<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
BEI MEDICAL SYSTEMS COMPANY, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
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2. Aggregate number of securities to which transaction applies:
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3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$11,656,600.00, which is the sum of: a cash payment of $11,206,600,
assumption of
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liabilities of up to $350,000 and forgiveness of royalty payments due
of up to $100,000
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4. Proposed maximum aggregate value of transaction:
$11,656,600.00
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5. Total fee paid:
$2,335.00
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
6. Amount Previously Paid:
---------------------------------------------------------------
7. Form, Schedule or Registration Statement No.:
---------------------------------------------------------------
8. Filing Party:
---------------------------------------------------------------
9. Date Filed:
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<PAGE>
COMPANY LOGO
November 10, 1999
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the Stockholders
(the "Special Meeting") of BEI on Tuesday, December 7, 1999 at the principal
executive offices of BEI located at 100 Hollister Road, Teterboro, New Jersey
at 9:00 a.m. At our Special Meeting, you will be asked to vote upon the
approval and adoption of the Asset Purchase Agreement, dated as of October 1,
1999 and amended on November 2, 1999 (the "Asset Purchase Agreement"), between
CooperSurgical Acquisition Corp., a Delaware corporation and BEI Medical
Systems Company, Inc., a Delaware corporation ("BEI"), providing for the sale
of a substantial portion of the assets of BEI pursuant to the terms and
subject to the conditions of the Asset Purchase Agreement (the "Asset Sale").
The foregoing proposal is described more fully in the accompanying Proxy
Statement.
After careful consideration, the BEI Board of Directors has unanimously
determined that the terms of the Asset Purchase Agreement and the Asset Sale
are fair to, and in the best interests of, BEI and its stockholders.
Accordingly, the BEI Board of Directors has unanimously approved the Asset
Purchase Agreement and unanimously recommends that the stockholders of BEI
vote FOR approval and adoption of the Asset Purchase Agreement and approval of
the Asset Sale. The approval and adoption of the Asset Purchase Agreement and
approval of the Asset Sale requires the affirmative vote of holders of at
least a majority of the outstanding shares of common stock of BEI as of the
record date.
Stockholders are urged to review carefully the information contained in the
Proxy Statement attached hereto prior to deciding how to vote their shares at
the Special Meeting. Because of the significance of the Asset Sale, your
participation in the Special Meeting, in person or by proxy, is especially
important. We hope you will be able to attend the Special Meeting. Whether or
not you expect to attend the Special Meeting in person, please complete, sign
and promptly return the enclosed proxy card in the enclosed postage-prepaid
envelope to assure representation of your shares. You may revoke your proxy at
any time before it has been voted, and if you attend the Special Meeting you
may vote in person, even if you previously returned your proxy card.
Your prompt cooperation will be greatly appreciated. We look forward to
seeing you at the Special Meeting.
Sincerely,
/s/ Charles Crocker /s/ Richard W. Turner
Charles Crocker Richard W. Turner
Chairman of the Board President and Chief Executive
Officer
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
100 Hollister Road
Teterboro, New Jersey 07608
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 7, 1999
To The Stockholders of BEI Medical Systems Company, Inc.:
Notice Is Hereby Given that a Special Meeting of Stockholders of BEI Medical
Systems Company, Inc., a Delaware corporation (the "Company" or "BEI"), will
be held on December 7, 1999 at 9:00 a.m. local time, at the Company's
principal executive offices located at 100 Hollister Road, Teterboro, New
Jersey, for the following purposes:
1. To approve the sale of a substantial portion of the assets of the
Company to CooperSurgical Acquisition Corp., a Delaware corporation
("CSAC"), pursuant to an Asset Purchase Agreement, dated as of October
1, 1999 and amended on November 2, 1999, by and between the Company and
CSAC (the "Asset Purchase Agreement") (the "Asset Sale Proposal").
2. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
The foregoing items of business are more completely described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on October 15, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at this Special Meeting of Stockholders and at any adjournment or
postponement thereof.
By Order of the Board of Directors
/s/ Thomas W. Fry
Thomas W. Fry
Corporate Secretary
Teterboro, New Jersey
November 10, 1999
All Stockholders Are Cordially Invited To Attend The Meeting In Person.
Whether Or Not You Expect To Attend The Meeting, Please Complete, Date, Sign
And Return The Enclosed Proxy As Promptly As Possible In Order To Ensure Your
Representation At The Meeting. A Return Envelope (which Is Postage Prepaid If
Mailed In The United States) Is Enclosed For That Purpose. Even If You Have
Given Your Proxy, You May Still Vote In Person If You Attend The Meeting.
Please Note, However, That Attendance At The Meeting Will Not By Itself Revoke
A Proxy. Furthermore, If Your Shares Are Held Of Record By A Broker, Bank Or
Other Nominee And You Wish To Vote At The Meeting, You Must Obtain From The
Record Holder A Proxy Issued In Your Name.
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
100 Hollister Road
Teterboro, New Jersey 07608
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
December 7, 1999
The enclosed proxy is solicited on behalf of the Board of Directors (the
"BEI Board") of BEI Medical Systems Company, Inc., a Delaware corporation (the
"Company" or "BEI"), for use at the Special Meeting of Stockholders to be held
on December 7, 1999, at 9:00 a.m. local time (the "Special Meeting"), or at
any adjournment or postponement thereof, to approve the sale (the "Asset
Sale") of a substantial portion of the assets of BEI to CooperSurgical
Acquisition Corp., a Delaware corporation ("CSAC"), pursuant to an Asset
Purchase Agreement, dated as of October 1, 1999 and amended on November 2,
1999, by and between BEI and CSAC (the "Asset Purchase Agreement") (the "Asset
Sale Proposal"). The Special Meeting will be held at BEI's principal executive
offices located at 100 Hollister Road, Teterboro, New Jersey. BEI intends to
mail this Proxy Statement and accompanying proxy card on or about November 15,
1999, to all stockholders entitled to vote at the Special Meeting.
