UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 3, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17885
BEI MEDICAL SYSTEMS COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 71-0455756
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Hollister Road
Teterboro, New Jersey 07608
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(Address of principal executive offices) (Zip code)
(201) 727-4900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 10, 1998 was $10,981,502 (A). As
of December 10, 1998, 7,778,296 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on December 10, 1998
as reported on the Nasdaq National Market System. Excludes 1,921,495 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 10, 1998.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement with respect to its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 46
Item 3. Legal Proceedings............................................. 46
Item 4. Submission of Matters to a Vote of Security Holders........... 46
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................... 47
Item 6. Selected Financial Data....................................... 49
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 50
Item 7a. Qualitative and Quantitative Disclosures about Market Risks... 57
Item 8. Financial Statements and Supplementary Data................... 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 80
PART III
Item 10. Directors and Executive Officers
of the Registrant............................................. 81
Item 11. Executive Compensation........................................ 81
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 81
Item 13. Certain Relationships and Related Transactions................ 81
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................... 82
Signatures .............................................................. 86
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PART I
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words, "intend", "anticipate", "believe",
"estimate" and "expect" and similar expressions as they relate to the Company
are intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in Item 1, "Business" as well
as Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 1. BUSINESS
BEI Medical Systems Company, Inc. ("BEI Medical" or the "Company")
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 Medical has an existing base of systems and devices it currently
markets to gynecologists in over 5,000 hospitals, clinics and office-based
practices in the United States and in 45 other countries worldwide. The
Company's 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. The Company believes its
existing product lines serve as a platform from which it can develop and
introduce innovative products to provide gynecologists with a comprehensive
selection of technologically advanced systems and devices. Currently, BEI
Medical is focusing its development and commercialization efforts on three
systems, including: i.) the Hydro ThermAblator(R) ("HTA(R)") to treat
menorrhagia, or excessive uterine bleeding, ii.) bipolar electrosurgical therapy
systems to perform LLETZ procedures and treat uterine fibroids, and iii.) the
Corson Office Hysteroscopy System (TM) to provide advanced uterine visualization
capabilities. BEI Medical believes these new products complement existing
product lines and will allow the Company to leverage its established direct
sales force to market to both new and existing customers.
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 in 1998. 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
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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 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.
The Company believes it is well positioned to provide innovative systems
and devices used in minimally invasive procedures which may allow certain
gynecological procedures to be performed in an outpatient setting in a safe and
cost-effective manner.
Business Strategy
The Company's goal is to become a leading provider of 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 is on
the diagnosis and treatment of disorders and conditions of the cervix, uterus
and other aspects of the reproductive system and particularly to offer
alternatives to existing procedures for the treatment of abnormal bleeding and
uterine fibroids.
The key components of the Company's strategy are as follows:
Offer a Broad Gynecological Product Line. BEI Medical intends to continue
to offer a broad array of minimally invasive gynecological systems and devices
to its existing customer base of gynecologists in over 5,000 hospitals, clinics
and office-based practices in the United States and 45 other countries
worldwide. The Company plans to develop and expand its market share through
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internal development, licensing and acquisition of additional complementary
product lines.
Leverage Existing Base of Customer Relationships. The Company's sales force
can leverage its existing customer relationships by introducing newly developed
or acquired systems and devices that are complementary to the Company's existing
product lines. In addition, the Company intends to expand its base of customers
through the introduction of new products, such as the HTA system and bipolar
electrosurgical therapy systems for LLETZ treatment of abnormal cervical tissue
and for treatment of uterine fibroids.
Develop and Commercialize Innovative Technologies. BEI Medical intends to
continue to develop cost-effective, minimally invasive technologies that
complement its existing product lines and provide new market opportunities. The
Company is currently directing product development efforts at international
commercialization of its Hydro ThermAblator system and is conducting its United
States Food and Drug Administration ("FDA") Phase III clinical trials in the
United States. The HTA is intended to provide a minimally invasive alternative
treatment to hysterectomy and other procedures currently used to treat
menorrhagia, or excessive uterine bleeding.
Acquire and License Complementary Technologies. BEI Medical intends to
continue to expand its product line through selective business acquisitions and
licensing of complementary technologies. In 1997, the Company acquired rights to
distribute Gyne-Tech's colposcope and cryosurgery systems to diagnose and treat
conditions of the cervix. Also in 1997, the Company acquired exclusive rights
from Valley Forge Scientific Corporation to distribute specialized patented
bipolar electrosurgical therapy systems for LLETZ treatment of abnormal cervical
tissue and for treatment of uterine fibroids. The Company is also focused on
commercialization of the Corson Office Hysteroscopy System providing an advanced
uterine visualization system for gynecologists. The Company licensed exclusive
manufacturing and marketing rights to that product in 1996.
Expand Global Sales and Marketing. The Company plans 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.
Within the past year the Company has broadened its sales force in the United
States by adding 61 independent field sales representatives to complement its 12
person inside sales force. BEI Medical plans to penetrate international markets
further through expansion of its network of distributors. In addition, the
Company intends to sponsor or participate in clinically based seminars conducted
by the Company's clinical investigators to familiarize practitioners with
innovative systems and devices, such as the HTA and the bipolar electrosurgical
therapy system, and to teach their uses. The Company also plans to continue to
support its sales and marketing efforts through participation in trade shows,
both nationally and regionally and through periodic distribution of a specialty
direct mail catalogue.
Expand Key Relationships with Leading Clinicians. BEI Medical has developed
working relationships with key clinicians regarding the evaluation and use of
innovative products and procedures that address gynecological conditions. The
Company has formed a Scientific Advisory Board consisting of leading
practitioners, which consults on the refinement of existing lines, on the
development of new products, on the evaluation of new technologies and
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treatment approaches, and on changes in healthcare reimbursement policies and
practices.
Existing Base of Products
The Company currently manufactures and markets 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
markets over 500 products to an existing base of gynecologists in over 5,000
hospitals, clinics and office-based practices in the United States and to
distributors in 45 other countries worldwide.
Management believes the Company has demonstrated core competencies in
developing the technologies necessary to manufacture a variety of products used
in gynecological procedures, including visualization, energy delivery, gas
pressure/flow control, fluid delivery, microprocessor-controlled systems,
catheter technology and surgical instrumentation/fabrication. BEI Medical
intends to leverage these competencies, as well as its existing base of
customers, to continue to develop and market new products in the field of
gynecology.
The Company believes that by providing a broad array of systems and
devices, it will continue to differentiate itself to its customers from single
product or narrow product offering suppliers. The Company currently sells a line
of specialty instruments, procedure kits, disposables and equipment for
gynecologists, as outlined in the following table.
- --------------------------------------------------------------------------------
Clinical Target Key Products
- --------------------------------------------------------------------------------
Cervix o Bi-Safe I(TM) bipolar electrosurgical generator and
bipolar LLETZ electrode system, for removal of abnormal
tissue from the cervix*
o Colposcopy instruments, including biopsy forceps and
specula
o Gyne-Tech (TM) colposcopes systems, for tissue
destruction
o Gyne-Tech cryosurgical systems, for tissue destruction
o OS Finder(TM) dilator, for cervical canal access
o Plus II(TM) monopolar generator and monopolar LLETZ
Plus(TM) electrodes, for removal of abnormal tissue
from the cervix
- --------------------------------------------------------------------------------
Uterus o Corson Office Hysteroscopy System, with ancillary
instruments, for examination and therapy of the inner
surface of the uterus
o Hydro ThermAblator, for treatment of excessive
menstrual bleeding**
o Hysteroscopic Insufflator, for precise control of
uterine distension*
o Z-Sampler(TM) endometrial suction curette, for tissue
sampling to detect carcinoma or precancerous
conditions*
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Clinical Target Key Products
- --------------------------------------------------------------------------------
Infertility o Corson Office Hysteroscopy System, with ancillary
Diagnosis instruments, for examination and therapy of the inner
surface of the uterus
o Hysteroscopic Insufflator, for precise control of
uterine distension
o Laparoscopic Insufflator, with high flow capability to
maintain proper peritoneal cavity distension*
o OS Finder dilator, for cervical canal access
o SHG catheter, for distension during sonohysterography
o Z-Sampler endometrial suction curette, for endometerial
dating and to monitor hormonal therapy effects*
o ZUI(TM) uterine injector, for hysterosalpingography
o ZUMI(TM) uterine manipulator/injector, for manipulation
of the uterus and injection of contrast media*
- --------------------------------------------------------------------------------
Oncological o Endo-Sock(TM)/Mega Pouch, for laparoscopic tissue
Surgery and removal*
Pelvic
Reconstruction o Laparoscopic Insufflator, with high flow capability to
maintain proper peritoneal cavity distension*
o MIYA Hook(TM), for pelvic suspension surgery
o Nichols-Veronikis Ligature Carrier, for pelvic
suspension surgery*
o Soderstrom LAVH Manipulator(TM), for laparoscopically
assisted hysterectomy
o Z-Clamps(TM) & Z-Scissors(TM), specially designed
instruments for hysterectomy
- --------------------------------------------------------------------------------
* Proprietary technologies for which the Company or the manufacturer owns or
licenses patents. See "Risk Factors -- Reliance on Patents and Protection
of Proprietary Technology"
** Not available in the United States
New Products and Technologies
The Company intends to develop, license and acquire new complementary
technologies that it plans to phase into future product offerings. The Company
has focused its recent efforts on the development and commercialization of the
following systems:
o The patented Hydro ThermAblator system for treatment of menorrhagia,
or excessive uterine bleeding.
o Specialized proprietary bipolar electrosurgical therapy systems used
for LLETZ treatment of abnormal cervical tissue and for treatment of
uterine fibroids.
o The Corson Office Hysteroscopy System for improved uterine
visualization.
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o These new products and their potential are more fully discussed below.
See "Risk Factors -- Uncertainty of Market Acceptance."
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 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 women'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.
The Hydro ThermAblator or HTA
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
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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 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.
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
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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). Two such devices, the ThermaChoice balloon from Gynecare (a
subsidiary of Johnson & Johnson) and the VestaBlate from Valleylab, (a
subsidiary of U. S. Surgical/Tyco) have recently received permission from the
FDA to market 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 effect of treatment, because they do not include hysteroscopic
capability. Recently 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.
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<TABLE>
<CAPTION>
Comparison of Endometrial Ablation Technologies
- -----------------------------------------------------------------------------------------------------------------------
Compatibility
With Varying
Method of Uterine Size & Pressurization of
Device Technology Introduction Location of Energy Source Shape the Uterine Cavity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balloon containing heated Blind insertion Heater inside balloon, inside Low High,
fluid uterus 150+ mmHg
- -----------------------------------------------------------------------------------------------------------------------
Balloon with conductive Blind insertion External electrosurgical Low High,
electrodes generator, electrodes inside 150+ mmHg
uterus
- -----------------------------------------------------------------------------------------------------------------------
Microwave probe Blind insertion External microwave generator, Low Not applicable
applicator inside uterus
- -----------------------------------------------------------------------------------------------------------------------
Cryogenic probe Blind insertion External unit, probe inside Low Not applicable
uterus
- -----------------------------------------------------------------------------------------------------------------------
Conductive mesh electrode Blind insertion External electrosurgical Low Vacuum
generator, electrode inside
uterus
- -----------------------------------------------------------------------------------------------------------------------
Free fluid circulation Blind insertion Heater inside probe, inside High Low,
probe uterus < 50 mmHg
- -----------------------------------------------------------------------------------------------------------------------
Free fluid circulation Insertion with External Heater, circulation to High Low,
hysteroscope visual control, uterus < 50 mmHg
connected to
Hydro ThermAblator video monitor
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Hydro ThermAblator Solution
The Company has developed the patented Hydro ThermAblator (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:
o Integral hysteroscope provides visual confirmation of uterine anatomy
and instrument position, as well as continuous observation of
treatment effect.
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o Variation in uterine size and shape are easily accommodated by freely
circulating heated saline.
o Freely circulating heated saline allows even and complete treatment of
the entire endometrium.
o Low pressurization of the uterine cavity reduces risk and patient
discomfort.
o Does not require extensive training prior to use.
o Clinical outcome is not dependent on user experience or variation in
technique.
o 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 Medical 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
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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.
Results of Clinical Trials
The Company completed FDA required Phase I clinical trials with 20 patients
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 Medical has
initiated its Phase III clinical trials at 11 sites and will treat 276 patients
suffering from menorrhagia, or excessive uterine bleeding. The study will
compare 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 anticipates completing the treatment phase of the
clinical trials in early 1999. Data from examinations one year following
treatment is required for approval of its premarket approval ("PMA")
application, but the Company will begin submitting six-month data to the FDA
when it becomes available. 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. On this basis, deliveries have been made in
Belgium, Brazil, France, Hong Kong, Israel, Italy, Germany, New Zealand,
Portugal, Spain, Switzerland, and in the United Kingdom. Recently, regulatory
authorities in Australia and in Canada have granted permission for the sale of
the HTA system. Over 340 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 18 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."
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Rights Granted Johnson & Johnson Development Corporation
In connection with a $1.5 million equity investment in the Company 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 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.
Bipolar Electrosurgical Therapy System
In July 1997 the Company licensed the rights to market proprietary bipolar
electrosurgical therapy systems to perform LLETZ procedures to treat abnormal
cervical tissue and to treat uterine fibroids. The Company markets and
distributes new, proprietary bipolar electrosurgical therapy systems which
eliminate the risk of alternate site burns associated with currently available
monopolar electrosurgical systems because energy travels only through the tissue
joining the two small active electrodes at the treatment site. The bipolar
electrosurgical therapy systems were introduced to the United States market at
the American College of Obstetricians and Gynecologists (ACOG) annual meeting in
May 1998.
LLETZ Procedures
More than 50 million PAP tests are performed annually in the United States,
of which approximately 5-7% are interpreted as abnormal. These patients are
candidates for further diagnosis, which often takes the form of magnified
examination of the suspicious tissue utilizing a colposcope. When abnormal
tissue is recognized during a colposcopic examination, the gynecologist can
perform electrosurgical excision of lesions from the cervix, a procedure known
as LLETZ (Large Loop Excision of the Transformation Zone). Since 1990, the LLETZ
procedure has become a standard approach to care in the clinical office practice
of most gynecologists. These LLETZ procedures have been done using monopolar
electrosurgical systems. The use of monopolar electrosurgical systems requires
the use of an external return electrode and the use of insulated ancillary
instruments. Electrosurgical energy in a monopolar system flows along a random
pathway from the point of contact of the active electrode, through the patient's
body, seeking the external return electrode. Alternative ground pathways in
contact with the patient's body present a risk
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of alternate site burns as the electrosurgical energy exits the patient's body
at a point other than the external return electrode.
