Hardware 1.11 0.55 0.28 0.28
Coated Instruments 1.11 0.55 0.28 0.28
------------- ------------- ---------- -------
Total LEEP Products N/A N/A N/A N/A
Other GYN Products:
- ------------------
Zumi 2.21 1.66 1.11 0.28
Zui 2.21 1.66 1.11 0.28
HSG/SHG 2.21 1.66 1.11 0.28
Z-Samplers 2.21 1.66 1.11 0.28
Endo-Sock/Mega-Pouch 2.21 1.66 1.11 0.28
Other GYN Disposables 2.21 1.66 1.11 0.28
------------- ------------- ---------- -------
Sub total - GYN Disposables N/A N/A N/A N/A
Biopsy Punch 2.21 1.66 1.11 0.28
Specula 2.21 1.66 1.11 0.28
Z-Clamps 2.21 1.66 1.11 0.28
Z-Scissors 2.21 1.66 1.11 0.28
OS Finder 2.21 1.66 1.11 0.28
Nichols Pelvic Surgery Set 2.21 1.66 1.11 0.28
Other Reusable Instruments 1.11 0.55 0.28 0.28
------------- ------------- ---------- -------
Sub total - GYN Instruments N/A N/A N/A N/A
Colposcopes 1.11 0.55 0.28 0.28
Hysteroscopy System 1.11 0.55 0.28 0.28
Cryo System 1.11 0.55 0.28 0.28
------------- ------------- ---------- -------
N/A N/A N/A N/A
TOTAL OTHER GYN N/A N/A N/A N/A
TOTAL GYN SALES N/A N/A N/A N/A
Other Products:
- --------------
GYNESYS Products N/A 0.28 0.28 0.28
Misc. Hardware 0.28 0.28 0.28 0.28
GI Products 0.28 0.28 0.28 0.28
OEM Products 0.28 0.28 0.28 0.28
HTA Products N/A N/A N/A N/A
TOTAL OTHER PRODUCTS N/A N/A N/A N/A
TOTAL BEI SALES N/A N/A N/A N/A
</TABLE>
<PAGE>
SCHEDULE 1.10(a)
Inventory Valuation Rules
-------------------------
A. Finished Goods Inventory
------------------------
Finished goods inventory of the Business on hand at the Facilities of
the Seller at Closing and not held by vendors shall be valued for purposes of
the Inventory Statement as provided in this Schedule
1. The number of units of each separate Product will be counted. The
result of this count for each Product is called the "Closing Unit Number." For
-------------------
this count, the following will be treated as one Product: (a) like Products
which are sold by the Seller in different package configurations (i.e., ZUMI 4.5
Box of 12 and ZUMI single will be treated as one Product); (b) groups of common
Products in varying sizes or configurations which the Seller has frequently sold
and promoted in sets (i.e., Z-Clamps and Z-Scissors will be treated as one
Product); and (c) a Product which is sold by the Seller in the United States and
the same Product which has been modified solely to meet requirements for a sale
by the Seller outside of the United States (i.e., a Lletz Plus II Generator in a
110-volt configuration for the United States market and in a 220-volt
configuration for the market outside the United States shall be treated as one
Product).
2. The "Two Year Sales Number" for each Product shall be determined.
---------------------
Two Years Sales Number for each Product means the number of units of such
Product sold by the Seller during the ten month period commencing October 1,
1998 and ending July 31, 1999 divided by 10 and multiplied by 24.
3. The excess, if any, of the Closing Unit Number for each Product
over the Two Year Sales Number for the same Product shall have zero value for
purposes of calculating the value of finished goods inventory on hand at
Closing.
4. That number of units of finished goods inventory of each Product
on hand at Closing not in excess of the Two Year Sales Number for the same
Product shall be valued as follows;
(a) The lessor of (i) The full absorbed standard costs
historically used by the Seller to value finished goods inventory
("Standard Costs"); or
--------------
(ii) the lesser of (x) the value of such inventory at the lower
of cost or market, (y) for the bipolar Product line (including generators,
Loops and Balls), 25% of Standard Costs and (z) for demonstration inventory
(except demonstration inventory consisting of the bipolar Product line), if
placed in service by the Seller within the four year period preceding the
Closing Date, 50% of Standard Costs, and if placed in service by the Seller
prior to such four year period, zero; and
(b) Evaluation Inventory represented by an invoice bearing a
date which is less than 90 days prior to the Closing Date, 50% of the
amount of the invoice
<PAGE>
SCHEDULE 5.7
[OMITTED]
<PAGE>
SCHEDULE 1.10(a) - Page 2
representing such inventory, and Evaluation Inventory represented by an invoice
bearing a date which is 90 days or more prior to the Closing Date, zero.