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of the Company's
common stock (the "Common Stock") beneficially owned by others to forward to
such beneficial owners. The Company may reimburse persons representing
beneficial owners of Common Stock for their costs of forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of the Company. No additional
compensation will be paid to directors, officers or other regular employees
for such services.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
FORWARD-LOOKING STATEMENTS................................................ 1
WHERE YOU CAN FIND MORE INFORMATION....................................... 1
SUMMARY................................................................... 2
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION......................... 8
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA................................ 9
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 11
COMPARATIVE PER SHARE DATA................................................ 12
RISK FACTORS.............................................................. 13
Risks If The Asset Sale Is Not Consummated.............................. 13
Lack of Adequate Capital................................................ 13
Risks If The Asset Sale Is Consummated.................................. 13
Narrowed Focus of Company Business; Dependence Upon HTA Technology...... 13
SPECIAL MEETING........................................................... 14
Date, Time And Place.................................................... 14
Matters To Be Considered At The Special Meeting......................... 14
Record Date And Voting Rights And Requirements.......................... 14
Voting Of Proxies....................................................... 14
Revocation Of Proxies................................................... 15
Solicitation Of Proxies................................................. 15
Stockholder Proposals................................................... 15
THE ASSET SALE PROPOSAL................................................... 16
Background of the Asset Sale............................................ 18
BEI's Reasons for the Asset Sale........................................ 19
Recommendation of the BEI Board......................................... 19
Opinion of Financial Advisor to BEI..................................... 19
Material Federal Income Tax Consequences................................ 22
Accounting Treatment.................................................... 23
Regulatory Matters...................................................... 23
Rights of Appraisal..................................................... 23
THE ASSET PURCHASE AGREEMENT.............................................. 23
Sale of Assets.......................................................... 23
Liabilities Assumed..................................................... 23
Asset Sale Consideration; Purchase Price Adjustments.................... 23
Use of Proceeds......................................................... 24
Representations and Warranties.......................................... 24
Conduct of BEI's Business Prior to the Asset Sale....................... 25
Exclusivity............................................................. 25
Termination Fees........................................................ 25
Conditions to the Asset Sale............................................ 25
Termination............................................................. 27
Indemnification......................................................... 27
Post-Closing Covenants Related to Receivables........................... 28
</TABLE>
i
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<TABLE>
<CAPTION>
Page
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<S> <C>
RELATED AGREEMENTS....................................................... 28
Transition Agreement................................................... 28
BEI Noncompetition Agreement........................................... 29
Turner Noncompetition Agreement........................................ 29
INTERESTS OF MANAGEMENT OR DIRECTORS IN THE ASSET SALE................... 30
BEI's BUSINESS........................................................... 31
Industry Overview...................................................... 31
BEI Business Strategy.................................................. 31
Base Business.......................................................... 32
The HTA................................................................ 33
The HTA Solution....................................................... 35
The HTA System......................................................... 36
Results of Clinical Trials............................................. 36
Sales and Marketing.................................................... 37
Competition............................................................ 38
Manufacturing.......................................................... 39
Research and Development; Technology................................... 40
Licenses, Patents and Proprietary Technology........................... 40
Government Regulation.................................................. 41
Employees.............................................................. 43
BEI PROPERTIES........................................................... 44
LEGAL PROCEEDINGS INVOLVING BEI.......................................... 44
SELECTED FINANCIAL DATA.................................................. 45
BEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 46
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 46
Nine-months Ended July 3, 1999 and June 27, 1998....................... 47
Fiscal years 1998, 1997 and 1996....................................... 47
Revenue................................................................ 47
Cost of Sales and Gross Profit......................................... 48
Selling, General and Administrative Expenses........................... 48
Research, Development and Related Expenses............................. 49
Interest Expense and Other Income...................................... 49
Income Tax Benefit..................................................... 49
Discontinued Operations................................................ 50
Liquidity and Capital Resources........................................ 50
Year 2000 Compliance: Modification of Management Information Systems... 51
Recent Accounting Pronouncements....................................... 52
Effects of Inflation................................................... 52
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK............... 53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 54
EXPERTS.................................................................. 56
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS........................ 56
OTHER MATTERS............................................................ 56
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
INDEX TO ANNEXES........................................................... 57
Appendix A--Asset Purchase Agreement
Appendix B--Opinion of Ewing Monroe Bemiss & Co.
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
iii
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Proxy Statement constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The reasons for the Asset Sale
discussed under the caption "The Asset Sale," statements about the expected
impact of the asset sale on the Company's business, financial performance and
condition, and statements about the accounting and tax treatment of the
Company related to the Asset Sale are forward-looking statements. Further, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements.
Without limiting the foregoing, the words "projects," "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company after the Asset
Sale to differ materially from those indicated by such forward-looking
statements, including factors related to the timely development and acceptance
and pricing of BEI's products and in particular its Hydro ThermAblator ("HTA")
products; whether BEI's new products now in U.S. or international clinical
trials prove to be safe and effective under applicable regulatory guidelines;
receipt of required United States Food and Drug Administration ("FDA")
approvals; the impact of competitive products and pricing; and general
economic conditions, such as the rate of employment, inflation, interest
rates, and the condition of the capital markets. This list of factors is not
exclusive. The Company undertakes no obligation to update any forward-looking
statements.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and files annual, quarterly and special reports, proxy statements and other
information with the SEC. These reports and information may be read and copied
at the following SEC locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
Copies of the reports and information filed by the Company may also be
obtained by mail from the Public Reference Section of the SEC, 450 Fifth
Street, Room 1024, Washington, D.C. 20549, at prescribed rates. Further
information on the operation of the SEC's Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a world wide web site that contains reports, proxy
statements and other information about registrants, such as the Company, that
file electronically with the SEC. The address of that web site is
http://www.sec.gov.
1
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important to you. To understand the
Asset Sale fully and for a more complete description of the legal terms of the
Asset Sale, you should read carefully this entire document and the Asset
Purchase Agreement attached hereto as Annex A. We have included page references
parenthetically to direct you to a more complete description of the topics
presented in this summary.
The Companies
BEI
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, New Jersey 07608
(201) 727-4900
BEI develops, manufactures and markets a broad array of advanced systems and
devices for minimally invasive diagnostic and therapeutic procedures in the
field of gynecology.
CSAC
CooperSurgical Acquisition Corp.
c/o The Cooper Companies, Inc.
6140 Stoneridge Mall Road, Suite 590
Pleasanton, California 94588
CSAC is a subsidiary of The Cooper Companies, Inc. ("Cooper"). Cooper,
through its principal subsidiaries, develops, manufactures and markets
healthcare products, including hard and soft daily, flexible and extended wear
contact lenses, and diagnostic products, surgical instruments and related
products.