The use of the bipolar LLETZ system removes the requirement for the use of
insulated ancillary instruments and can reduce the overall cost of the
disposable components required for treatment through the use of a proprietary
design bipolar electrode and the elimination of the requirement for a patient
return electrode.
The following are advantages of BEI Medical's bipolar electrosurgical
therapy systems when employed for LLETZ treatment:
o Patented electrode design provides precise area of electrosurgical
effect.
o Reduces overall cost of disposable components through elimination of
items required for monopolar treatments.
o Eliminates risk of alternate site burns associated with monopolar
technology.
o Eliminates need for insulated ancillary instruments.
Fibroid Treatments
During the course of their lives, it is estimated that as many as 50% of
all women will develop uterine fibroids (benign tumors, also known as myomas).
Uterine fibroids can cause an enlargement of the uterus that puts pressure on
the bladder, resulting in frequency of urination or incontinence; if the fibroid
grows towards the back, pressure can cause lower back pain, discomfort with
activity or intercourse, or constipation. A fibroid may cause sterility if it
blocks the fallopian tube. It may also interfere with fetal growth, and may
cause difficult childbirth. Fibroid growth is stimulated by estrogen, and
hormonal drug therapies exist which can be used to shrink fibroids on a
short-term basis only. These drugs, which block the production of estrogen by
the ovaries, do not offer a long-term solution since side effects mimic
menopause. Although the majority of women with fibroids may never have symptoms
that require treatment, it is estimated that 30% of the 600,000 hysterectomies
performed annually in the United States are the choice of last resort for
symptomatic fibroids.
Fibroids can grow either subserosally (near the outer surface of the
uterus) or submucousally (inside the uterus). Symptomatic subserosal fibroids
are often treated by hysterectomy, but can also be surgically removed through a
myomectomy, thus leaving the uterus intact. Myomectomies require a similar
surgical approach as an abdominal hysterectomy and can expose the patient to
significant risk. When the fibroid is excised during a myomectomy, there is a
risk of hemorrhage due to the vascularity of the uterus wall and the uterine
wall requires repair with sutures to regain its structural integrity. Recently a
laparoscopic technique has been introduced to remove subserosal fibroids which
requires the surgeon to puncture the uterine wall and cut the fibroid into small
pieces with a mechanized device. This procedure is highly skill dependent and
can result in adhesion (scar tissue) formation between the uterine wall and
adjacent organs.
BEI Medical's BiSafe(R) bipolar electrosurgical therapy system includes
specially designed laparoscopic needle electrodes for a treatment of fibroids,
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known as myolysis. Utilizing laparoscopic visualization, the surgeon introduces
the bipolar needle electrode, retracted into its protective sleeve, through a
small puncture in the abdominal wall. The electrodes are advanced and introduced
into the fibroid tissue, and bipolar electrosurgical energy desiccates the
fibroid and destroys its blood supply. This procedure can be repeated if there
are multiple fibroids. In the weeks following the treatment, the fibroid(s)
shrink in size, relieving the symptoms caused by the original growth of the
fibroid(s), avoiding the need for complete surgical removal. The Company plans
to introduce the laparoscopic portion of the BiSafe system to the market in
calendar year 1999.
The gynecologist can treat submucousal fibroids using a hysteroscopic
resectoscope, an instrument adapted from urology, to electrosurgically shave
away fragments of the fibroid. This technique requires significant distension of
the uterus to create working space with the risk of excessive absorption of
non-conductive (salt free) fluid into the vessels of the uterus due to the
high-pressures (100-150 mmHg). When significant amounts of this non-physiologic
fluid is absorbed, 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. This technique requires precise control of the depth of thermal
destruction caused by the monopolar electrosurgical energy used to cut and
coagulate. While this surgical technique offers advantages over traditional
hysterectomy, clinical results are extremely dependent on the skill and
experience of the surgeon.
BEI Medical's BiSafe bipolar electrosurgical therapy system to treat
submucousal fibroids is being expanded to include: i.) specially designed
bipolar needle electrodes to shrink fibroids and ii.) specially designed
resectoscope electrodes to allow the gynecologist to shave away fragments of a
fibroid without the major risks of traditional systems. Much of the risk of
excessive absorption of non-conductive fluid associated with the use of existing
monopolar resectoscope systems is eliminated, since the patented bipolar system
will allow use of physiologically compatible fluids to distend the uterine
cavity. The Company intends to introduce the hysteroscopic portion of the BiSafe
system in late calendar year 1999.
The following are advantages of BEI Medical's bipolar electrosurgical
therapy systems when employed for subserosal and submucousal fibroid treatment:
o Minimally invasive techniques to avoid hysterectomy and surgical
myomectomy.
o Potential to preserve reproductive function by saving the uterus.
o Bipolar hysteroscopic electrodes minimize risk of fluid overload
through use of saline.
o Bipolar electrosurgical technology eliminates damage to adjacent
organs caused by random pathway monopolar current.
o Eliminate risk of alternate site burns associated with monopolar
technology.
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The Corson Office Hysteroscopy System
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 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.
The Company has obtained an exclusive license to manufacture and market the
Corson Office Hysteroscopy System, developed in conjunction with Stephen Corson,
M.D., a recognized authority on and teacher of hysteroscopic techniques, and is
currently marketing the product. This system is designed around a specially
developed telescope that has a smaller diameter (3mm) and is equipped with an
optical system that provides a wider field of view than other hysteroscopic
telescopes. This optical system allows panoramic viewing of the uterine cavity
without significant maneuvering of the telescope, thus eliminating the principal
source of patient discomfort. The system also features a patented hysteroscopic
CO2 insufflator that allows precise control of distension of the uterine cavity
for diagnostic procedures without the need for fluid management systems.
The Company believes that the Corson Office Hysteroscopy System offers a
distinct advantage compared to traditional hysteroscopy systems by incorporating
the following features:
o Reduced outer diameter allows for use with patient comfort.
o Panoramic viewing without uncomfortable instrument manipulation.
o Option of CO2 gas or continuous flow liquid for distension of the
uterus.
o Modular design to minimize initial investment, allowing future
expansion of capabilities.
o Both diagnostic and therapeutic capabilities.
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o Instrumentation for biopsy, cutting and grasping.
o Specifically designed for office use with a favorable cost/benefit
ratio.
Sales and Marketing
The Company's sales and marketing strategy is 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.
BEI Medical's domestic distribution network includes approximately 12 inside
sales personnel and two field managers in addition to 17 independent
manufacturers' representative organizations, employing approximately 61 field
representatives to market its products directly to gynecologists in hospitals,
surgical centers and office based practices. BEI Medical's independent
manufacturer's representative organizations generally consist of experienced
sales professionals with industry-specific knowledge. They also represent
manufacturers of other medical products that are complementary with the
Company's products and work on a straight commission basis.
The Company's direct sales force can leverage its existing customer
relationships by introducing newly developed, acquired or licensed systems and
devices which are complementary to the Company's current product lines. In
addition, through the introduction of new products that enhance the
gynecologist's practice, such as the HTA, the bipolar electrosurgical therapy
systems, and the Corson Office Hysteroscopy System, management intends to expand
the Company's base of customers for both existing and new products.
The Company plans to further penetrate international markets through
expansion of its network of country-specific distributors. Internationally, BEI
Medical sells its products through distributors in 45 countries and distributors
in 14 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 will need to establish additional international
distribution relationships in order to sell its products in those markets.
Additionally, the Company offers 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 revenues. Also, a variety of products
are manufactured by BEI Medical 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. In fiscal 1998, revenue of
gastrointestinal endoscopy products and OEM revenue were 9.7% and 9.9% of BEI
Medical'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
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third party vendor's ability to supply the Company, which in turn could have a
material adverse impact on the Company.
BEI Medical 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 participate in and sponsor postgraduate courses on the
diagnosis and treatment of cervical conditions to support the marketing of
products such as the Gyne-Tech colposcopes and the Bipolar LLETZ system.
Sponsorship will be provided 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 Hydro ThermAblator.
Internationally, BEI Medical 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.
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
Medical believes that its products compete primarily on the basis of price,
design, performance, reliability, delivery service and support.
The principal competitors for the Company's core gynecology products
include Circon Corporation, CooperSurgical, Inc., a subsidiary of The Cooper
Companies, Inc., Karl Storz GmbH, Leisegang Medical, Inc., a subsidiary of
Galileo Corporation, Olympus Corp., Utah Medical Products, Inc., Wallach
Surgical Devices, Inc., and Richard Wolf Medical Instruments Corp. The principal
competitors for the Company's Hydro ThermAblator and the bipolar electrosurgical
therapy system include FemRx, Inc., a subsidiary of Ethicon, Inc./Johnson &
Johnson, 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), Valleylab, Inc., a subsidiary of U.S.
Surgical/Tyco (whose VestaBlate balloon, a device for endometrial ablation, has
been cleared by the FDA to be marketed in the United States) and Wallsten
Medical SA.
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 Medical.
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
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continue to attract and retain highly qualified personnel, to obtain the
required regulatory approvals, and to continue to manufacture and successfully
market high quality products. See "Risk Factors -- Competition; Uncertainty of
Technology Change."
Manufacturing
BEI Medical's manufacturing operations consist primarily of the manufacture
and assembly of electromechanical equipment such as the Hydro ThermAblator,
electrosurgery generators, endoscope illuminators, endoscopes and electronic
insufflators. 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. See "Risk Factors --Dependence
on Third Party Vendors."
BEI Medical 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 the third quarter of fiscal 1998, the Company consolidated its
manufacturing, distribution and administrative activities located in Hackensack,
New Jersey and Chatsworth, California into a single 24,400 square foot facility
located in Teterboro, New Jersey. The Company believes the consolidation will
reduce operating costs due to the elimination of redundant operations and
provide additional space to accommodate future growth. Additionally, engineering
efforts are underway to reduce the cost of the disposable HTA procedure kit as
volume increases by streamlining production methods and eliminating or replacing
higher cost methods and materials.
In order to commercialize the HTA successfully, BEI Medical 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. See "Risk Factors -- Scale Up Risk."
During fiscal 1996, BEI Medical'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
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October 1998. The audit report did not include any negative observations or
identify any areas of noncompliance. Additionally, the Company's facilities and
documentation procedures for the manufacture of medical devices are required to
conform to the 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
BEI Medical intends to develop and expand its market share through internal
development, licensing and acquisition of additional product lines. 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. The Company anticipates
that the vast majority of current 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. Product concepts, internally or externally
originated, are developed into commercially viable systems and devices by
relying on core competencies. The Company's areas of core competency include
visualization, gas pressure/flow control, fluid delivery, energy delivery,
microprocessor systems, catheter technology and surgical
instrumentation/fabrication. For instance, development of the HTA system from
the Goldrath patent required application of visualization technology to allow
the gynecologist to monitor the process, precise control of fluid pressure and
energy delivery to perform the ablation and microprocessor control of complex
heating and safety systems. Additionally, the Company continues development
efforts to improve and enhance its disposable and instrument product lines for
both outpatient and office applications. Through strategic alliances, the
Company also continues to develop new applications related to fibroid resection
for its bipolar electrosurgical generators. The Company also works with several
OEM customers for the adaptation of its proprietary technology to various
private label requirements.
BEI Medical has developed working relationships with key clinicians on the
evaluation and use of innovative products and procedures that address
gynecological conditions. The Company has formed a Scientific Advisory Board
consisting of leading practitioners, which consults on the refinement of
existing lines, on new product development, on evaluation of new technologies
and treatment approaches, and on changes in healthcare reimbursement policies
and practices.
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.
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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 is 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 3, 1998, the Company had a portfolio including 16 United
States patents and one allowed United States patent, in addition to certain
issued foreign patents. Among the 16 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
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 James H. Harris, M.D. This patent was issued in 1984 and is
expected to expire in 2001. This ZUMI product line accounts for a significant
percentage of the Company's disposable instrument revenues.
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. This
patented bipolar technology is applicable to LLETZ procedures. Patents cover the
bipolar generator product and the loop electrode product for LLETZ, each of
which are owned by Valley Forge. Nothing in this agreement constitutes a
transfer to BEI of any of the patents, intellectual property rights, trade
secrets or know-how of Valley Forge relating to the Valley Forge products or a
license for BEI to use such patents, intellectual property rights, trade secrets
or know-how. The remaining term of the agreement is 57 months subject to
negotiating annual minimum requirements after the first fifteen-month period,
for subsequent twelve-month periods.
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.
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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.
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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 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
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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.
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 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
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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. See "Risk Factors -- Government
Regulation."
Employees
As of October 3, 1998, BEI Medical had 73 full-time employees, including 11
in research, development and engineering, 24 in marketing and sales, 27 in
operations and 11 in administration. There are no unions representing the
Company's employees. The Company believes that its relations with its employees
are good.
Risk Factors
Limited Operating History; History of Losses and Possible Future Losses;
Fluctuations in Operating Results
The Company has a limited medical device operating history upon which an
evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by entrants
into the medical device industry, which is characterized by an increasing number
of participants, intense competition and a high failure rate. Historically, BEI
Medical has incurred significant losses in its medical device business and
expects losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in funding
clinical trials in support of regulatory and reimbursement approvals, expansion
of marketing and sales activities and
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research and development. BEI Medical's future revenues will depend upon, among
other factors, its ability to cost-effectively commercialize the Hydro
ThermAblator (HTA) and any other of the Company's new products, such as its
hysteroscopy system and its bipolar electrosurgical therapy system. There can be
no assurance that the HTA or such other new products will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales of such products. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
In the event the Company is unable to achieve profitability or secure additional
sources of capital, its ability to continue as a going concern may be severely
impaired. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- New Products and Technologies."