5. Notwithstanding the foregoing, (a) OEM Industrial Inventory shall
be valued at zero and (b) that number of units at Closing of finished goods
inventory of the integrated video system Product which equals up to the greater
of (x) the Two Year Sales Number for that Product and (y) 24, shall be valued at
Standard Costs. The excess of units of such inventory over such number of units
at Closing shall be valued at zero.
B. Raw Materials Inventory and Inventory Held By Vendors
-----------------------------------------------------
Attached to this Schedule is an analysis of raw material inventory of
the Business at July 31, 1999, separated into categories of Products. The
inventory in such analysis constitutes approximately 72% of the value of all raw
material inventory of the Business at that date. The valuation percentage of
Standard Costs for each category of Products in the analysis is specified
opposite the description of such category. Raw material and unfinished inventory
and inventory of the Business held by vendors and not located at Closing at the
Seller's Facilities (except inventory held by Venusa, Ltd.) which is a component
of or included in each category of Products will be valued at the same
percentage of Standard Costs as raw material, unfinished inventory and inventory
included in such analysis. Raw material, unfinished inventory and inventory held
by Venusa, Ltd. shall be valued at zero.
C. Work-in-Process
---------------
Work-in-Process shall be valued at Standard Cost therefor.
D. General
-------
HTA inventory and components and inventory of Products which have been
discontinued by the Seller shall be valued at zero. HTA inventory and components
are not part of the Purchased Assets. Inventories of Products that have been
discontinued are part of the Purchased Assets. Units of Products which are
Products used in the Business and which are also HTA Related Products (as
defined in the Non-Competition Agreement) shall be divided as follows:
(a) that percentage of units of such products on hand at Closing
equal to the percentage of the Seller's sales of all Products for the nine
(9) month period ended September 30, 1999 represented by sales of Products
used in the Business shall constitute Purchased Assets.
(b) The balance of units of such products on hand at Closing shall
constitute Excluded Assets.
As specified in the Agreement to which this Schedule is attached,
inventory shall be valued in accordance with GAAP, applied consistently with the
Seller's allocations thereof, as GAAP may be modified by this Schedule.
<PAGE>
SELLER DISCLOSURE SCHEDULE
[OMITTED]
<PAGE>
September 23, 1999
Board of Directors
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, NJ 07608
Gentlemen:
You have asked that Ewing Monroe Bemiss & Co. ("EMB&Co.") render an opinion (the
"Opinion") as to the fairness, from a financial point of view, to the
stockholders of BEI Medical Systems Company, Inc. (the "Company"), of the
consideration (the "Consideration") to be paid by The Cooper Companies
("Cooper") in connection with the purchase of certain assets of the Company (the
"Purchase") pursuant to the Asset Purchase Agreement between the Company and
Cooper dated as of September 22, 1999 (the "Asset Purchase Agreement").
As part of our investment banking business, EMB&Co. regularly engages in the
valuation of private and publicly-traded companies and of the assets,
liabilities, and debt and equity securities thereof, in connection with mergers
and acquisitions, private placements and valuations for estate, corporate and
other purposes. We have been retained as a financial advisor to the Company and
will receive fees upon delivery of this Opinion and upon consummation of the
Purchase.
In arriving at our Opinion, we have taken into account such financial and other
factors as we considered relevant and performed such investigations and analyses
as we have deemed necessary and appropriate under the circumstances. Among other
things we have:
(i) reviewed the Asset Purchase Agreement and related ancillary documents;
(ii) reviewed the audited financial statements of the Company for the fiscal
years ended September 28, 1996, September 27, 1997 and October 3, 1998 and of
Cooper for the fiscal years ended October 31, 1996, 1997 and 1998; the interim
financial statements of the Company for the eleven-month period ended August 31,
1999 and of Cooper for the nine-month period ended July 31, 1999;
(iii) reviewed such internally prepared financial and operating information
(including financial projections) developed by the management of the Company as
we deemed relevant;
(iv) discussed the business and operations, assets, financial condition and
future prospects of the Company with the senior management of the Company;
(v) compared the Company from a financial point of view with certain other
publicly traded companies which we consider to be generally comparable to the
Company, and reviewed the historical performance of, and current market
conditions for, the common stock of the Company in relation to those of other
publicly held medical instrumentation and device companies which we considered
to be comparable;
(vi) considered the terms of the Purchase in light of the terms of certain
recent business combinations and asset purchase transactions involving companies
which we deemed comparable to the Purchase;
1.