The Special Meeting
The Special Meeting will be held at the Company's principal executive offices
located at 100 Hollister Road, Teterboro, New Jersey at 9:00 a.m. local time,
on December 7, 1999. At the Special Meeting, the Company's stockholders will be
asked to consider and vote on a proposal to approve the Asset Sale and approve
and adopt the Asset Purchase Agreement. Only stockholders of record of Common
Stock at the close of business on October 15, 1999, will be entitled to notice
of and to vote at the Special Meeting. At the close of business on October 15,
1999, the Company had outstanding and entitled to vote 7,685,707 shares of
Common Stock. Each holder of record of Common Stock on such date will be
entitled to one vote for each share held on all matters to be voted upon at the
Special Meeting.
The Asset Sale
Reasons for the Asset Sale (page 18)
The BEI Board believes, among other things, that:
. The proposed purchase price, as reduced by estimated purchase price
adjustments, was approximately 95% of the market capitalization of the
Company both at the time of Cooper's initial offer and at the time the
Asset Purchase Agreement was signed, notwithstanding that (i) the assets
being purchased in the Asset Sale (the "Purchased Assets") represented
approximately 65% of the total assets of the Company as reported on the
July 3, 1999 balance sheet of the Company, and (ii) the management
believes that the value of the Company's HTA technology is substantially
in excess of that at which it is carried on the Company's books;
2
<PAGE>
. The assets to be sold constitute a business of developing,
manufacturing, marketing and servicing a broad array of advanced systems
and devices for diagnostic and therapeutic procedures in the medical
fields of gynecology and gastroenterology (the "Base Business"). In
addition to the Base Business, the Company is developing a new
therapeutic system, the Hydro ThermAblator for treatment of excessive
uterine bleeding. The Company has been unable to secure a minority
equity or convertible debt financing from traditional debt or equity
markets on terms acceptable to the Company to: (i) complete the expanded
clinical trials of the HTA system; (ii) aggressively launch the HTA
product into the market; and (iii) continue to build the Base Business.
. The BEI Board believes that the Company's HTA technology has significant
commercial potential, but does not believe that the public capital
markets currently represent a realistic source of funding adequate to
complete the development and commercialization of the HTA. The BEI Board
believes that it can best enhance stockholder value by applying the
proceeds from the Asset Sale to the further development and promotion of
the HTA.
These and other reasons for approving and recommending the Asset Sale, as
well as negative factors in considering the Asset Sale, are discussed further
on pages 18 through 19 of this document.
The Sale of Assets (page 23)
CSAC will purchase substantially all of the assets of the Base Business.
After the sale, BEI will remain a public company and will continue to operate
its business in order to complete the development and commercialization of its
new HTA product.
Risk Factors (page 13)
There are certain risks that exist if the Asset Sale is not consummated,
including the impact it would have on BEI's ability to raise sufficient capital
to meet BEI's liquidity requirements. The consummation of the Asset Sale also
involves certain risks and uncertainties, including risks relating to the
ability of BEI to achieve its business goals with respect to the approval,
marketing and sale of its HTA products.
Consideration to be received by BEI (pages 23-24)
Total Consideration. If the Asset Sale is consummated, BEI will receive total
consideration consisting of the following:
. $11,206,600 for the sale of the assets, subject to adjustment;
. up to $350,000 of specified liabilities being assumed by CSAC (the
"Assumed Liabilities");
. the assumption by CSAC of certain contracts of BEI (the "Assumed
Contracts"); and
. the forgiveness by CooperSurgical, Inc. ("CSI") of royalty payments that
may be due to it in the future from BEI in an amount of up to $100,000.
Cash Proceeds Paid at Closing and Adjustments. At the closing of the Asset
Sale (the "Closing"), BEI will receive total consideration of up to $11,206,600
in cash (the "Cash Proceeds"), subject to:
. a dollar-for-dollar downward adjustment if the inventory and net
receivables of BEI on the date of the Closing (the "Closing Date"), as
reflected in a balance sheet prepared by BEI after the Closing, are in
the aggregate less than $3,600,000;
. a dollar-for-dollar upward adjustment if the inventory and net
receivables of BEI on the Closing Date, as reflected in a balance sheet
prepared by BEI after the Closing, are in the aggregate greater than
$3,750,000;
3
<PAGE>
. a downward adjustment based on a complex valuation matrix which is
dependent upon both (i) BEI's sales for the nine month period ended
October 2, 1999, on an annualized basis, and (ii) the sales mix of the
Base Business during the same nine month period (the "Sales Shortfall
Calculation");
. a dollar-for-dollar upward adjustment to the extent the amount of the
liabilities being assumed by Cooper is less than $350,000; and
. a downward adjustment if certain customers indicate that they will not
continue after the Closing to purchase products that are included in the
product lines being sold in the Asset Sale based upon the sales to these
customers as included in the sales valuation matrix mentioned above. As
of the date of this Proxy Statement, none of these customers have
indicated to BEI that they do not intend to continue to purchase the
products that are included in the product lines being sold in the Asset
Sale.
As of October 31, 1999, the Company believes that there will be a downward
adjustment of approximately $225,000 based on the Sales Shortfall Calculation.
Although the Company is not certain what additional adjustments may result from
the above described post-closing valuation of the Company's inventory and net
receivables, if the Asset Sale had closed on October 2, 1999 (the end of the
Company's fiscal year), the estimated value of BEI's inventory and net
receivables related to the Base Business was approximately $3,100,000, and the
downward adjustment would have been approximately $500,000 (representing the
difference between $3,600,000 and $3,100,000).
The Company's stockholders are being asked to approve the Asset Sale
regardless of the magnitude of the downward adjustments discussed above. In
addition, the vote of the stockholders of the Company will not be resolicited
even if the purchase price drops materially below the current estimate, which
is the original purchase price less approximately $725,000.
Obligations of BEI. In connection with the Asset Sale, BEI has agreed to
provide certain transition services to CSAC pursuant to a transition agreement.
Under the transition agreement, for three months following the Closing (and at
CSAC's option, for up to an additional three months), BEI will operate on
behalf of CSAC certain aspects of the Base Business. The transition agreement
is more fully described below. See "The Asset Sale Proposal--Related
Agreements--Transition Agreement." Under the transition agreement, the Company
is obligated to do the following:
. pay approximately $260,000 in connection with severance payments,
bonuses and other costs associated with the transition services to be
provided by BEI to CSAC; and
. provide the first $245,000 of products and services to CSAC without cost
for transition services.