The Company expects that its operating results will fluctuate significantly
from quarter to quarter in the future and will depend on a number of factors,
many of which are outside the Company's control. These factors include actions
relating to regulatory and reimbursement matters, the extent to which the
Company's products gain market acceptance, the timing and size of international
distributor purchases and the timing of product approvals. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Future Capital Needs
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, 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 severely 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Government Regulation
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and, in some instances, by foreign
and state governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, as
amended (the "FDC Act"), and the regulations promulgated thereunder, the FDA
regulates the preclinical testing, manufacture, labeling, sale,
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distribution, and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier PMA
application process. Noncompliance with applicable requirements, including FDA's
QSR can result in, among other things, warning letters, fines, injunctions,
civil penalties, public notifications, recall or seizure of products, total or
partial suspension of product revenues, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA has the authority to require
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
The process of complying with FDA regulations with respect to new and
existing products can be costly and time-consuming. FDA requirements for the
Company's HTA require obtaining FDA premarket approval. The first stage of the
PMA process is submission of an application for an IDE. The IDE permits clinical
evaluations of products on human subjects under controlled experimental
conditions by designated qualified medical institutions. The Company is
conducting clinical trials of the HTA pursuant to a phased IDE that has been
approved by the FDA. The Company completed a Phase I safety feasibility study of
the HTA in April 1996 and in June 1998 completed a Phase II feasibility study
limited to twenty patients. The Company has also obtained FDA conditional
approval for Phase III trials and is currently enrolling and treating patients.
The Company is required to conduct a full-scale Phase III safety and efficacy
study to obtain data necessary to support the submission of a PMA application.
There can be no assurance that any data obtained from the Phase III study will
support the safety and effectiveness of the HTA.
The second stage of the PMA process is the PMA application, which is a
comprehensive report of all data and information obtained by the applicant
throughout the product's development and testing. The PMA includes reports of
prior inventions, QSR information, the results of bench testing of the device
and other data and information including the results of the IDE clinical
studies. The FDA will issue a PMA if it finds that the safety and effectiveness
of the product have been sufficiently demonstrated and that the product complies
with all applicable regulations and standards. After reviewing the PMA
application, the FDA may require further clinical evaluation of the product,
terminate the clinical studies, issue a PMA, or require additional patient
follow-up for an indefinite period of time. Approval of the Company's PMA
application for its HTA will depend on a wide variety of factors, many of which
are outside the Company's control. There can be no assurance that the Company
will reach a stage of development at which filing a PMA application will be
appropriate, nor that it will be successful in obtaining a PMA for the HTA in a
timely manner, or at all, which is necessary to market the Company's HTA
commercially in the United States. Delays in obtaining marketing approvals and
clearances in the United States, or recalls related to the Company's other
products, could have material adverse effects on the Company and its operations.
Although the Company has been successfully inspected with respect to its former
facilities for compliance of its operations with the QSR, final approval of the
HTA will require an inspection by the FDA to determine whether the Company's
operations at its new facilities conform with the FDA's current QSR. Even after
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, to
29
<PAGE>
its labeling or to its manufacturing process that affects the safety or
effectiveness of the device.
Until the Company receives a PMA for the HTA, the Company will be subject
to FDA-imposed limitations on the number of HTA procedures that may be performed
in the United States, as well as the number and location of clinical sites at
which procedures may be performed. As the Company approaches these limitations,
it will be required to apply to the FDA for approval of additional procedures,
but there can be no assurance that such approval will be received on a timely
basis, if at all. Should it reach the limits authorized by the FDA, the Company
would be unable to conduct additional HTA procedures in the United States until
such time as a PMA is approved, if at all, or until such time as approval for
additional clinical procedures is obtained. The timing of the PMA review process
is unpredictable, and the failure to obtain the necessary approval on a timely
basis would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company manufactures and markets a number of general gynecological and
surgical devices for which 510(k) clearances have been obtained. Any
modifications to the Company's currently marketed devices that could
significantly affect their safety or efficacy or that would constitute a major
change to the intended use will require new 510(k) submissions. There can be no
assurance that Company can obtain such 510(k) clearances in a timely fashion, or
at all. Delays in modifications resulting from the 510(k)-clearance process
could materially adversely effect the Company. In addition, the Company has made
modifications to its 510(k) cleared devices that the Company believes do not
require new 510(k) notices based upon an FDA guidance document intended to
assist the companies in performing the analysis of whether a new 510(k)
submission is required. There can be no assurance, however, that the FDA would
agree with any of the Company's determinations not to submit a new 510(k) notice
for any of the changes made to the device. If the FDA requires the Company to
submit a new 510(k) notice for any device modification, the Company may be
prohibited from marketing the modified device until the 510(k) notice is cleared
by the FDA.
In addition, the Company manufactures and markets products, including ZSI
gynecological products and Meditron medical devices, the rights to which it
obtained through the acquisition of other medical device companies. There can be
no assurance that the acquired companies were in compliance with applicable FDA
regulations at the time they were acquired and that any noncompliance on the
part of the acquired companies would not have regulatory consequences for the
Company. Noncompliance on the part of the acquired companies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is subject to certain FDA regulations governing defective
products and complaints about its products. The Company's products are subject
to recall at any time by the FDA or the Company if it appears that use of the
products could result in, among other things, unwarranted health risks. The FDA
has authority to inspect the Company's facilities to ensure compliance with the
FDC Act and regulations thereunder. Failure to comply with these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The Company distributes products manufactured by third party vendors, such
as the bipolar electrosurgical systems provided by Valley Forge and the
colposcope and cryosurgical systems provided by Gyne-Tech Instrument Corporation
("Gyne-Tech"), 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 Company.
The FDA regulates the export of medical devices that have not been approved
or cleared for marketing in the United States. The Company expects to export
products directly to the European Union under the provisions of the FDA Export
Reform and Enhancement Act of 1996. In certain instances, however, the Company
may need to apply for export approval from the FDA. There can be no assurance
that required approvals will be granted.
Developments such as the enactment of the Safe Medical Devices Act of 1990
and increased enforcement actions reflect a trend toward more stringent product
regulation by the FDA. One result is an increase in the typical time elapsed
between the filing of an application and the receipt of FDA clearance or
approval of commercial release of a medical device. In addition, the FDA often
requires clinical data with such applications, which can increase the cost of
obtaining such clearance to market. Furthermore, rigorous regulatory action may
be taken in response to deficiencies noted in inspections or to any product
performance problems.
The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions 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.
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.
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative healthcare delivery and payment systems. Legislative debate is
expected to continue in the future, and the Company cannot predict what impact
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the adoption of any federal or state healthcare reform measure or future private
sector reform may have on its business.
Medical device laws are also in effect in many countries outside the United
States in which the Company does business. These range from comprehensive device
approval requirements to requests for product data or certifications. The number
and scope of these requirements are increasing. This trend toward increasing
product regulation is evident in the European Union, where efforts are under way
to harmonize the regulatory systems. In January 1995, the MDD was fully
implemented in the European Union, which is intended to make regulatory
requirements of European Union countries more consistent. The time required to
obtain approvals required by foreign countries may be longer or shorter than
that required for FDA approval and requirements for licensing may differ from
FDA requirements. 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 and the European Free Trade Association,
the Company is required to file for a CE Mark approval. Although the Company has
obtained a CE Mark for most of its products, including the HTA, which allows the
Company to commence marketing of these products in countries that are members of
the European Union and the European Free Trade Association, subject to limited
regulations in certain countries, there can be no assurance that the Company
will be successful in obtaining CE Mark approval for any other products on a
timely basis if at all, and any failure to receive or delay in receiving could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Government Regulation."
Risks Related to Possible Acquisitions
The Company may seek to expand its operations through future acquisitions
of other complementary businesses or product lines. There can be no assurance
that the Company will be able to identify or acquire additional businesses, or
to successfully integrate and profitably manage acquired businesses. In
addition, increased competition for acquisition candidates may develop, in which
event there may be fewer acquisition opportunities available to BEI Medical as
well as higher acquisition prices. Further, acquisitions involve a number of
special risks, including possible adverse effects on the Company's operating
results, diversion of management's attention, risks related to having adequate
corporate and financial controls and procedures to manage and monitor the
Company's operations as they expand, risks associated with unanticipated events
or liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly in the fiscal quarters
immediately following the consummation of such transactions. There also can be
no assurance that businesses acquired in the future will achieve anticipated
revenues and earnings. In addition, margins may be negatively impacted to the
extent that margins on acquired product lines are lower than BEI Medical's
average margins. There can be no assurance that acquisitions can be consummated
on acceptable terms, that any acquired businesses can be integrated successfully
into the Company's operations, or that any such acquisitions will not have a
material adverse
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effect on BEI Medical's business, financial condition and results of operations.
Uncertainty of Market Acceptance
The Company's success is dependent upon acceptance by the medical community
of the HTA and, to a lesser extent, other new products introduced by the Company
as reliable, safe and cost-effective treatments for the medical conditions they
are intended to treat. There can be no assurance that the HTA or such other
products will gain any significant degree of market acceptance among physicians,
patients and healthcare payors, even if the necessary international and United
States regulatory approvals are obtained. BEI Medical believes that
recommendations and endorsements by physicians will be essential for market
acceptance of the HTA and such other products, and there can be no assurance
that any such recommendations or endorsements will be obtained. The Company
believes that physicians will not use the HTA unless they determine, based on
clinical data and other factors, that the HTA is an attractive treatment
alternative for excessive menstrual bleeding and offers clinical utility in a
cost-effective manner. Although the Company believes that physicians will not
require extensive training prior to using the HTA, acceptance among physicians
will depend upon the Company's ability to train potential users of the HTA in
interventional techniques, and the willingness of such users to learn these new
techniques. Failure of BEI Medical to achieve significant market acceptance of
the HTA and other new products introduced by the Company would have a material
adverse effect on the Company's business, financial condition and results of
operations. Any future products developed by the Company that gain regulatory
approval will have to compete for market acceptance and market share. The timing
of market introduction of competitive products could adversely affect the
competitiveness of the Company's products. Accordingly, the relative speed with
which the Company can develop new products, complete clinical testing and the
regulatory approval process and supply commercial quantities of the product to
the market are expected to be important competitive factors. The Company expects
that competition in the gynecological device market will be based on many
factors, including clinical outcomes, ease of use, relative efficacy, safety,
product reliability, physician familiarity with the device, third-party
reimbursement policies, patent protection, sales and marketing capability,
reputation and price. There can be no assurance that FDA approval will be
obtained for the Company's products, that competitors will not introduce new
products with similar or more advanced features or that the market will accept
the Company's products. See "Business -- New Products and Technologies."
Scale-Up Risk
In order to commercialize the HTA successfully, BEI Medical must
manufacture or assemble the HTA by itself or through third parties in accordance
with FDA requirements in commercial quantities, at high quality levels and at
commercially reasonable costs. The Company has no experience in manufacturing
and assembling the HTA in commercial quantities. The Company has not yet
produced the HTA in commercial quantities at commercially reasonable costs, and
there can be no assurance that it will be able to do so. As a result, there can
be no assurance that BEI Medical will not encounter difficulties in scaling up
its manufacturing capabilities, including problems involving production yields,
quality control, component supply and shortages of qualified manufacturing
personnel. Failure of the Company to produce the
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HTA in commercial quantities at high quality levels and at commercially
reasonable prices would have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Direct Sales Experience
The Company has only limited experience in direct field sales and marketing
of the HTA and other products both domestically and internationally. BEI Medical
recently established a direct domestic field sales force of independent
manufacturers' representatives to market and sell the HTA (if approved by the
FDA) and other products. The Company has no direct international field sales
force, and has only a limited number of partnership relationships with
international distributors to market the HTA and other products. There can be no
assurance that the Company will be successful in establishing additional
partnership relationships on commercially reasonable terms, if at all. Achieving
market acceptance for the HTA and other products will require BEI Medical to
establish additional marketing and direct sales capability sufficient to support
sales in commercial quantities. Establishing such capability will require
significant resources and there can be no assurance that the Company will be
able to recruit and retain additional qualified marketing personnel or direct
sales personnel or that future sales efforts of the Company will be successful.
The failure to establish and maintain an effective distribution channel for the
HTA and other products or to establish and retain qualified and effective sales
personnel to support commercial sales of the Company's HTA and other products
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with International Sales
The Company markets and sells its products internationally through a
network of distributors. The Company's international sales are dependent upon
the marketing efforts of, and sales by, these distributors. BEI Medical may also
rely on these distributors to assist it in obtaining reimbursement approvals
from both government and private insurers in certain international markets. In
general, the Company has chosen to operate through small distribution firms
because of its belief that these firms will devote greater attention to the
Company's products. The use of small distributors increases the risks associated
with financial instability of distributors, which includes the risk that
distributors will cease operations or will be unable to satisfy financial
obligations to the Company. If a distributor were to fail to invest adequate
capital promoting the Company's products or were to cease operation, the Company
would likely be unable to achieve significant revenues in the territory. In
addition, because the Company has only recently commenced international sales,
it has only limited sell-through experience with many of its distributors. BEI
Medical also does not currently have distributors in a number of significant
international markets that it has targeted and will need to establish additional
international distribution relationships. There can be no assurance that the
Company will engage qualified distributors on commercially reasonable terms in a
timely manner. The failure to engage such distributors or the failure of such
distributors to achieve significant revenues from sales of the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
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A number of other risks are inherent in international operations and
transactions. International revenues and operations may be limited or disrupted
by the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in managing
international operations and fluctuations in foreign currency exchange rates.
There can be no assurance that the Company will be able to successfully
commercialize any of its existing or future products in any international
market. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Reliance on Patents and Protection of Proprietary Technology
BEI Medical's ability to compete effectively will depend substantially on
its ability to develop and maintain the proprietary aspects of its technology.
There can be no assurance that any of the Company's issued patents, or any
future patents that may be issued, will offer any degree of protection to the
Company's products against competitive products. There can be no assurance that
any patents that may be issued or licensed to the Company or any of the
Company's patent applications will not be challenged, invalidated or
circumvented in the future. In addition, there can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property disputes, and some companies
in the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference or other proceedings in the USPTO. The defense and prosecution of
intellectual property suits, USPTO proceedings and related legal and
administrative proceedings are both costly and time consuming. Litigation may be
necessary to enforce patents issued or licensed to the Company, to protect the
Company's trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others.