<PAGE>
(vii) considered the future prospects of the Company with and without the
assets that Cooper proposes to purchase, and prepared discounted cash flow
analyses to compare the Consideration to the discounted present value of the
cash flows that the assets to be purchased could reasonably be expected to
generate in the hands of the Company;
(viii) participated in discussions and negotiations among representatives of the
Company and Cooper and their financial and legal advisors; and
(ix) performed such other investigations and analyses, and considered such
other factors, as we deemed appropriate and relevant.
In arriving at our Opinion, we have assumed and relied upon the accuracy and
completeness of the information that has been provided to us by the managers and
auditors of the Company or made available from public sources. We have not
attempted independently to verify any such information, nor have we conducted an
appraisal of the assets or liabilities of the Company, nor have we been given
any such appraisals. With respect to certain financial projections and
forecasts, we have assumed that they have been reasonably prepared on a basis
that reflects the best currently available estimates and judgments of the senior
managers of the Company.
This Opinion is based on economic, market and other conditions as they exist,
and can be evaluated, as of the date of this letter. Because subsequent
developments may affect this Opinion, we understand that you may ask that we
update, revise or reaffirm this Opinion at a later date. We do not hereby
express, nor will we subsequently express any opinion as to the price at which
the common stock of the Company may trade at any time in the future.
This Opinion is solely for the benefit of the Board of Directors of the Company
in connection with their evaluation of the Purchase, and it is not to be used
for any other purpose without our prior written consent, except that this
Opinion may be included in its entirety in any filing made by the Company or
Cooper with the Securities and Exchange Commission in respect of the Purchase.
This Opinion is not for the benefit of, nor shall it confer rights to, or
provide remedies for, any person other than the Directors of the Company.
Based upon and subject to the foregoing, it is our Opinion that, as of the date
hereof, the consideration to be paid to the Company in connection with the
Purchase is fair from a financial point of view.
Sincerely,
EWING MONROE BEMISS & CO.
By:__________________________________
Samuel M. Bemiss, III
Managing Director
2.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the Proxy
Statement dated October 8, 1999 of BEI Medical Systems Company, Inc. and to the
use of our reports dated November 13, 1998, with respect to the consolidated
financial statements and schedule of BEI Medical Systems Company, Inc. included
in its Annual Report on Form 10-K for the year ended October 3, 1998, filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
October 7, 1999
1.
<PAGE>
Proxy
BEI MEDICAL SYSTEMS COMPANY, INC.
Proxy Solicited By The Board Of Directors
For the Special Meeting of Stockholders
To be held November 11, 1999
The undersigned hereby appoints Charles Crocker and Thomas W. Fry, and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of BEI Medical Systems Company,
Inc., which the undersigned may be entitled to vote at the Special Meeting of
Stockholders of BEI Medical Systems, Inc. to be held at the Company's facility
located at 100 Hollister Road, Teterboro, New Jersey, on Thursday, November 11,
1999 at 9:00 a.m. (local time), and at any and all postponements, continuations
and adjournments thereof with all powers that the undersigned would possess if
personally present, upon and in respect of the following materials and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
THE UNDERSIGNED HEREBY DIRECTS AND AUTHORIZES SAID PROXIES, AND EACH OF
THEM, OR THEIR SUBSTITUTES, TO VOTE AS SPECIFIED BELOW WITH RESPECT TO THE
PROPOSAL LISTED IN THE PARAGRAPH ON THE REVERSE SIDE, OR IF NOT SPECIFICATION IS
MADE, TO VOTE IN FAVOR THEREFOR.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
The undersigned hereby acknowledges receipt of: (1) Notice of Special
Meeting of Stockholders of the Company, and (2) accompanying Proxy Statement.
(continued on reverse side)
<PAGE>
Please mark your votes as indicated in [X] this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
FOR AGAINST ABSTAIN
1. To approve the Asset Sale [_] [_] [_]
pursuant to the Asset
Purchase Agreement and
to approve and adopt the
Asset Purchase Agreement
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If signer is
a corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please sign in
partnership name by authorized person.
Dated: ______________________________________, 1999
___________________________________________________
___________________________________________________
Signature(s)
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE WHICH
IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