Use of Proceeds (page 24)
The cash proceeds will be utilized by BEI (i) to pay expenses associated with
the Asset Sale, (ii) to repay the outstanding amount owed under the credit
facility with Transamerica Business Credit Corporation, (iii) as working
capital to finance completion of the FDA Phase III clinical trials and initiate
commercialization of the HTA product and (iv) to fund BEI's ongoing operating
expenses. BEI's stockholders are not expected to receive any distribution from
the proceeds of the Asset Sale.
Recommendation of the BEI Board (page 19)
THE BEI BOARD HAS APPROVED THE ASSET SALE AND THE ASSET PURCHASE AGREEMENT
AND HAS DETERMINED THAT THE ASSET SALE AND THE ASSET PURCHASE AGREEMENT ARE
FAIR TO, AND IN THE BEST INTERESTS OF, BEI AND THE BEI STOCKHOLDERS.
ACCORDINGLY, THE BEI BOARD HAS UNANIMOUSLY RECOMMENDED THAT THE BEI
STOCKHOLDERS VOTE FOR APPROVAL OF THE ASSET SALE PROPOSAL.
4
<PAGE>
Opinion of Financial Advisor to BEI (page 19)
Ewing Monroe Bemiss & Co. delivered its opinion dated September 23, 1999 (the
"Opinion") to the BEI Board that, as of the date of such opinion, the
consideration to be paid to BEI by CSAC was fair from a financial point of view
to the BEI stockholders. The full text of the Opinion, which sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations on the scope of review undertaken in connection with the Opinion,
is attached hereto as Annex B. The Opinion does not constitute a recommendation
as to how any holder of BEI Common Stock should vote at the Special Meeting.
BEI stockholders are urged to, and should, read the Opinion in its entirety.
Conditions to the Asset Sale (pages 25-26)
BEI and CSAC will complete the Asset Sale only if several conditions are
satisfied, including the following:
. the representations and warranties of BEI and CSAC contained in the
Asset Purchase Agreement shall be true and correct in all respects as of
the closing date, subject to certain exceptions;
. BEI and CSAC shall have performed or complied in all material respects
with all agreements and covenants required by the Asset Purchase
Agreement unless the failure to perform will not result in a material
adverse effect;
. there shall not have been commenced and be pending against BEI or CSAC
any material legal proceeding that is reasonably likely to have the
effect of preventing, delaying, making illegal or seeking material
damages in connection with the Asset Sale;
. no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
constraint or prohibition preventing the consummation of the Asset Sale
shall be in effect and no action taken or entered into or law enacted or
enforced which makes the consummation of the Asset Sale illegal;
. the Asset Purchase Agreement and the Asset Sale shall have been approved
by the requisite vote of the stockholders of BEI;
. required consents shall have been obtained for contracts being assumed
by CSAC;
. Transamerica Business Credit Corporation has released its encumbrances
on the assets being sold;
. a noncompetition agreement and a transition agreement between CSAC and
BEI are entered into and a noncompetition agreement between Richard W.
Turner, the President and Chief Executive Officer of BEI ("Turner"), and
CSAC is entered into (such agreements are collectively referred to
herein as the "Related Agreements"); and
. certain royalty obligations of BEI to Cooper shall have been terminated.
Termination of the Asset Purchase Agreement (page 27)
Either BEI or CSAC can terminate the Asset Purchase Agreement if:
. the Closing has not taken place on or before December 31, 1999;
. a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a ruling
prohibiting the Asset Sale;
. the holders of a majority of the BEI Common Stock shall not have
approved the Asset Sale and the Asset Purchase Agreement;
. either BEI or CSAC has willfully breached the Asset Purchase Agreement
and such breach shall not have been cured within 10 business days of
receipt of notice thereof; or
. if the matters contained in an amendment to BEI's disclosure schedule to
the Asset Purchase Agreement constitute a material adverse effect as
described in the Asset Purchase Agreement.
5
<PAGE>
BEI and CSAC may also mutually agree to terminate the Asset Purchase
Agreement at any time prior to the Closing.
Indemnification (pages 27-28)
BEI is required to indemnify the "Purchasers Indemnified Persons," which
include CSAC and its affiliates, for losses suffered as a result of, among
other things, inaccuracies and breaches of any representation or warranty made
by BEI under the Asset Purchase Agreement and the Related Agreements, failure
by BEI to perform any agreement or covenant under the Asset Purchase Agreement
and the Related Agreements, losses from liabilities CSAC is not assuming or
assets it is not acquiring, and certain tax losses. The indemnification
obligations of BEI survive for 15 months following the Closing Date with
respect to breaches of certain of its representations and warranties, and
throughout the applicable statutes of limitations with respect to certain other
representations and warranties and certain other indemnity obligations. The
aggregate indemnification obligations of BEI shall not exceed the cash purchase
price for the Asset Sale. Purchaser Indemnified Persons may only seek
indemnification from BEI when the aggregate amount of losses suffered by CSAC
reaches $125,000; thereafter, those persons will be able to recover on the full
amount of losses, including losses less than $125,000.
The Related Agreements (pages 28-30)
Pursuant to the Asset Purchase Agreement, as a condition to the consummation
of the Asset Sale, CSAC and BEI shall enter into a transition agreement under
which BEI will provide certain services to CSAC in connection with the Base
Business and the assets being sold in the Asset Sale. CSAC and BEI shall also
enter into a noncompetition agreement whereby BEI shall agree to be subject to
certain noncompetition covenants for a period of five years. Also as a
condition to the consummation of the Asset Sale, Richard W. Turner, the
President and Chief Executive Officer of BEI, and CSAC shall enter into a
noncompetition agreement whereby Mr. Turner will be subject to certain
noncompetition covenants for a period of three years.
Business Plan Following the Asset Sale
Following the proposed Asset Sale, the Company's business plan will consist
of:
. Immediate reductions in workforce and spending that do not contribute to
the HTA project, excluding certain corporate functions;
. Ongoing collection and reporting of clinical data in support of
obtaining FDA approval to market the HTA in the United States;
. Expansion of international selling efforts in selected countries through
a network of country-specific surgical-specialty distributors, and
support of these distributors through promoting the HTA at medical trade
shows;
. Conducting seminars for physicians on the use of the HTA product as an
alternative for hysterectomy; and
. Preparation and refinement of plans for launching the HTA product in
North America as soon as possible after FDA approval to market the HTA
product is obtained.