Any litigation or USPTO proceedings involving BEI Medical will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or USPTO proceedings to which the Company may become a party could
subject the Company to significant liabilities to third parties or require the
Company to seek licenses from third parties. Although some patent and
intellectual property disputes in the medical device area have been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include substantial ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. An adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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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 vendors' ability to supply the Company, which in turn could have a
material adverse impact on the Company.
In addition to patents, BEI Medical relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
an individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties
or utilized by the individual, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to BEI Medical shall be the exclusive property of
the Company. There can be no assurance that the Company's proprietary
information will not be misused or confidentiality agreements with employees,
consultants and others will not be breached, that the Company will become aware
of such breach or will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors. See "Business -- Research and Development; Technology"
and "--Licenses, Patents and Proprietary Technology."
Uncertainty Relating to Third-Party Reimbursement and Healthcare Reform
In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
government health administration authorities and private health insurance plans,
to reimburse all or part of the cost associated with the treatment of patients.
Although reimbursement for diagnostic and therapeutic procedures to treat
uterine disorders such as menorrhagia, or excessive uterine bleeding and fibroid
treatment have generally been available in the United States, there is no
assurance that it will continue to be the case or that the fees currently
allowed for these procedures will not be reduced. Furthermore, there can be no
assurance, even if the Company's products are cleared by the FDA for new
clinical applications, that full reimbursement will be available for such
procedures. BEI Medical could also be adversely affected by changes in
reimbursement policies of government or private healthcare payors, particularly
to the extent that any such changes affect reimbursement for diagnostic or
therapeutic procedures in which the Company's products are used. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from healthcare payors for procedures in which the
Company's products are used, or adverse changes in government and private
third-party payors' policies toward reimbursement for such procedures, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Market acceptance of the Company's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
healthcare payment systems. Reimbursement and healthcare payment systems in
international markets vary significantly by country, and include both government
sponsored and private healthcare insurance. Although BEI Medical will seek
international reimbursement approvals, obtaining such approvals can
36
<PAGE>
require 12 to 18 months or longer and there can be no assurance that any such
approvals will be obtained in a timely manner, that the Company will obtain
sufficient reimbursement, or that the Company will obtain any reimbursement at
all. Failure to receive additional international reimbursement approvals could
have a material adverse effect on market acceptance of the Company's products in
the international markets in which the Company is seeking approvals and could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."
The Company expects that there will be continued pressure on
cost-containment throughout the United States healthcare system. Reforms may
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company.
Competition; Uncertainty of Technology Change
The medical device industry is highly competitive and characterized by
constant innovation and technological change. Many of the Company's existing
competitors have significantly greater financial and manufacturing capabilities,
are more established, have larger marketing and sales organizations, and have
larger technical staffs than the Company. Such companies are developing and
marketing devices directly competitive with the Company's products for the
diagnosis and treatment of disorders and conditions of 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 principal
competitors for the Company's core gynecology products include Circon
Corporation, CooperSurgical, Inc., a subsidiary of The Cooper Companies, Inc.,
Karl Storz GmbH, Leisegang Medical, Inc., a subsidiary of Galileo Corporation,
Olympus Corp., Utah Medical Products, Inc., Wallach Surgical Devices, Inc., and
Richard Wolf Medical Instruments Corp. The principal competitors for the
Company's Hydro ThermAblator and the bipolar electrosurgical therapy system for
fibroid treatment include FemRx, Inc., a subsidiary of Ethicon, Inc./Johnson &
Johnson; Gynecare, a subsidiary of Ethicon, Inc./Johnson & Johnson (whose
ThermaChoice balloon has been cleared by the FDA to be marketed in the United
States), Valleylab, Inc., a subsidiary of U.S. Surgical/Tyco (whose VestaBlate
has been cleared by the FDA to be marketed in the United States), and Wallsten
Medical SA. See "Business -- Competition."
Other large healthcare companies may enter the market for minimally
invasive diagnostic and surgical gynecological products in the future. Competing
companies may succeed in developing technologies and products that are
efficacious or more cost effective than those currently offered or that the
Company may develop. There can be no assurance that these companies will not
succeed in developing technologies and products that are more effective than any
which have been or are being developed by BEI Medical or that would
37
<PAGE>
render the Company's technologies or products obsolete or not competitive. The
Company also competes with such other companies for clinical sites to conduct
trials. Such competition could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company expects
competition for devices and service to treat excessive menstrual bleeding to
increase. See "Business -- Competition."
Product Liability Risk; Limited Insurance Coverage
The medical device industry has historically been litigious, and BEI
Medical faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury. Although the Company has not experienced any claims to date, the Company
plans to market new technology and there can be no assurance that the Company
will not experience losses due to product liability claims in the future. BEI
Medical currently maintains product liability insurance with coverage limits of
$1,000,000 per occurrence and $2,000,000 in the aggregate. The Company's
products are highly complex and some are, or will be, used in medical procedures
and in situations where there is a potential risk of serious injury, adverse
side effects or death. As a result, the Company currently carries product
liability insurance covering its products with policy limits per occurrence and
in the aggregate which the Company has deemed to be sufficient. It cannot be
predicted, however, whether such insurance is sufficient, or if not, whether the
Company will be able to obtain such insurance as is sufficient, to cover the
risks associated with the Company's business or whether such insurance will be
available at premiums that are commercially reasonable. A successful claim
against - or settlement by - the Company in excess of its insurance coverage or
the Company's inability to maintain insurance in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Employees
BEI Medical is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's ability to manage its transition to
commercial-scale operations, and hence its success, will depend on the efforts
of these individuals. The Company's success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel. The Company faces intense competition for qualified personnel, and
there can be no assurance that the Company will be able to attract and retain
such personnel. The Company does not currently have key person insurance on the
life of any employee.
Dependence on Third Party Vendors
The Company relies on third party vendors for certain of the contract
manufacturing services and for certain of the components used in the Company's
products. Approximately 54.1% of BEI Medical's fiscal 1998 net revenues were
realized from products produced by contract manufacturers. Two contract
manufacturers supply products that accounted for approximately 32.8% and 11.9%,
respectively, of the Company's net revenues for the 1998 fiscal year.
Additionally, a number of significant components, such as thermisters and heater
rods, are purchased from sole source suppliers. For certain contract
38
<PAGE>
manufactured products and components there are relative few sources of supply,
and establishing additional or replacement suppliers for such components or
services cannot be accomplished quickly. Although the Company tries to maintain
sufficient quantities of inventory of such components to minimize production
delays or interruptions, there can be no assurance that the Company will find
suitable alternatives at reasonable prices, if at all, or that any such
alternatives will remain available to the Company. The Company's inability to
obtain acceptable contract manufacturing services or suppliers of components in
a timely manner or find and maintain suitable replacement contract manufacturing
services or suppliers of components would have a material adverse effect on the
Company's business, financial condition and results of operations, including its
ability to manufacture its products and supply its customers.
Year 2000
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 a preliminary assessment of Year 2000
issues as they relate to the Company's IT systems. This analysis includes 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, Year 2000 compliant versions of these systems are available. In some
cases, the version of the software the Company is currently using is believed to
be compliant in all storage and calculation functions but may have some screens
that display a two-digit year. In other cases, the version of the software
currently in use is believed to be fully Year 2000 compliant, based upon
representation received from the vendors. In still other cases, the version of
the software currently being operated by the Company is not Year 2000 compliant.
However, for software that is not Year 2000 compliant, the Company has acquired
an updated version of the software that is believed to be Year 2000 compliant
based upon representations from the vendor. The Company plans to use both
internal and external resources to test the versions of the software believed to
be Year 2000 compliant and to complete such testing by the middle of calendar
year 1999 and plans to implement these versions before the end of fiscal year
1999. 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 is currently assessing the impact of Year 2000
readiness of External Agents with which the Company relies for critical products
and services. The Company is developing questionnaires and letters of inquiry to
be sent 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. The letter to be sent to each External Agent will be
39
<PAGE>
tailored to the significance of the contribution each makes to the Company's
business. The Company anticipates that the assessment phase of this part of the
project will be completed by early calendar year 1999. 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 are currently being inventoried and evaluated. 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 by early
calendar year 1999 and anticipates it will utilize both internal and external
resources to reprogram, replace and test noncompliant equipment. 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 Medical 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.
While the Company currently believes that it has an effective program in
place to resolve the Year 2000 issues in a timely manner, as noted above, 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 also materially
adversely affect the Company.
The Company currently has no contingency plan in place in the event it does
not successfully complete all phases of its Year 2000 project. The Company plans
to evaluate the status of completion in early calendar year 1999 and determine
whether such a plan is necessary.
Control by Existing Stockholders and Management
The Company's directors, officers and their affiliates beneficially own
approximately 28.6% of the outstanding Common Stock (assuming exercise of vested
stock options). As a result of such Common Stock ownership, the Company's
directors, officers and their affiliates, if they voted together, would be able
to exercise significant influence over the election of members of the Company's
Board of Directors and other corporate actions requiring stockholder approval.
See "Security Ownership of Certain Beneficial Owners and Management."
Limitation on New Equity
The Company completed the spin-off of BEI Technologies, Inc.
("Technologies") at the end of fiscal year end September 1997. Shortly prior to
the transaction, on August 5, 1997, President Clinton signed the Taxpayer Relief
Act of 1997 (the "Act"), which would deny tax-free treatment to any spin-off
that is "part of a plan (or series of related transactions) pursuant
40
<PAGE>
to which one or more persons acquire directly or indirectly" a 50% or greater
(measured by vote or value) equity interest in either the distribution
corporation of the spun-off corporation. Under the Act, transactions occurring
within the period beginning two years before the date of distribution and ending
two years after the distribution generally would be presumed to have occurred
pursuant to a plan.
In response to the new law, and in conjunction with tax counsel's opinion
regarding the tax-free nature of the spin-off of Technologies, the management of
the Company represented to tax counsel that it had no plan or intention to issue
shares after the transaction in an amount such that 50% of the outstanding
shares of the Company (measured by vote or value) after such issuance would have
been issued during the four-year period beginning two years prior to the date of
the spin-off.
Anti-Takeover Effects of Delaware Law and Certain Charter Provisions;
Stockholder Rights Plan
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. While the Company has no present intention to issue
shares of Preferred Stock, such issuance, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), and the Company's
Certificate of Incorporation contains a fair price provision, the combined
effect of which prohibits the Company from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 and the fair price provision could have the effect of delaying or
preventing a change of control of the Company. The Company's Certificate of
Incorporation provides for staggered terms for the members of the Board of
Directors. The staggered Board of Directors and certain other provisions of the
Company's Certificate of Incorporation and Bylaws may have the effect of
delaying or preventing changes in control or management of the Company, which
could adversely affect the market price of the Company's Common Stock.
Furthermore, the Board of Directors of the Company has adopted a Stockholder
Rights Plan that has certain anti-takeover effects. Rights issued under the plan
will cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors.
Forward-Looking Statements
The statements contained in this Form 10-K Annual Report that are not
historical fact are "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "would," or "anticipates" or the negative thereof or
41
<PAGE>
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Management wishes to caution the
reader that these forward-looking statements contained in this Form 10-K Annual
Report regarding matters that are not historical facts are only predictions. The
Company's future results of operations and other forward looking statements
contained in the Form 10-K Annual Report, in particular the statements
concerning revenues, pricing, new products development, future capital needs and
Year 2000 issues, involve a number of risks and uncertainties. No assurances can
be given that the future results indicated, whether expressed or implied, will
be achieved. Forward-looking statements are based upon a variety of assumptions
relating to the business of the Company, which, although considered reasonable
by the Company, may not be realized. Because of the number and range of the
assumptions underlying the Company's forward-looking statements, many of which
are subject to significant uncertainties and contingencies that are beyond the
reasonable control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Form 10-K Annual Report. These forward-looking statements are
based on current expectations, and the Company assumes no obligation to update
this information. Therefore, the actual experience of the Company and results
achieved during the period covered by any particular forward-looking statements
may differ substantially from those predicted. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
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<PAGE>
Executive Officers and Directors of the Company
The directors, executive officers and key employees of the Company and
their ages and titles as of December 10, 1998 are as follows:
Name Age Title
- ---- --- -----
Charles Crocker 59 Chairman of the Board of Directors
Herbert H. Spoon 54 President and Chief Executive Officer
Samuel Dickstein 58 Vice President, New Business
Development and Technology
Thomas W. Fry 54 Vice President, Finance and
Administration, Secretary and Treasurer
Dr. Ralph M. Richart(1) 64 Director
Richard W. Turner 52 Director
Dr. Lawrence A. Wan(2) 60 Director
Gary D. Wrench(1)(2) 65 Director
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Charles Crocker, a founder of the Company, has served as Chairman of
the Board of Directors of the Company since October 1974. Mr. Crocker served as
President and Chief Executive Officer of the Company from October 1995 until the
Distribution. Mr. Crocker is President and Chief Executive Officer of
Technologies. He served as President of Crocker Capital Corporation (a Small
Business Investment Company), from 1970 to 1985, and as General Partner of
Crocker Associates, a venture capital investment partnership, from 1970 to 1990.
He currently serves as a director of Technologies, Fiduciary Trust Company
International, Pope & Talbot, Inc. and KeraVision. Mr. Crocker holds a B.S. from
Stanford University and an M.B.A. from the University of California, Berkeley.
Mr. Herbert H. Spoon has served as President and Chief Executive Officer of
the Company since April 1998. Prior to joining the Company, Mr. Spoon was
President and Chief Executive Officer of LifeQuest Medical, Inc., a designer,
developer, manufacturer and distributor of disposable and reusable gynecological
and general surgical devices. Mr. Spoon also served as the President of
Gynopharma, Inc., from 1987 to 1991, a company specializing in the development
and distribution of gynecological pharmaceuticals, devices and diagnostics which
was acquired by Johnson & Johnson. He also served as Vice President and General
Manager of Lederle Laboratories, the U. S. pharmaceutical division of American
Cyanamid. Prior to that, Mr. Spoon had 15 years of experience with Ciba-Geigy,
including senior management positions. Mr. Spoon holds a B.S. degree from Howard
Payne University.
Mr. Samuel Dickstein served as Vice President, New Business Development and
Technology of BEI Medical Systems Company, Inc. from June 1997 until the
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merger of that entity into Electronics in November 1997. He served as Vice
President, Operations, from the acquisition of Meditron Devices, Inc. by the
Company in 1992 until June 1997. Prior to the acquisition, Mr. Dickstein, a
co-founder of Meditron Devices, Inc., served as a Vice President from 1987 to
1992. From 1970 to 1978 Mr. Dickstein served as Electro-Medical Engineering
Manager for American Cystoscope Makers (Circon Corp.). Mr. Dickstein holds a
B.S.E.E. from the City College of New York and has also completed graduate level
studies in Electrical Engineering at both New York University and the New Jersey
Institute of Technology.
Mr. Thomas W. Fry served as Vice President, Finance and Administration of
BEI Medical Systems Company, Inc. from October 1992 until the merger of the
subsidiary into Electronics in November 1997. Mr. Fry was employed by
Disctronics Ltd. as Corporate Controller from 1989 to 1992, by Cavitron,
Inc./CUSA, a medical device, engineering and manufacturing company, as
Controller/CFO from 1986 to 1989, and by Cheeseborough-Ponds International as
Manager of Profit Planning and Manufacturing Controller from 1979 to 1986. Prior
to that time, Mr. Fry was employed by GTE from 1970 to 1979 in various
accounting and financial roles, including three years as the Controller of GTE
Sylvania in Caracas, Venezuela. Mr. Fry holds a B.S. from Southeast Missouri
State University and an M.B.A. with academic honors from Pace University.
Dr. Ralph M. Richart has been a director of the Company since November 1997
and was a director of BEI Medical Systems Company, Inc. from 1996 until that
Company's merger into Electronics in November 1997. Dr. Richart is a Professor
of Pathology and Obstetrics in Gynecology at the Columbia University College of
Physicians and Surgeons and Director of Gynecological Pathology and Cytology at
the Sloane Hospital for Women in New York City. He served as a Career Research
Development Awardee at the Medical College of Virginia before moving to
Columbia-Presbyterian Medical Center in 1963. His professional interests have
centered around obstetrical and gynecological pathology and cytology with
particular emphasis on the study of cervical neoplasia and, more recently, the
relationship of the human papillomavirus to lower genital tract neoplasia. He is
the past President of the International Gynecologic Cancer Society. He received
his medical training at the University of Rochester School of Medicine and
Dentistry, and completed his pathology residency in the Harvard Hospitals
system.
Mr. Richard W. Turner founded in 1991 what is now the Company as a
subsidiary of Electronics. Mr. Turner served as President of that subsidiary
from 1991 until it merged into the Company in November 1997, and then as
President of the Company until April 1998. He has served as a director of the
Company since September 1997. Previously, President of the Healthcare Group for
the Cooper Companies, Mr. Turner has held executive leadership positions in the
medical industry for over 20 years, including President and Director of
Cooper-LaserSonics, Inc., President of CooperVision Inc., President and Chief
Executive Officer/Director for Pancretec, Inc. and President of Kay
Laboratories. Mr. Turner holds a B.S. from Old Dominion University and an M.B.A.
from Pepperdine University.
Dr. Lawrence A. Wan has been a director of the Company since November 1997.
He served as Vice President and Chief Technical Officer of Electronics from July
1990 to September 1997, and is currently Vice President and Chief Technical
Officer of Technologies, and President of SiTek, Inc., a Technologies
subsidiary. From 1984 until 1990, he served as Vice President,
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Engineering, of Systron Donner Corporation, and also held various other
technical and general management positions with that company between 1979 and
1984. From 1968 through 1979, he was founder and Chief Executive Officer of
Sycom, Inc., a commercial electronics company. Prior to that, he worked for
Hughes Aircraft Company where he headed the Radar Systems Section of the Hughes
Ground Systems Group. In 1962, Dr. Wan and two other professors established an
Engineering School at the University of California, Santa Barbara, where he also
taught Engineering. Dr. Wan holds B.S., M.S. and Ph.D. degrees in Engineering
and Applied Sciences from Yale University.
Mr. Gary D. Wrench has been a director of the Company since 1986. He served
as Senior Vice President and Chief Financial Officer of Electronics from July
1993 to September 1997. From April 1985 to July 1993, he served as Vice
President of Electronics and President and Chief Executive Officer of Motion
Systems Company, Inc., then a wholly owned subsidiary of Electronics that is now
a part of Technologies. Previous experience includes 20 years with Hughes
Aircraft Company, including an assignment as President of Spectrolab, Inc., a
Hughes subsidiary. He currently serves as a director of Technologies. Mr. Wrench
holds a B.A. from Pomona College and an M.B.A. from the University of
California, Los Angeles.
Staggered Board of Directors
The Company has a staggered Board of Directors, which may have the effect
of deterring hostile takeovers or delaying changes in control or management of
the Company. For purposes of determining their term of office, directors are
divided into three classes, with the term of office of the first class to expire
at the 2001 annual meeting of stockholders, the term of office of the second
class to expire at the 1999 annual meeting of stockholders and the term of
office of the third class to expire at the 2000 annual meeting of stockholders.
Class I consists of Dr. Wan; Class II consists of Mr. Crocker and Dr.
Richart; and Class III consists of Mr. Turner and Mr. Wrench. Directors elected
to succeed those directors whose term expires will be elected for a three-year
term of office. All directors hold office until the next annual meeting of
stockholders, at which their term expires, and until their successors have been
duly elected and qualified. Executive officers serve at the discretion of the
Board. There are no family relationships among any of the officers and
directors.
Board Committees
The Board of Directors of the Company has established an Audit Committee
(consisting of Dr. Richart and Mr. Wrench) which reviews the results and the
scope of the audit and other services provided by the Company's independent
accountants and periodically reviews the results of the Company's internal audit
controls, and a Compensation Committee (consisting of Dr. Wan and Mr. Wrench)
which makes recommendations concerning salaries, incentives and other forms of
compensation for directors, executive officers and other key employees of the
Company and administers various incentive compensation and benefits plans.
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ITEM 2. 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 Medical'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.
ITEM 3. LEGAL PROCEEDINGS
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 parties signed a final settlement agreement 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 Technologies in exchange for all of Technologies' outstanding
common stock, Electronics distributed that stock to its stockholders in a
tax-free spin-off of Technologies (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. The closing price of the Company's
common stock was $1.875 on December 10, 1998.
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>
1998 Fiscal Year Cash Dividend
(ended 10/03/98) High Low Declared
<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
(from October 9, 1997) $4.38 $3.50 $0.00
<CAPTION>
1997 Fiscal Year Cash Dividend
(ended 9/27/97) High Low Declared
<S> <C> <C> <C>
Fourth Quarter $14.50 $10.38 $0.02
Third Quarter $11.00 $8.00 $0.02
Second Quarter $12.38 $10.38 $0.02
First Quarter $11.25 $9.25 $0.02
-----------------------------------------------------------------------------------------------
</TABLE>
As of December 10, 1998, there were approximately 1,100 holders of record
of the Company's common stock. There are no restrictions on the Company's
ability to pay dividends; however, it is currently the intention of the Board
47
<PAGE>
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 1998. Prior to the Distribution,
the Board of Directors declared and the Company paid quarterly cash dividends of
$.02 per share of common stock in each quarter of fiscal 1997.
48
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five fiscal years presented below is
derived from the audited Consolidated Financial Statements of the Company. The
data should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.
The data and the accompanying analysis in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" cover periods in
which the Company's operations include business segments which are now operated
by Technologies and include the results of those business 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 27, 1997 (File No. 0-22799).
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended
--------------------------------------------------------------------------
October 3, September September September October 1,
1998 28, 1997 27, 1996 30, 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 9,651 $ 10,005 $ 9,357 $ 8,847 $ 8,678
Loss from continuing operations (4,971) (4,348) (2,682) (2,350) (2,458)
Income (loss) from discontinued operations -- 4,583 4,571 (2,041) 714
Net income (loss) (4,971) 235 1,889 (4,391) (1,744)
Loss from continuing operations per common
share, basic and diluted ($ 0.68) ($ 0.64) ($ 0.40) ($ 0.36) ($ 0.38)
Earnings (loss) from discontinued
operations per common share, basic and
diluted -- 0.67 0.68 (0.30) 0.11
Earnings (loss) per common share, basic and
diluted ($ 0.68) $ 0.03 $ 0.28 ($ 0.66) ($ 0.27)
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
Balance Sheet Data:
Cash and cash equivalents $ 3,504 $ 9,271 $ 9,128 $ 9,023 $ 1,103
Working capital (1) 8,284 11,085 38,102 35,923 40,189
Total assets (1) 17,388 22,584 115,011 113,738 112,432
Long-term debt (excluding current
portion) -- 22 212 392 560
Stockholders' equity (1) 14,440 17,660 55,972 53,319 57,829
</TABLE>
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for fiscal years 1996, 1995 and 1994.
49
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and in
"Business."
The following table sets forth, for the fiscal periods indicated, the
percentage of revenue represented by certain items in the Company's Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of sales 58.4 59.7 61.9
- -------------------------------------------------------------------------------------------------------------
Gross profit 41.6 40.3 38.1
Operating expenses:
Selling, general and administrative expenses 90.0 78.8 69.6
Research, development and related expenses 29.7 18.6 14.2
- -------------------------------------------------------------------------------------------------------------
Loss from operations (78.1) (57.1) (45.7)
Other income 3.2 1.3 3.5
Interest expense (0.2) (0.7) (1.2)
- -------------------------------------------------------------------------------------------------------------
Loss before income taxes (75.1) (56.5) (43.4)
Income taxes (benefit) (23.6) (13.0) (14.8)
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%
=============================================================================================================
</TABLE>
50
<PAGE>
Revenue
Fiscal years 1998, 1997 and 1996
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
Hydro ThermAblator 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 Hydro ThermAblator 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.
51
<PAGE>
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 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 Hydro ThermAblator 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.
52
<PAGE>
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
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 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.
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, tax
refunds and anticipated working capital financing will provide adequate funding
to meet the Company's liquidity requirements for the next twelve
53
<PAGE>
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 severely 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.
During fiscal 1998, operating activities of continuing operations utilized
$6,172,000 in cash. The loss from operations of $4,971,000, plus an increase in
refundable income taxes of $2,374,000, inventory purchases of $423,000 and
decreases in accounts payable, accrued expenses and other liabilities of
$172,000, were partially offset by non-cash charges for depreciation and
amortization of $311,000 and $1,115,000, respectively, and a loss on the sale of
assets of $545,000.
Investing activities, which generated $579,000 in cash, consisted of
$975,000 from the sale of a product line offset by purchases of plant and
equipment of $372,000 and purchases of patents and licenses of $24,000.
Cash used in financing activities consisted primarily of $191,000 in
principal payments on long-term debt and other liabilities and proceeds from
$17,000 for options exercised.
The Company had no material capital or other commitments at October 3,
1998.
Year 2000
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 a preliminary assessment of Year 2000
issues as they relate to the Company's IT systems. This analysis includes 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, Year 2000 compliant versions of these systems are available. In some
cases, the version of the software the Company is currently using is believed to
be compliant in all storage and calculation functions but may have some screens
that display a two-digit year. In other cases, the version of the software
currently in use is believed to be fully Year 2000 compliant, based upon
representation received from the vendors. In still other cases, the version of
the software currently being operated by the Company is
54
<PAGE>
not Year 2000 compliant. However, for software that is not Year 2000 compliant,
the Company has acquired an updated version of the software that is believed to
be Year 2000 compliant based upon representations from the vendor. The Company
plans to use both internal and external resources to test the versions of the
software believed to be Year 2000 compliant and to complete such testing by the
middle of calendar year 1999 and plans to implement these versions before the
end of fiscal year 1999. 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 is currently assessing the impact of Year 2000
readiness of External Agents with which the Company relies for critical products
and services. The Company is developing questionnaires and letters of inquiry to
be sent 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. The letter to be sent to each External Agent will be tailored to the
significance of the contribution each makes to the Company's business. The
Company anticipates that the assessment phase of this part of the project will
be completed by early calendar year 1999. 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 are currently being inventoried and evaluated. 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 by early
calendar year 1999 and anticipates it will utilize both internal and external
resources to reprogram, replace and test noncompliant equipment. 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 Medical 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 compatible. Accordingly, the Company
does not believe the Year 2000 issue presents a material exposure as it relates
to the Company's products.
While the Company currently believes that it has an effective program in
place to resolve the Year 2000 issues in a timely manner, as noted above, 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 also materially
adversely affect the Company.
55
<PAGE>
The Company currently has no contingency plan in place in the event it does
not successfully complete all phases of its Year 2000 project. The Company plans
to evaluate the status of completion in early calendar year 1999 and determine
whether such a plan is necessary.
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.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had
a material effect on the Company's operations.
56
<PAGE>
ITEM 7a. 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 and outstanding debt which is not material, is at fixed rates of interest.
The Company believes its market risk exposures are not material.
57
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(dollars in thousands except share amounts) October 3, September 27,
1998 1997
- --------------------------------------------------------------------------------
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
================================================================================
See notes to consolidated financial statements.
58
<PAGE>
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(dollars in thousands except share amounts) October 3, September 27,
1998 1997
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
14,776 17,660
Less: Unearned restricted stock and other -- Note 10 (336) --
- --------------------------------------------------------------------------------
Total stockholders' equity 14,440 17,660
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $17,388 $22,584
================================================================================
See notes to consolidated financial statements.
59
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended
- -------------------------------------------------------------------------------------------------------------------
October 3, September 27, September 28,
(dollars in thousands except share and per share amounts) 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 income (loss) ($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 consolidated financial statements.
60
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended
- --------------------------------------------------------------------------------------------------------------------
October 3, September 27, September 28,
(dollars in thousands) 1998 1997 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 provided by (used in) financing activities of
continuing operations (174) (1,709) 1,168
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations--Note 3 -- 6,344 4,825
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) 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 consolidated financial statements.
61
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Unearned
Additional Retained restricted
(dollars in thousands) 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
shares at $9.67 average per share) (1,303) (1,303)
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 consolidated financial statements.
62
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
On September 27, 1997, BEI Electronics, Inc. ("Electronics") distributed to
holders of Electronics common stock one share of common stock of BEI
Technologies, Inc. ("Technologies"), a newly formed subsidiary, for each share
of Electronics common stock held ("the Distribution"). 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.