To date, the Company has successfully completed Phase I and II of its
clinical trial of the HTA for the treatment of dysfunctional uterine bleeding.
The Company has also completed the human patient treatment phase required in
Phase III of its clinical trial. The Company's clinical investigators are
currently in the process of collecting patient data following patient treatment
at the three-, six- and twelve-month intervals. During this one-year follow up
period the Company will be sending the FDA scheduled modular submissions based
upon a time line proposal already reviewed and accepted by the FDA. Each module
will contain information pertinent to the evolution of the product development
and subsequent patient treatment up to and including the Phase III statistical
results at twelve months. All patient data at the twelve-month interval is
expected to be completed in September 2000. The Company plans to submit these
modules to the FDA on a regularly scheduled basis
6
<PAGE>
beginning in December 1999 and ending in October 2000. The Company is hopeful
that the FDA will authorize it to begin marketing the HTA in the United States
between October 2000 and April 2001. There can be no assurance that the Company
will be successful in obtaining FDA approval on a timely basis, or at all.
The Company believes it will obtain FDA authorization to market its HTA
product, but in the event that it does not receive timely authorization, it
would work to address and remove any deficiencies that are factors in the
Company not being able to obtain such authorization. The Company would move to
reduce its costs for all non-essential spending and conserve cash reserves
during this period. If FDA approval is not obtained for the HTA technology, the
BEI Board will evaluate all alternatives available to the Company at the time,
which alternatives may include:
. The affiliation of the Company with a non-U.S. company to exploit the
HTA technology offshore;
. The licensing or sale of the HTA technology, and the reinvestment of the
proceeds derived from such license or sale in an appropriate business
based on the Company's existing expertise, goodwill and management
skills; and
. The sale of the stock of the Company or the sale of the assets of the
Company with the distribution of proceeds to the Company's stockholders.
Regulatory Matters (page 23)
BEI is not aware of any regulatory or governmental approvals required to
consummate the Asset Sale.
Material Federal Income Tax Consequences (pages 22-23)
The Company will recognize a gain on the Asset Sale, but anticipates that,
for Federal and New Jersey state tax purposes, it will have net operating
losses ("NOLs") in amounts sufficient to offset such taxable gain. However, the
Company may be required to pay alternative minimum tax and sales tax as a
result of the Asset Sale. The Asset Sale will not have a tax consequence for
stockholders of the Company.
Accounting Treatment (page 23)
The transaction will be accounted for as a sale of assets in accordance with
generally accepted accounting principles. The Company will recognize a gain for
book purposes based upon the excess net proceeds to be received under the Asset
Purchase Agreement over the book value of the net assets sold.
Appraisal Rights (page 23)
Under Delaware law, BEI stockholders do not have dissenters' rights of
appraisal as a result of the Asset Sale.
Recent Developments
For the fourth quarter ended October 2, 1999, unaudited net sales were
approximately $1,900,000, as compared to $2,400,000 in the fourth quarter of
fiscal 1998. The Company anticipates that the operating loss for the fourth
quarter of fiscal 1999 has increased compared to the operating loss for the
third quarter of fiscal 1999 due to lower sales, higher expenses for
professional fees related to the Asset Sale and an adjustment related to a
write-down of the bipolar product line of approximately $175,000 to reflect
negotiated concessions related to the anticipated sale of this category of
inventory to CSAC pursuant to the Asset Purchase Agreement.
7
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following information to aid you in your analysis of the
financial aspects of the Asset Sale. The summary selected consolidated
financial data for each of the five years in the period ended October 3, 1998
have been derived from the audited Consolidated Financial Statements of BEI,
which are included herein. The summary selected consolidated financial data as
of and for the periods ended June 27, 1998 and July 3, 1999 have been derived
from unaudited Condensed Consolidated Financial Statements of BEI which are
included herein, and which, in the opinion of BEI management, have been
prepared on a basis substantially consistent with the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information for the period. The
results of such interim periods are not necessarily indicative of the results
for the full fiscal year. The data presented below should be read in
conjunction with BEI's Audited Consolidated Financial Statements for each of
the fiscal years in the five year period ended October 3, 1998 and the
Unaudited Condensed Consolidated Financial Statements as of and for the periods
ended June 27, 1998 and July 3, 1999, which are included herein.
BEI Summary Selected Historical Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------------------------------------------- --------------------
October 3, September 27, September 28, September 30, October 1, July 3, June 27,
1998 1997 1996 1995 1994 1999 1998
---------- ------------- ------------- ------------- ---------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $9,651 $10,005 $ 9,357 $ 8,847 $ 8,678 $ 6,512 $ 7,246
Loss from continuing
operations............. (4,971) (4,348) (2,682) (2,350) (2,458) (4,891) (3,324)
Loss from continuing
operations per common
share, basic and
diluted................ ($0.68) ($0.64) ($0.40) ($0.36) ($0.38) ($0.65) ($0.45)
Cash dividends per
common share........... -- $ 0.08 $ 0.08 $ 0.08 $ 0.08 -- --
Weighted average shares
outstanding............ 7,354 6,817 6,737 6,617 6,541 7,497 7,316
Balance Sheet Data:
Cash and cash
equivalents............ $3,504 $ 9,271 $ 9,128 $ 9,023 $ 1,103 $ 2,429
Working capital(1)...... 8,284 11,085 38,102 35,923 40,189 5,075
Total assets(1)......... 17,388 22,584 115,011 113,738 112,432 12,922
Long-term debt
(excluding current
portion)............... -- 22 212 392 560 1,000
Stockholders'
equity(1).............. 14,440 17,660 55,972 53,319 57,829 9,710
</TABLE>
- --------
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for 1996, 1995 and 1994.
8
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma financial data is based on the
historical financial statements of BEI. The pro forma statement of operations
data has been prepared assuming the Asset Sale was completed as of September
28, 1997. The pro forma financial data and notes thereto should be read in
conjunction with the historical financial statements of BEI included herein.