Common Shares
Pre-Merger Post-Merger
Medical Electronics
Common Stock Common Stock
---------------------------------------------------------------------------
Johnson & Johnson 52,131 287,561
Management 12,650 69,778
Others 15,721 86,716
---------------------------------------------------------------------------
80,502 444,055
===========================================================================
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.
63
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 2
Summary of Significant Accounting Policies
Operations: The Company is a manufacturer of diagnostic and therapeutic
products focused on gynecology and women's health issues. In the U.S., the
Company utilizes independent manufacturers' representative organizations, direct
sales representatives, telemarketers and domestic distributors to market its
products directly to end users, hospitals, surgical centers and doctors'
offices. Products are also sold through a network of international distributors.
Medical's operations consist of Zinnanti Surgical Instruments in Chatsworth,
California and Xylog Corporation, Meditron Devices, Inc., and BEI Medical
Systems International, Inc. in 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 severely 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.
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.
64
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 non-competition agreements and goodwill acquired in purchase
acquisitions. Patents and non-competition 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.
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.
65
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Note 3
Discontinued Operations
Technologies was incorporated on June 30, 1997 in the State of Delaware, as
a wholly owned subsidiary of Electronics. On September 27, 1997, Electronics
distributed to holders of Electronics common stock one share of common stock of
Technologies for each share of Electronics common stock held on September 24,
1997. In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its Sensors and
Defense business segments. Accordingly, the financial position and results of
operations of Sensors and Defense are shown as discontinued operations for all
periods presented.
Note 4
Inventories
(dollars in thousands) 1998 1997
---------------------------------------------------------------------------
Finished products $2,128 $1,843
Work in process 196 230
Materials 763 866
---------------------------------------------------------------------------
Inventories $3,087 $2,939
===========================================================================
66
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Note 5
Bank Credit Agreements
The Company had no bank credit agreements at October 3, 1998 and September
27, 1997.
Note 6
Accrued Expenses and Other Liabilities
(dollars in thousands) 1998 1997
--------------------------------------------------------------------------
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
==========================================================================
Note 7
Long-Term Debt
(dollars in thousands) 1998 1997
------------------------------------------------------------------------
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
========================================================================
67
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Note 8
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of October 3, 1998 and
September 27, 1997 are as follows:
(dollars in thousands) 1998 1997
----------------------------------------------------------------------------
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)
============================================================================
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.
68
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Significant components of the benefit for income taxes from continuing
operations are as follows:
(dollars in thousands) 1998 1997 1996
-------------------------------------------------------------------------
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)
=========================================================================
A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<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>
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.
69
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9
Stockholders' Equity
The Company's preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to establish from time to time
the number of shares to be included in each series, and to designate the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices and liquidation preferences.
During fiscal 1992 and 1990, the Board of Directors of the Company
authorized the purchase from time to time in open market transactions of up to
300,000 and 500,000 shares of common stock, respectively. During fiscal year
1996, the Board approved an additional repurchase of up to 200,000 shares on the
open market. At the end of fiscal year 1997, 934,424 shares had been repurchased
at a cost of $6,969,178 under this program. The treasury stock shares were then
retired at September 27, 1997.
Note 10
Stock Option and Restricted Stock Plans
In 1982, the Company's stockholders voted to adopt an incentive stock
option plan. The plan provided for option prices based on the fair market value
of the stock on the date the option is granted. The Incentive Stock Option Plan
of 1982 terminated December 15, 1991. The remaining 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.
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
70
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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>
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:
71
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Options Life Price Per Number Price
Prices Outstanding (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
Number of Exercise Average
Common Price Exercise 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>
72
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - 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
73
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
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.
Note 11
Employee Benefit Plans
The Company has a defined contribution retirement plan for the benefit of
all eligible employees. The plan qualifies under Section 401(k) of the Internal
Revenue Code thereby allowing eligible employees to make tax-deductible
contributions to the plan. Non-discretionary employer contributions are based on
a fixed percentage of total eligible employee compensation and a formula based
matching of the participant's contribution to the plan. Additional contributions
are at the discretion of the Board of Directors. The Company's contributions to
the plan for fiscal 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.
74
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 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.
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
75
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 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.
Note 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.
76
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Note 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.
77
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 15
Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for
fiscal 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended
(dollars in thousands except per share amounts)
----------------------------------------------------------------------------------------------------------
Dec. 27, Mar. 28, Jun. 27, Oct. 3,
1997 1998 1998 1998
----------------------------------------------------------------------------------------------------------
<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)
<CAPTION>
----------------------------------------------------------------------------------------------------------
Dec. 28, Mar. 29, Jun. 28, Sep. 27,
1996 1997 1997 1997
----------------------------------------------------------------------------------------------------------
<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>
78
<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.
Ernst & Young LLP
Hackensack, New Jersey
November 13, 1998
79
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
80
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive officers is set
forth in Part I of this Report. Additional information required by this Item is
incorporated herein by reference to the section entitled "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement
related to the Company's 1998 Annual Meeting of Stockholders to be filed by the
Company with the Securities and Exchange Commission (the "Definitive Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Relationships and
Related Transactions" of the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Relationships and
Related Transactions" of the Definitive Proxy Statement.
81
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
Form 10-K
Page Number
<S> <C> <C>
(a)(1) Index to Consolidated Financial Statements.
The following Consolidated Financial Statements of BEI Medical Systems
Company, Inc. are filed as part of this Form 10-K:
Consolidated Balance Sheets -
Years ended October 3, 1998 and September 27, 1997 58
Consolidated Statements of Operations Years ended October 3, 1998,
September 27, 1997
and September 28, 1996 60
Consolidated Statements of Cash Flows Years ended October 3, 1998,
September 27, 1997
and September 28, 1996 61
Consolidated Statements of Stockholders' Equity Years ended October
3, 1998, September 27, 1997
and September 28, 1996 62
Notes to Consolidated Financial Statements -
October 3, 1998 63
Report of Independent Auditors S-2
</TABLE>
(a)(2) Index to Financial Statement Schedule.
The following Consolidated Financial Statement Schedule of BEI
Medical Systems Company, Inc. (formerly BEI Electronics, Inc.) for
each of the years ended October 3, 1998, September 27, 1997 and
September 28, 1996 is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts S-1
Report of Independent S-2
Auditors as to Schedule
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
82
<PAGE>
(a)(3) Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit Numbers Description Footnote
--------------- ----------- --------
<S> <C> <C>
2.1 Distribution Agreement between BEI Electronics, Inc.
and BEI Technologies, Inc. dated September 26, 1997 (i)
2.2 Corporate Services Agreement between BEI Technologies,
Inc. and BEI Electronics, Inc. dated as of September
26, 1997 (i)
2.3 Tax Allocation and Indemnity Agreement between BEI
Electronics, Inc. and BEI Technologies, Inc. dated as
of September 26, 1997 (i)
2.4 Assumption of Liabilities and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.5 Technology Transfer and License Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.6 Trademark Assignment and Consent Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.7 Agreement Regarding Certain Representations and
Covenants by and between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of September 26, 1997 (i)
3.1 Restated Certificate of Incorporation (ii)
3.2 Amended Bylaws of the Company as of June 30, 1997 (iii)
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Exhibit Numbers Description Footnote
--------------- ----------- --------
<S> <C> <C>
3.3 Certificate of Designation of Series A Junior
Participating Preferred Stock (iii)
4.1 Reference is made to exhibits 3.1, 3.2 and 3.3 (iii)
4.2 Form of Rights Certificate (iii)
4.3 Summary of Rights to Purchase Preferred Shares (iii)
10.2 * Registrant's Amended 1987 Stock Option Plan (iv)
10.3 * Standard option grant form used in connection with
Registrant's Amended 1987 Stock Option Plan (v)
10.6 * Description of Management Incentive Bonus Plan (ii)
10.8 * Registrant's 1992 Restricted Stock Plan, as amended (iv)
10.14 1989 Employee Stock Purchase Plan, adopted June 1, 1989,
as Amended through November 18, 1993 (vi)
10.27 Rights Agreement dated June 30, 1997 between the
Registrant and ChaseMellon Shareholder Services, LLC (vi)
10.28 * Consulting Agreement between the Registrant and Ralph
Richart, M.D. dated as of March 1, 1998
10.29 * Employment agreement between the Registrant and Herbert
H. Spoon dated February 27, 1998
10.30 * Severance Agreement between the Registrant and Thomas W.
Fry dated February 12, 1997
10.31 Amendment to Tax Allocation and Indemnity Agreement
dated December 15, 1998 between the Registrant and
BEI Technologies dated September 1997
</TABLE>
84
<PAGE>
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule (EDGAR only)
* Indicates management contracts or compensatory plans or
arrangements filed pursuant to Item 601(b)(10) of regulation S-K.
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated September 27, 1997.
(ii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No.
33-29032).
(iii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 30, 1997.
(iv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (File No.
333-64155).
(v) Incorporated by reference. Previously filed as an exhibit to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (No. 33-29032).
(vi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 2, 1993.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEI MEDICAL SYSTEMS COMPANY, INC.
By: /s/ Thomas W. Fry
------------------------------
Thomas W. Fry
Vice President of Finance and
Administration,
Secretary & Treasurer
January 4, 1999
86
<PAGE>
<TABLE>
SCHEDULE II
BEI MEDICAL SYSTEMS COMPANY, INC.
----------------
VALUATION AND QUALIFYING ACCOUNT
<CAPTION>
Column C
Column A Column B Additions Column D Column E
- ------------------------------------- ------------- ------------------------------ ------------- -------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended October 3, 1998:
- ---------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $112 $76 $-- $14 (B) $174
Valuation allowances of deferred
tax assets 1,784 -- -- -- 1,784
------------- ------------- ------------- ------------- -------------
Total $1,896 $76 $-- $14 $1,958
============= ============= ============= ============= =============
Year ended September 27, 1997:
- ------------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $236 $57 $-- $181 (B) $112
Valuation allowances of deferred
tax assets 929 855 (A) -- -- 1,784
Valuation allowances of
discontinued operations 701 75 (94) 682 --
------------- ------------- ------------- ------------- -------------
Total $1,866 $987 ($94) $863 $1,896
============= ============= ============= ============= =============
Year ended September 28, 1996:
- ------------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $56 $39 $162 (D) $21 (B) $236
Valuation allowance for deferred
tax assets 1,077 -- (148)(C) -- 929
Valuation allowances of
discontinued operations 538 282 (49) 70 701
------------- ------------- ------------- ------------- -------------
Total $1,671 $321 ($35) $91 $1,866
============= ============= ============= ============= =============
</TABLE>
(A) Allowance adjustment resulting from evaluation of the realizability of the
related deferred tax assets
(B) Uncollectible accounts written off
(C) Adjustment based on evaluation of uncertainties in the realization of state
net operating loss carryovers
(D) Purchased allowance from acquisition
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS, AS TO SCHEDULE
The Board of Directors and Shareholders
BEI Medical Systems Company, Inc.
We have audited the consolidated financial statements of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 3, 1998 and
September 27, 1997, and for each of the three years in the period ended October
3, 1998, and have issued our report thereon dated November 13, 1998. Our audits
also included the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
Hackensack, New Jersey
November 13, 1998
S-2
<PAGE>
23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-82867), pertaining to the 1987 Stock Option Plan and the Restricted
Stock Plan of BEI Medical Systems Company, Inc. (formerly BEI Electronics,
Inc.), of our reports dated November 13, 1998, with respect to the consolidated
financial statements and schedule of BEI Medical Systems Company, Inc. included
in this Annual Report (Form 10-K) for the year ended October 3, 1998, filed with
the Securities and Exchange Commission.
Ernst & Young LLP
Hackensack New Jersey
December 29, 1998
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10.28 Consulting Agreement between the Registrant and Ralph Richart, M.D.
dated as of March 1, 1998
10.29 Employment Agreement between the Registrant and Herbert Spoon dated
February 27, 1998
10.30 Severance Agreement between the Registrant and Thomas W. Fry dated
February 12, 1997
10.31 Amendment to Tax Allocation and Indemnity Agreement dated December 15,
1998 between the Registrant and BEI Technologies dated September 1997
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule
BEI MEDICAL SYSTEMS COMPANY, INC.
CONSULTING AGREEMENT
THIS AGREEMENT is made by BEI MEDICAL SYSTEMS, INC., ("BEI") and RALPH
RICHART, M.D., an individual residing at 350 Shore Drive, Oakdale, New York
11769 ("Contractor"), effective March 1, 1998, for the purpose of setting forth
the exclusive terms and conditions by which BEI will acquire Contractor's
services on a temporary basis.
In consideration of the mutual obligations specified in this Agreement and
any compensation paid to Contractor for her or his services, the parties agree
to the following:
1. Work To Be Performed.
(a) Contractor will use his "best efforts" to consult with the Company
on matters that may come before the management team in areas of medical
research and clinical information, including but not limited to:
(i) the review of protocol(s) and method(s) for clinical studies
within the Territory defined on Schedule A (the "Territory");
(ii) participation in planning and preparation for and
participation in BEI-sponsored workshops, anticipated to be scheduled
at rate of six per twelve month period and to require up to twelve
man-days of Consultant's time per twelve month period;
(iii) participation in the preparation and submission of
abstracts for presentation at major clinical meetings within the
Territory (AAGL/ACOG type meetings);
(iv) communicating with Federal Drug Administration ("FDA")
officials;
(v) reviewing documents to be submitted to the FDA for accuracy,
completeness and scientific consistency;
(vi) reviewing and interpreting tissue samples in response to FDA
inquiries;
(vii) reviewing clinical and scientific papers and reports
presented to BEI concerning BEI products; and
(viii) representing BEI in communications with FDA investigators
for scientific affairs, clinical affairs and historical procedural
issues in connection with the FDA's Phase 3 investigation of the
HydroThermAblator(R) (the "HTA(R)").
1.
<PAGE>
(b) BEI is not obligated to issue any additional orders for work by
Contractor under this Agreement. Contractor should not commence services
under this Agreement until this Agreement is signed and delivered by an
authorized representative of BEI.
(c) It is understood that Contractor is presently affiliated with
Columbia University (the "Institution"). Services performed pursuant to
this Agreement shall be performed during such hours and on such terms as
shall not conflict with Contractor's responsibilities and obligations to
the Institution.