The unaudited pro forma financial data is based upon certain assumptions and
estimates of management which are subject to change. The pro forma financial
data is presented for illustrative purposes only and is not necessarily
indicative of any future results of operations or the results that might have
occurred if the Asset Sale had actually occurred on the indicated dates.
Statement of Operations Data:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended July 3, 1999 Year Ended October 3, 1998
------------------------------------ -----------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Historical Adjustments as Adjusted Historical Adjustments as Adjusted
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 6,512 $6,252(1) $ 260 $ 9,651 $9,376(1) $ 275
Cost of sales........... 3,878 3,129(1) 749 5,638 4,617(1) 1,021
------- ------ ------- ------- ------ -------
Gross Profit............ 2,634 3,123 (489)(3) 4,013 4,759 (746)(3)
Selling, general and
administrative
expenses............... 5,414 2,585(1) 2,829 8,688 4,534(1) 4,154
Research, development
and related expenses... 2,485 -- 2,485 2,866 -- 2,866
------- ------ ------- ------- ------ -------
7,899 2,585 5,314 11,554 4,534 7,020
Income (loss) from
operations............. (5,265) 538 (5,803) (7,541) 225 (7,766)
Interest income......... 88 -- 88 312 -- 312
Interest expense........ (29) (29)(2) -- (21) -- (21)
------- ------ ------- ------- ------ -------
Income (loss) before
income taxes........... (5,206) 509 (5,715) (7,250) 225 (7,475)
Income tax benefit...... (315) -- (315) (2,279) -- (2,279)
------- ------ ------- ------- ------ -------
Net income (loss)....... $(4,891) $ 509 $(5,400) $(4,971) $ 225 $(5,196)
======= ====== ======= ======= ====== =======
Income (loss) per common
share:
Income (loss) per common
share, basic and
diluted................ $ (0.65) $ (0.72) $ (0.68) $ (0.71)
======= ======= ======= =======
Weighted average shares
outstanding............ 7,497 7,497 7,354 7,354
======= ======= ======= =======
</TABLE>
9
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of July 3, 1999
(in thousands) ---------------------------------------------------------
Pro Forma Adjustments
----------------------------------
Assets Proceeds Debt Pro Forma
Historical Sold(4) of Sale(5) Repayment(7) as Adjusted
---------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.......... $ 2,429 $ -- $10,481(6) $(1,000) $11,910
Trade receivables,
net.................. 1,675 (1,514) 161
Inventories........... 2,559 (2,211) 348
Refundable income
taxes................ 423 423
Other current assets.. 201 201
------- ------- ------- ------- -------
Total current assets.... 7,287 (3,725) 10,481 (1,000) 13,043
Property, plant and
equipment, net......... 611 (92) 519
Tradenames, patents and
other, net............. 1,656 (1,420) 236
Goodwill, net........... 3,173 (3,173) --
Other assets............ 195 (58) 137
------- ------- ------- ------- -------
Total assets............ $12,922 $(8,410) $10,481 $(1,058) $13,935
======= ======= ======= ======= =======
Liabilities and
stockholders' equity
Current liabilities:
Trade accounts
payable.............. $ 664 $ (200) $ -- $ -- $ 464
Accrued expenses and
other liabilities.... 1,548 (150) 1,155 2,553
------- ------- ------- ------- -------
Total current
liabilities............ 2,212 (350) 1,155 -- 3,017
Long-term debt, less
current portion........ 1,000 (1,000) --
Stockholders' equity.... 9,710 (8,060) 9,326 (58) 10,918
------- ------- ------- ------- -------
Total liabilities and
stockholders' equity... $12,922 $(8,410) $10,481 $(1,058) $13,935
======= ======= ======= ======= =======
</TABLE>
- --------
The unaudited pro forma financial information as of and for the nine month
period ended July 3, 1999 and for the year ending October 3, 1998, gives effect
to the following pro forma adjustments:
Statement of Operations Data:
(1) To give retroactive effect to the decrease in revenues and operating
expenses estimated by the Company to be attributable to substantially all
operating activities of the Company, other than that which is required to
support the on going development of its HTA product line.
(2) To reflect a reduction in interest expense incurred related to the
$1,000,000 Transamerica Business Credit Corporation ("TBCC") credit
facility, assuming the application of proceeds from the Asset Sale to repay
the outstanding indebtedness under this facility.
(3) The negative gross margins of $489,000 and $746,000 for the nine month
period ended July 3, 1999 and year ended October 3, 1998, respectively,
reflect direct product costs for the HTA business of $194,000 and $164,000,
as well as pro forma allocations of $555,000 and $857,000, respectively of
fixed manufacturing overhead costs which are projected to continue
following the Asset Sale.
Balance Sheet Data:
(4) Represents assets to be sold to and liabilities assumed by CSAC, as well as
goodwill attributable to the Base Business.
(5) Reflects estimated proceeds from the sale, less estimated transaction costs
of $1,155,000. Such costs include estimated professional fees to be paid by
BEI in connection with the Asset Sale ($465,000), employee bonuses relating
to the completion of the Asset Sale ($185,000), estimated severance
payments ($260,000), and the cost of products and services associated with
the Transition Agreement to be provided to CSAC free of charge ($245,000).
The resulting estimated gain on the sale of the Base Business of $1,266,000
(estimated net proceeds of $9,326,000 less basis of $8,060,000) and
estimated transaction costs have not been considered or reflected in the
accompanying pro forma statement of operations. In addition, as a condition
to the consummation of the Asset Sale, the Company was required to enter
into a noncompetition agreement with and for the benefit of CSAC for a
period of five years. No value has been assigned to the noncompetition
agreement in the Asset Purchase Agreement or in the pro forma financial
data presented above.
(6) Represents gross cash sales price of $11,206,600 less estimated downward
adjustments of $500,000 and $225,000, respectively, based upon the
unaudited net book value of inventory and accounts receivable at October 2,
1999 (assuming the Closing was completed on October 2, 1999) and the
annualized unaudited sales for the nine month period ended October 2, 1999.
Such adjustments have been calculated in accordance with the terms
prescribed by the Asset Purchase Agreement.
(7) Reflects repayment of outstanding amounts owed under the $1,000,000 TBCC
credit facility, as well as the write-off of the unamortized debt financing
fees associated with such debt. (Note that during the month of October
1999, the Company borrowed an additional $500,000 under the revolving
credit facility, therefore the actual repayment upon the Closing will be
$1,500,000.)