2. Rate and Method of Payment. As full and complete compensation for
Contractor's services and for the discharge of all Contractor's obligations
hereunder, BEI shall:
(a) Subject to approval of the Board of Directors or BEI's
Compensation Committee, as applicable, award Contractor fifty thousand
(50,000) shares of BEI common stock in exchange for services to be rendered
under this Agreement, subject to the following conditions:
(i) ten thousand (10,000) of the shares of BEI common stock shall
be granted outright in consideration of prior service and shall not be
subject to vesting or forfeiture to BEI if this Agreement were
terminated prior to the end of the Initial Term (as hereinafter
defined);
(ii) forty thousand (40,000) of the shares of BEI common stock
shall vest at the rate of 1,666 shares per month for 23 months with
1,682 shares vesting in the 24th month such that all 40,000 shares
shall be fully vested at the end of 24 months;
(iii) the unvested shares of BEI common stock shall revert to BEI
upon any termination of this Agreement prior to the end of the Initial
Term;
(iv) the unvested shares of BEI common stock shall be placed in
escrow with BEI and Contractor shall execute and deliver to BEI two
stock assignments, duly endorsed (with date and number of shares
blank), to facilitate the transfer of unvested shares of BEI upon
termination of this Agreement prior to the end of the Initial Term;
(v) Contractor and BEI shall execute a stock purchase agreement
containing the provisions identified above and any other terms
reasonably necessary in the judgment of BEI within 21 days after the
execution of this Agreement.
(b) In accordance with BEI's travel policy, reimburse Contractor for
travel and other out-of-pocket costs reasonably incurred by him in the
course of performing services under this Agreement; provided however, that
BEI shall not be obligated hereunder unless (i) BEI has agreed in advance
to reimburse such costs and (ii) Contractor provides BEI with appropriate
receipts or other relevant documentation for all such costs as part of any
submission by Contractor for reimbursement.
2.
<PAGE>
(c) Pay Contractor a commission of one thousand dollars ($1,000.00) by
the thirtieth day after the end of each calendar quarter for each HTA
Hardware Unit sold and shipped in the Territory by BEI and paid for by the
customer prior to the termination or expiration of this Agreement. This
commission is payable in arrears in U.S. Dollars on cash amounts actually
paid to and received by BEI during the immediately preceding calendar
quarter for orders solicited from parties in the Territory, accepted by BEI
and delivered by BEI within the Territory.
(d) Within 30 days after the end of each calendar quarter, pay
Contractor a commission equal to two percent (2%) of the Net Invoice Price
of HTA Disposables (as hereinafter defined on Schedule B) included in
orders solicited and received by BEI prior to the first anniversary of the
termination or expiration of this Agreement. This commission is payable in
arrears in U.S. Dollars on cash amounts actually paid to and received by
BEI during the immediately preceding calendar quarter for orders solicited
from parties within the Territory, accepted by BEI and delivered by BEI to
users within the Territory. "Net Invoice Price" shall mean BEI's billing
price less refunds, returns, commissions payable to third parties,
packaging, insurance, duty, shipping costs, taxes, and allowances granted.
(e) Make and keep full and accurate books and records in sufficient
detail to enable commissions payable hereunder to be determined. On seven
(7) days prior written notice to BEI, independent certified public
accountants nominated and paid by Contractor shall have full access to the
books and records of BEI pertaining to activities under this Agreement and
shall have the right to make copies therefrom at Contractor's expense. Said
certified public accounts shall have such access at all commercially
reasonable times during normal business hours. Prompt adjustment shall be
made by BEI to compensate for any errors or omissions disclosed by such
audit and agreed to by BEI. Contractor agrees to hold confidential all
information learned in the course of any examination of BEI's books and
records hereunder, except when it is necessary for Contractor to reveal
such information in order to enforce his rights under this Agreement in
court, or similar dispute resolution or enforcement proceeding or action,
or when compelled by law, and shall take all reasonable steps necessary to
prevent the public dissemination of such information given BEI's status as
a publicly-traded company.
Contractor shall not be entitled to a commission on any order solicited by
Contractor which is rejected by BEI, regardless of the reason for BEI's
rejection, and no commission shall be payable on any orders that are canceled or
terminated for any reason. Subject to the provisions of Section 2(d), Contractor
shall not be entitled to a commission on any order solicited by Contractor which
is received by BEI after the termination or expiration of this Agreement. If,
after a commission has been paid to Contractor for a product, BEI refunds any or
all of the purchase price of such product to the customer for any reason, BEI
may deduct from future commissions all or the proper proportionate amount of the
commission previously paid to Contractor for such product or, at BEI's election,
require Contractor to repay BEI such amount within thirty (30) days after
receiving notice of such election.
Notwithstanding anything in this Agreement to the contrary, any part of any
amount payable to Contractor hereunder may be reduced due to any counterclaim,
set-off, adjustment or other right which BEI might have against Contractor.
3.
<PAGE>
All payments of commissions not disputed as to correctness by Contractor
within two (2) years after receipt thereof shall thereafter conclusively be
deemed correct for all purposes.
3. Nondisclosure And Trade Secrets.
(a) During the term of this Agreement and in the course of
Contractor's performance hereunder, Contractor may receive and otherwise be
exposed to confidential and proprietary information relating to BEI's
business practices, strategies and technologies. Such confidential and
proprietary information may include but not be limited to confidential and
proprietary information supplied to Contractor with the legend "BEI
Confidential and Proprietary", or equivalent. The confidential and
proprietary information may include, but is not limited to, BEI's marketing
and customer support strategies, BEI's financial information, including
sales, costs, profits and pricing methods, BEI's internal organization,
employee information and customer lists, BEI's technology, including
discoveries, inventions, research, clinical data, test data, and
development efforts, processes, samples, methods, product know-how and
show-how, and all derivatives, improvement and enhancements to any of the
above and information of third parties as to which BEI has an obligation of
confidentiality (collectively referred to as "Information").
(b) Contractor acknowledges the confidential and secret character of
the Information, and agrees that the Information is the sole, exclusive and
extremely valuable property of BEI. Accordingly, Contractor agrees not to
use the Information except in the performance of this Agreement, and not to
disclose all or any part of the Information in any form to any third party,
either during or after the term of this Agreement, unless necessary to
perform the tasks which are the subject of this Agreement. Upon termination
of this Agreement for any reason, including expiration of term, Contractor
agrees to cease usage and to return to BEI all whole and partial copies and
derivatives of the Information, whether in Contractor's possession or under
Contractor's direct or indirect control.
(c) Contractor shall not disclose or otherwise make available to BEI
in any manner any confidential information of Contractor or confidential
information received by Contractor from third parties that Contractor is
not entitled to disclose.
(d) Contractor agrees not to export, directly or indirectly, any U.S.
source technical data acquired from BEI or any products utilizing such data
to any counties outside the United States which export may be in violation
of the United States Export Laws or Regulations. Nothing in this section
releases Contractor from any obligation stated elsewhere in this Agreement
not to disclose such data.
(e) At all times, both during the term of this Agreement and after its
termination, Contractor will keep in confidence and trust all Information
and shall not use or disclose and Information or anything related to such
information without the written consent of the Company, except as may be
required in the ordinary course of performing services as a Contractor to
the Company.
4.
<PAGE>
(f) Notwithstanding subsection (e) above, Contractor shall not be
obliged to keep in Confidential Information which:
(i) prior or after the time of disclosure becomes part of the
public knowledge or literature, not as a result of any inaction or
action of Contractor, or
(ii) is approved in writing for release by the Company.
(g) This Section 3 shall survive the termination of this Agreement for
any reason, including expiration of term.
4. Additional Activities.
(a) During the period in which Contractor provides advisory,
consulting and related services to and for the Company (the "Consulting
Period"), Contractor will not directly or indirectly (whether for
compensation or without compensation):
(i) as an individual, proprietor, partner, stockholder, officer,
employee, consultant, director, joint venture, investor, lender, or in
any other capacity whatsoever (other than as the holder of not more
than one percent (1%) of the total outstanding stock of a publicly
held company), engage in any business activity that involves the
development, production, marketing or selling of products, processes
or techniques which are, directly or indirectly, identical to,
substantially similar to, or competitive with products and processes
or techniques of the Company or other businesses involved in the
design or production of medical devices utilized in gynecology,
obstetrics or reproductive medicine (the "Field");
(ii) recruit, solicit or induce, or attempt to induce, any
employee of or consultant to the Company to terminate their employment
or consultancy or otherwise cease their relationship with the Company;
or
(iii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers
or accounts of the Company, or prospective clients, customer or
accounts, if any, of the Company that were contact, solicited or
served by Contractor during the term of this Agreement.
(b) During the 180 days following termination of the Consulting
Period, Contractor will not directly or indirectly (whether for
compensation or without compensation) engage in the activities identified
in paragraph 4(a)(i)-(iii), above. For purposes of the prior sentence, the
definition of the term "Field" shall mean engaging in any business activity
that involves the development, production, marketing or selling of
products, processes or techniques which are, directly or indirectly,
identical to, substantially similar to, or competitive with products,
processes or techniques of the Company or other businesses involved in the
design or production of endometrial ablation products.
(c) The restrictions set forth in paragraphs 4(a) and (b) are
considered by the parties to be reasonable for the purposes of protecting
the business of the Company. However, if
5.
<PAGE>
any such restriction is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too
great a range of activities or m too broad a geographic area, it shall be
interpreted to extend only over the maximum period of time, range of
activities or geographic areas as to which it may be enforceable.
(d) After termination of this Agreement, Contractor will disclose all
patent applications filed by him within a year after such termination. At
the time of each such disclosure, Contractor will advise BEI in writing of
any Inventions that Contractor believes are not subject to the assignment
provisions of Section 8; and Contractor will at that time provide to BEI in
writing all evidence necessary to substantiate that belief.
5. No Conflicting Obligation.
(a) Contractor represents that Contractor's performance of all of the
terms of this Agreement and Contractor's services as a consultant to BEI do
not and will not breach any agreement to keep in confidence any proprietary
information of another entity.
(b) Contractors represents and warrants that his performance of all
terms of this Consulting Agreement and Contractor's services as a
consultant to BEI do not and will not conflict with any written or oral
agreement.
6. Reports. Contractors shall keep the President of BEI fully informed of
the Contractor's activities under this Consulting Agreement and, at the request
of the President of BEI, shall discuss all matters relating to the conduct of
the Contractor's activities hereunder with the Vice President of International
Sales and the Director, Quality and Regulatory Affairs, or with any other
personnel designated by the President of BEI. If requested by the President of
BEI, Contractor shall provide the President of BEI with written reports
describing Contractor's activities under this Consulting Agreement. A final
written report shall be rendered to BEI within a reasonable period subsequent to
termination of the Agreement.
7. Current Employment and Consulting Relationships. Contractor represents
that he is not currently a director, employee, consultant, advisor, partner or
stockholder of any third party in the Field.
8. Ownership Of Work Product.
(a) Contractor shall specifically describe and identify in Exhibit C
to this Agreement all technology (i) which Contractor intends to use in
performing under this Agreement (ii) which is either owned solely by
Contractor or licensed to Contractor with a right to sublicense, and (iii)
which is in existence in the form of a writing or working prototype prior
to the effective date of this Agreement ("Background Technology").
(b) Contractor agrees that any and all ideas, improvements, inventions
and works of authorship conceived, written, created or first reduced to
practice in the performance of work under this Agreement shall be the sole
and exclusive property of BEI and hereby assigns to BEI
6.
<PAGE>
all its right, title and interest in and to any and all such ideas,
improvements, inventions and works of authorship.
(c) Contractor further agrees that except for Contractor's rights in
Background Technology, BEI is and shall be vested with all rights, title
and interests including patent, copyright, trade secret and trademark
rights in all of Contractor's work product under this Agreement. Contractor
hereby grants to BEI a non-exclusive, royalty free and worldwide right to
use and sublicense the use of Background Technology for the purpose of
developing and marketing BEI products, but not for the purpose of marketing
Background Technology separate from BEI products.
(d) Contractor shall execute all papers, including patent
applications, invention assignments and copyright assignments, and
otherwise shaft assist BEI as reasonably required to perfect BEI the
rights, title and other interests in Contractor's work product expressly
granted to BEI under this Agreement. Costs related to such assistance, if
required, shall be paid by BEI.
9. Indemnification.
(a) Contractor agrees to take all necessary precautions to prevent
injury to any persons (including employees of BEI) or damage to property
(including BEI's property) during the term of this Agreement and shall
indemnify and hold harmless BEI and its officers, agents, directors and
employees against any claim, loss judgment, liability, expense (including
reasonable attorneys' and expert witnesses' fees and costs) and injury to
person or property (including death) resulting in any way from Contractor's
willful misconduct, breach of contract or negligence in the performance or
failure to perform Contractor's obligations under this Agreement.
(b) BEI agrees to indemnify and hold Contractor harmless against any
claim, loss, judgment, liability, expense (including reasonable attorneys'
and expert witnesses' fees and costs) and injury to person or property
(including death) to the extent of any act, omission or negligence on the
part of BEI resulting during the performance of the Contractor's duties
under this Agreement.
(c) In the event of the assertion or commencement by an person of any
claim or legal proceeding (whether against BEI or against any other person)
with respect to which Contractor may become obligated to hold harmless,
indemnify, compensate or reimburse BEI or its affiliates pursuant to this
Section 9, BEI shall have the right, at its election, to proceed with the
defense of such claim or legal proceeding on its own. If BEI so proceeds
with the defense of any such claim or legal proceeding:
(i) all reasonable expenses relating to the defense of such claim
or legal proceeding shall be borne and paid exclusively by Contractor;
(ii) Contractor shall make available to BEI any documents and
materials in his possession or control that may be necessary to the
defense of such claim or legal proceeding; and
7.
<PAGE>
(iii) BEI shall have the right to settle, adjust or compromise
such claim or legal proceeding with the consent of Contractor
provided, however, that such consent shall not be unreasonably
withheld.
(d) No indemnitee (other than BEI or any successor thereto or assign
thereof) shall be permitted to assert any indemnification claim or exercise
any other remedy under this Agreement unless BEI (or any successor thereto
or assign thereof) shall have consented to the assertion of such
indemnification claim or the exercise of such other remedy.