10
<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock was initially offered to the public in July 1989
and traded on the Nasdaq National Market System under the Nasdaq symbol "BEII"
from August 1, 1989 through the fiscal year end of September 27, 1997. During
the period from October 3 to October 7, 1997, the stock traded under the Nasdaq
symbol "BEIV." After October 7, 1997, the Company's common stock began trading
under the Nasdaq symbol "BMED."
On September 27, 1997, having transferred all of its non-medical device
businesses to BEI Technologies, Inc. ("Technologies") in exchange for all of
Technologies' outstanding common stock, BEI Electronics, Inc. ("Electronics")
distributed that stock to its stockholders in a tax-free spin-off of
Technologies (the "Distribution"). As a result of the spin-off of Technologies,
whose business represented the majority of Electronic's assets and revenues,
the market price of the Company's stock adjusted to account for the
Distribution. On November 4, 1997, Electronics merged with its subsidiary, BEI
Medical Systems Company, Inc., and changed its name to BEI Medical Systems
Company, Inc.
Set forth below are the high and low closing sale prices on the Nasdaq
National Market System for the periods indicated. Such quotations do not
reflect retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Cash Dividend
High Low Declared
----- ----- -------------
<S> <C> <C> <C>
1999 Fiscal Year (ended 10/02/99)
Fourth Quarter................................... $3.50 $1.12 $0.00
Third Quarter.................................... $1.56 $0.94 $0.00
Second Quarter................................... $2.19 $1.44 $0.00
First Quarter.................................... $2.06 $1.50 $0.00
<CAPTION>
Cash Dividend
High Low Declared
----- ----- -------------
<S> <C> <C> <C>
1998 Fiscal Year (ended 10/03/98)
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
</TABLE>
On October 1, 1999, the last full trading day prior to the date of the public
announcement of the Asset Sale, BEI's common stock closed at $1.44 per share.
On October 15, 1999, the closing bid price for BEI's common stock was $1.063
per share. As of October 15, 1999, BEI had 342 stockholders of record.
There are no restrictions on the Company's ability to pay dividends; however,
it is currently the intention of the BEI Board 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 BEI Board has not declared and the Company did not pay dividends in fiscal
1999 or fiscal 1998.
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data and
unaudited pro forma per share data to reflect the consummation of the Asset
Sale. The pro forma data is not necessarily indicative of actual or future
operating results or of the financial position that would have occurred or will
occur upon consummation of the Asset Sale. The data presented below should be
read in conjunction with the unaudited pro forma financial data set forth under
"Summary Unaudited Pro Forma Financial Data" and the separate historical
consolidated financial statements which are included herein.
Historical and pro forma book value per share is calculated by dividing
stockholders' equity at the end of the period by the number of common shares
outstanding at the end of the period.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
----------- ---------------------------------------------------------------
July 3, October 3, September 28, September 27, September 30, October 1,
1999 1998 1997 1996 1995 1994
----------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Historical:
Loss from continuing
operations per common
share, basic and
diluted................ $ (0.65) $ (0.68) $(0.64) $(0.40) $(0.36) $(0.38)
Cash dividends per
common share........... -- -- 0.08 0.08 0.08 0.08
Book value per share.... 1.30 1.96 2.59 8.31 8.06 8.84
Pro Forma:
Loss from continuing
operations per common
share, basic and
diluted................ (0.72) (0.71)
Cash dividends per
common share........... -- --
Book value per share.... 1.48
</TABLE>
12
<PAGE>
RISK FACTORS
Risks if the Asset Sale is Not Consummated
Lack of Adequate Capital
The Company's capital requirements depend on numerous factors, including the
progress of the Company's clinical research and product development programs,
the timing and receipt of regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing its
products. The Company's capital requirements also depend on the resources
required to expand and develop a direct sales force in the United States and
the extent to which the Company's products gain market acceptance and sales.
The timing and amount of such capital requirements cannot be predicted
accurately. The Company unsuccessfully sought additional financing. The
Company believes its existing cash balances and credit facility together with
operating revenues and tax refunds will provide funding to meet the Company's
liquidity requirements only to the end of 1999. There is no assurance that
additional financing will be available on terms favorable to the Company, or
at all. In the event the Asset Sale is not consummated and the Company is
unable to secure additional financing, the Company's ability to continue as a
going concern may be impaired. Any additional equity financing may be dilutive
to stockholders and additional debt financing, if available, may involve
restrictive covenants and/or also be dilutive to stockholders.
Risks if the Asset Sale is Consummated
Narrowed Focus of Company Business; Dependence Upon HTA Technology
The consummation of the Asset Sale, if approved, will narrow the focus of
the Company to its HTA technology. Following completion of the Asset Sale, the
profitability of the Company will depend on the Company's ability to generate
meaningful revenues from the HTA product at acceptable margins. The Base
Business represented approximately 96% of the Company's revenues for the nine
month period ended July 3, 1999. HTA revenues were only $260,000 for that
period. There can be no assurance that the Company will be successful in
increasing revenue from the HTA product at acceptable margins, or if it does,
that it will become profitable. While the Company believes that its HTA
technology is suited to present market conditions, there are several factors
that may offset the eventual success of this technology. These include the
risks that: (i) the Company does not obtain FDA approval to market the HTA
product in the United States, (ii) the demand for the HTA product may fail to
materialize; (iii) BEI will not be able to produce the HTA in commercial
quantities at reasonable costs; (iv) BEI will not be able to develop and
maintain the proprietary aspects of its technology and that the Company's
issued patents, or any future patents will not offer any significant degree of
protection against competitive products; and (v) the Company may not be able
to develop products that gain market acceptance.
13
<PAGE>
SPECIAL MEETING
Date, Time and Place
This document is being furnished to the holders of BEI Common Stock in
connection with the solicitation of proxies by the BEI Board for use at the
Special Meeting to be held at the Company's principal executive offices
located at 100 Hollister Road, Teterboro, New Jersey on December 7, 1999,
starting at 9:00 a.m., local time.
Matters to be Considered at the Special Meeting
At the Special Meeting, BEI stockholders will be asked to consider and vote
on the Asset Sale Proposal and such other matters as may be properly brought
before the Special Meeting or any adjournment or postponement thereof.