BEI shall give the Contractor prompt notice of the commencement of any such
legal proceeding against BEI; provided, however, that any failure on the part of
BEI to so notify Contractor shall not limit any of the obligations of Contractor
under this Section 9 (except to the extent such failure materially prejudices
the defense of such legal proceeding).
10. Term and Termination.
(a) The initial term of this Agreement shall be two (2) years
("Initial Term"). The Initial Term may be extended for additional twelve
(12) month periods (a "Subsequent Term") only upon the mutual written
consent of BEI and Contractor, executed no less than sixty (60) days prior
to the termination of the current term.
(b) Either BEI or Contractor may terminate this Agreement with or
without cause with thirty (30) days' advance written notice. In such event,
Contractor shall cease work immediately after receiving notice from BEI,
unless otherwise advised by BEI, and shall notify BEI of expenses incurred
up to the termination date.
11. Effect of Termination. Unless otherwise state herein, upon the
termination of this Agreement, each party shall be released from all obligations
and liabilities to the other occurring or arising after the date of such
termination, except that any termination of this Agreement shall not relieve
Contractor of Contractor's obligations under sections 3, 4, 6, 8, 9, 11 and 14
hereof, nor shall any such termination relieve Contractor or BEI from any
liability arising from any breach of this Agreement. Upon termination of this
Agreement for any reason whatsoever, Contractor shall promptly surrender and
deliver to BEI all documents, notes, laboratory notebooks, drawings,
specification, calculations, sequences, data and other materials of any nature
pertaining to Contractor's work with BEI, and any documents or data of any
description (or any reproduction of any documents or data) containing or
pertaining to any Information. Contractor agrees that in the event of such
termination, Contractor will cooperate with BEI in completing and signing BEI's
termination statement for consultants.
12. Compliance with Applicable Laws. Contractor warrants that all material
supplied and work performed under this Agreement complies with or will comply
with all applicable United States and foreign laws and regulations.
13. Independent Contractor. Contractor is an independent contractor, is not
an agent or employee of BEI and is not authorized to act on behalf of BEI,
except as expressly stated in this Agreement or mutually agreed by the President
of BEI and Contractor. Contractor
8.
<PAGE>
will not be eligible for any employee benefits, nor will BEI make deductions
from any amounts payable to Contractor for taxes or other employee withholdings.
Taxes and such withholdings shall be the sole responsibility of Contractor.
14. Legal and Equitable Remedies. Contractor hereby acknowledges and agrees
that in the event of any breach of this Agreement by Contractor, including,
without limitation, the actual or threatened disclosure of Information without
the prior express written consent of BEI, BEI will suffer an irreparable injury,
such that no remedy at law will afford it adequate protection against, or
appropriate compensation for, such injury. Accordingly, Contractor hereby agrees
that BEI shall be entitled to specific performance of Contractor's obligations
under this Agreement, as well as such further relief as may be granted by a
court of competent jurisdiction.
15. General. The parties' rights and obligations under this Agreement will
bind and insure to the benefit of their respective successors, heirs, executors,
and administrators and permitted assigns. This Agreement and the Schedules
attached hereto and hereby incorporated herein constitute the parties' final,
exclusive and complete understanding and agreement with respect to the subject
matter hereof, and supersede all prior and contemporaneous understandings and
agreements relating to its subject matter. This Agreement may no be waived,
modified, amended or assigned unless mutually agreed upon in writing by both
parties. In the event any provision of this Agreement is found to be legally
unenforceable, such unenforceability shall not prevent enforcement of any other
provision of the Agreement. This Agreement shall be governed by the laws of the
State of New Jersey, excluding its conflict of laws principles. Any notices
required or permitted hereunder shall be given to the appropriate party, at the
address specified below or at such other address as the party shall specify in
writing.
Such notice shall be deemed given: (a) upon personal delivery; (b) or sent
by certified or registered mail, postage prepaid, three (3) days after the date
of mailing; (c) when sent by confirmed facsimile or telex if sent during normal
business hours of the recipient, if not, then on the next business day; or (d)
one day after deposit with a nationally recognized overnight courier, specifying
next day delivery, with written verification of receipt.
9.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
BEI MEDICAL SYSTEMS COMPANY, INC. CONTRACTOR
By: /s/ Herb Spoon By: /s/ Ralph Richart, M.D.
------------------------------ ------------------------------
Herb Spoon Ralph Richart, M.D.
(Print Name)
President & CEO
- ----------------------------------- -----------------------------------
(Title) Social Security Number
Address: __________________________ Address: __________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
10.
<PAGE>
SCHEDULE A
TERRITORY
LATIN AMERICA
(Including: MEXICO, CENTRAL AMERICA, SOUTH AMERICA
AND THE CARIBBEAN)
FAR EAST
(Including: INDIA, CHINA, AUSTRALIA
AND THE PACIFIC RIM)
<PAGE>
SCHEDULE B
PRODUCTS
HTA(R) HARDWARE
Hydro ThermAblator(R) System for Hysteroscopic Endometrial Ablation (Reorder
Numbers: 55000 & 55001 per attached pages 1 & 2)
HTA(R) Disposables
Procedure Set, Sterile, Single Patient use (Reorder Number 55015 per attached
page 3)
<PAGE>
SCHEDULE C
BACKGROUND TECHNOLOGY
[BEI LETTERHEAD]
February 27, 1998
Personal and Confidential
-------------------------
Mr. Herb Spoon
9114 Fire Water
San Antonio, TX 78255
Dear Herb:
This letter will constitute a formal offer to you to become President and Chief
Executive Officer of BEI Medical Systems Company beginning on or about March
30, 1998. The compensation would include the following:
o A base salary of $175,000 per year;
o A moving allowance combined with a sign-up bonus designed to
compensate, in part, you for real estate expenses, consisting in total
of a one-time payment of $20,000;
o An annual bonus payable to you in either cash or a combination of cash
and stock of up to 50% of your salary for the attainment of pre-agreed
upon annual objectives. This bonus would be made after the Company's
audited results following the end of our fiscal year each September
30th;
o Finally, the Company would offer you 240,000 shares of stock, one-half
in the form of Restricted stock and one-half in the form of Stock
Options at the current market price. These shares would vest over a
four-year period. In the event the Company were sold, the unvested
shares would vest on sale.
Under minor detail, Herb, I have changed your start date to Monday, March 30,
1998 to allow us to make the announcement at our Annual Meeting on March 28 or
immediately thereafter, based on advice from the lawyers. Also, the Company does
not have sufficient restricted shares currently authorized to meet your
commitment. I expect to get approval for additional shares at our Annual
Shareholders meeting, and authorization is in the proxy (enclosed for your
review.)
<PAGE>
Mr. Herb Spoon
February 27, 1998 Page 2 of 2
You will report to the Company's Board of Directors, and it is my intent to
continue as Chairman of the Board.
You are eligible to be covered by our life, medical, dental and disability plans
on the first of the month following the month in which you begin employment (or
on the first day of employment if your employment begins on the 1st of the
month). You will also be eligible to participate in BEI's 401K Retirement
Savings Plan on the first entry date following three months of employment. We
will provide additional information at the time of your enrollment.
The above referenced terms and conditions are contingent upon your execution of
an Employment Propietary Information and Inventions Agreement (sample enclosed).
Herb, I hope these points cover the major topics we discussed in our very
pleasant meeting of last Thursday, February 19. I very much look forward to
working with you. I believe there is a real opportunity to build Medical Systems
into a premier company.
Please signify your acceptance of this position and the corresponding conditions
by countersigning this letter where indicated below. With kind regards.
Yours sincerely,
BEI MEDICAL SYSTEMS COMPANY
/s/ CHARLES CROCKER
- ---------------------------
Charles Crocker
Chairman of the Board
CC:jc
Enclosures
Acceptance: /s/ HERB SPOON 3/2/98
-------------------- --------------------
Herb Spoon Date
[BEI LETTERHEAD]
February 12, 1997
CONFIDENTIAL
Mr. Thomas W. Fry
45 Hunter Lane
Ridgefield, Connecticut 06877
Dear Tom,
As approved by Charles Crocker, Chairman of the Board, and because of the
employment uncertainties resulting from the current financing and acquisition
activities, the potential for a change in control of BEI Medical Systems
Company, Inc., and the important role you have in effecting these changes, I am
pleased to confirm our mutual understanding and agreement that the six-month
severance compensation package outlined in my "Offer of Employment" letter to
you dated September 11, 1992 has been extended form six months to twelve months.
BEI Medical Systems Company, Inc. and/or its successor company will provide you
with a severance package equal to twelve months of your current compensation
should you be asked to terminate your employment with the Company or if you
elect to terminate your employment as a result of any of the following reasons:
i) there is significant reduction in your authority or duties;
ii) your aggregate compensation is reduced so that it as a whole falls
below its current value;
iii) the benefits available to you are materially reduced;
iv) the company requires you to relocate the principal place where you
perform services for the Company without your agreement.
Sincerely, APPROVED:
/s/ RICHARD W. TURNER /s/ GARY D. WRENCH
- ----------------------------- -----------------------------
Richard W. Turner Gary D. Wrench
Senior Vice President and
Chief Financial Officer
RWT/em Feb 18, 1997
-----------------------------
Date
[SEAL]
FIRST AMENDMENT TO
TAX ALLOCATION AND INDEMNITY AGREEMENT
This First Amendment to Tax Allocation and Indemnity Agreement is entered
into this 15th day of December 1998, by and between BEI Electronics, Inc., a
Delaware corporation ("Electronics"), and BEI Technologies, Inc., a Delaware
corporation ("Technologies").
RECITALS
1. Electronics and Technologies entered into a Tax Allocation and Indemnity
Agreement on September 26, 1997, in connection with the distribution of
Technologies stock to Electronics' shareholders (the "Agreement").
2. In order better to reflect the parties' original intentions, the parties
to the Agreement wish to amend and restate certain provisions of the Agreement
as if they had been originally incorporated therein.
3. All defined terms used below shall have the same meaning as defined in
the agreement.
AMENDMENTS
A. Article III Section 3.1(a) is hereby amended and restated to read as
follows:
3.1 Federal Income Taxes:
(a) For each taxable year (or portion thereof) in which
Technologies and any other members of the Technologies Subgroup are
included in the Electronics Affiliated Group consolidated federal
income tax return, the Technologies Subgroup (1) shall be allocated
and Technologies shall be responsible for the payment of 100% of the
Electronics Affiliated Group's federal income tax liability for the
year (including any alternative minimum tax or environment tax, as
determined under this Section 3.1), subject to the Subsequent
Adjustments provisions of Article V of this agreement, and (2) shall
be entitled to the receipt of any federal income tax refunds
(including any alternative minimum tax or environment tax, as
determined under this Section 3.1) received by Electronics for the
taxable year.
B. Article III Section 3.2(a) is hereby amended and restated to read as
follows:
3.2 State Income and Franchise Taxes:
(a) For each taxable year (or portion thereof) for which
Technologies and/or any other members of the Technologies Subgroup are
included in any combined state income or franchise tax return filed by
the Electronics Unitary Group, the Technologies Subgroup (1) shall be
allocated and Technologies shall be responsible for the payment of all
state
<PAGE>
income and franchise taxes (including any alternative minimum tax) per
any state income and franchise tax returns in Technologies and/or any
other members of the Technologies Subgroup are included, subject to
Subsequent Adjustments provisions of Article V of this agreement, and
(2) shall be entitled to the receipt of any state income and franchise
tax refunds (including any alternative minimum tax) received by
Electronics for the taxable year in which Technologies and/or any
other members of the Technologies Subgroup are included in any
combined state income or franchise tax return filed by Electronics
Unitary Group.
IN WITNESS WHEREOF, the parties hereto have caused this Tax
Allocation and Indemnity Agreement to be executed by their duly
authorized representatives.
Electronics
By: /s/ Thomas W. Fry
------------------------------------
Name: Thomas W. Fry
----------------------------------
Title: Vice President of Finance and
Administration
Secretary & Treasurer
---------------------------------
Technologies
By: /s/ Robert R. Corr
------------------------------------
Name: Robert R. Corr
----------------------------------
Title: Secretary, Treasurer and
Controller
---------------------------------
(Exhibit 21.1)
SUBSIDIARIES OF THE REGISTRANT
Meditron Devices, Inc.
XYLOG Corporation
BEI Medical Systems International Inc.
Zinnanti Surgical Instruments
OvaMed Corporation
Calculus Instruments Company, Inc.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles Crocker and Thomas W. Fry, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/Charles Crocker Chairman of the Board of January 4, 1999
- --------------------------------------- Directors
(Charles Crocker)
Vice President of Finance and
/S/Thomas W. Fry Administration, Secretary and January 4, 1999
- --------------------------------------- Treasurer
(Thomas W. Fry) (Principal Financial and Accounting January 4, 1999
Officer)
/S/Ralph M. Richart Director January 4, 1999
- ---------------------------------------
(Ralph M. Richart)
/S/Herbert H. Spoon President and Chief Executive Officer January 4, 1999
- --------------------------------------- (principal executive officer)
(Herbert H. Spoon)
/S/Richard W. Turner Director January 4, 1999
- ---------------------------------------
(Richard W. Turner)
/S/Lawrence A. Wan Director January 4, 1999
- ---------------------------------------
(Lawrence A. Wan)
/S/Gary D. Wrench Director January 4, 1999
- ---------------------------------------
(Gary D. Wrench)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE COMNTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCT. 3, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> OCT-03-1998
<CASH> 3,504
<SECURITIES> 0
<RECEIVABLES> 2,071
<ALLOWANCES> 174
<INVENTORY> 3,087
<CURRENT-ASSETS> 11,232
<PP&E> 1,600
<DEPRECIATION> 780
<TOTAL-ASSETS> 17,388
<CURRENT-LIABILITIES> 2,948
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 14,430
<TOTAL-LIABILITY-AND-EQUITY> 17,388
<SALES> 9,651
<TOTAL-REVENUES> 9,651
<CGS> 5,638
<TOTAL-COSTS> 5,638
<OTHER-EXPENSES> 11,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (7,250)
<INCOME-TAX> (2,279)
<INCOME-CONTINUING> (4,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,971)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