Record Date and Voting Rights and Requirements
Record Date. The BEI Board has fixed October 15, 1999, as the record date
for the Special Meeting. Accordingly, only BEI stockholders of record at the
close of business on the record date will be entitled to notice of, and to
vote at, the Special Meeting. At the close of business on the record date,
there were 7,685,707 shares of BEI Common Stock entitled to vote at the
Special Meeting, held by approximately 342 holders of record.
Voting Rights. Each share of BEI Common Stock outstanding on the record date
entitles its holder to one vote on the Asset Sale Proposal.
Quorum Requirement. To constitute a quorum at the Special Meeting, the
majority of the total number of shares entitled to vote on the record date
must be present, represented either in person or by proxy.
Vote Required. Under Delaware law, the affirmative vote of a majority of the
shares of BEI Common Stock issued and outstanding on the record date is
required to approve the Asset Sale Proposal. As of the record date, there were
7,685,707 shares of BEI Common Stock outstanding, of which 1,744,334 shares
(approximately 22.7% of the outstanding shares) of BEI Common Stock were held
by directors in their capacity as stockholders of BEI. Although the directors
have not entered into any voting agreements, they currently intend to vote
their shares in favor of the Asset Sale Proposal.
Abstentions and Broker Nonvotes. All votes will be tabulated by the
inspector of election appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes. Abstentions
will be counted toward the tabulation of votes cast on proposals presented to
the stockholders. An abstention from voting or a broker non-vote will have the
practical effect of voting against approval of the Asset Sale since a vote to
abstain or a broker non-vote represents one less vote cast in favor of such
approval.
Voting of Proxies
BEI stockholders may use the proxy that came with this document if they are
unable to attend the Special Meeting in person or wish to have their shares
voted by proxy even if they do attend the Special Meeting. All shares
represented by valid proxies received pursuant to this solicitation, and not
revoked before they are exercised, will be voted in the manner that they
specify. IF A BEI STOCKHOLDER DOES NOT SPECIFY HOW HIS OR HER PROXY IS TO BE
VOTED, IT WILL BE VOTED FOR APPROVAL OF THE ASSET SALE PROPOSAL. There are no
matters other than voting on the Asset Sale Proposal that are scheduled to be
brought before the Special Meeting. If any other business is properly brought
before the Special Meeting, including a motion to adjourn or postpone the
Special Meeting for the purpose of soliciting additional proxies in favor of
the Asset Sale Proposal or to permit the dissemination of information
regarding material developments relating to the Asset Sale or otherwise
relevant to the Special Meeting, one or more of the persons named in the
14
<PAGE>
proxy will vote the shares represented by proxies as determined in their
discretion. If the Special Meeting is adjourned for any reason prior to the
approval and adoption of the Asset Purchase Agreement and approval of the
Asset Sale, stockholders may, at any meeting, consider and vote on the
approval and adoption of the Asset Purchase Agreement and approval of the
Asset Purchase Agreement. A proxy voted AGAINST the Asset Sale will not be
voted FOR adjournment of the Special Meeting for the purpose of soliciting
additional proxies in favor of the Asset Sale Proposal.
Revocation of Proxies
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 100
Hollister Road, Teterboro, New Jersey 07608, a written notice of revocation or
a duly executed proxy bearing a later date, or it may be revoked by attending
the meeting and voting in person. Please note, however, that attendance at the
meeting will not by itself revoke a proxy. Furthermore, if the shares are held
of record by a broker, bank or other nominee and the stockholder wishes to
vote at the meeting, the stockholder must obtain from the record holder a
proxy issued in the stockholder's name.
Solicitation of Proxies
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of Common Stock
beneficially owned by others to forward to such beneficial owners. The Company
may reimburse persons representing beneficial owners of Common Stock for their
costs of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by our directors, officers or other regular employees of
the Company. No additional compensation will be paid to directors, officers or
other regular employees for such services.
Stockholder Proposals
Pursuant to Rule 14a-8 of the Securities and Exchange Commission, to include
a stockholder proposal in the Company's proxy statement and form of proxy for
a meeting of stockholders other than a regularly scheduled annual meeting, the
stockholder proposal must be submitted at a reasonable time before the Company
begins to print and mail its proxy materials. Stockholders are also advised to
review the Company's By-laws, which contain additional requirements with
respect to advance notice of stockholder proposals.
15
<PAGE>
THE ASSET SALE PROPOSAL
This section of the Proxy Statement describes certain aspects of the Asset
Sale. The description does not purport to be complete and is qualified by
reference to the Asset Purchase Agreement, which is attached as Annex A hereto
and is incorporated by reference herein.
Background of the Asset Sale
The terms and conditions of the Asset Purchase Agreement and the Asset Sale
are the result of arm's length negotiations between the representatives of
Cooper and the representatives of BEI. Set forth below is a summary of the
background of these negotiations.
During the second half of fiscal year 1998, the clinical trial protocols
mandated by the FDA for the Company's HTA product were changed in a manner
that substantially increased the time required for these tests and the
associated costs. Management believed that the HTA technology had significant
commercial potential that could only be realized if the Company could attract
sufficient capital to complete the development and marketing of the HTA.
Accordingly, management accelerated a search for additional sources of
capital, particularly a minority equity or convertible debt investment, that
would enable the Company to (i) complete the clinical trials of the HTA system
in full compliance with the FDA revised protocol and (ii) to launch the
product into the U.S. market when and if approved by the FDA.
Throughout the January 1999 to March 1999 timeframe, BEI management further
explored the possibility of a minority equity or convertible debt investment
with a number of investment bankers, brokers, advisors, and private investor
groups. The Company retained Prudential Securities Incorporated and HSBC
Securities, Inc. in August 1998 for the purpose of finding minority equity
financing for the Company. The Company was unsuccessful in obtaining investors
for the proposed private placement of the Company's securities. In
management's opinion, the various proposals it evaluated were deficient
because they provided insufficient funding while requiring the payment of fees
and financing costs that were unacceptably high or creating unsatisfactory
dilution to the holdings of the Company's existing stockholders. By April
1999, management concluded it would not be possible to raise financing
sufficient to meet its objectives from traditional sources of convertible debt
and minority equity capital on terms acceptable to the Company. The Company
negotiated and concluded an interim secured credit facility from Transamerica
Business Credit Corporation on May 10, 1999.
In April 1999, confidential discussions were initiated with a small public
company regarding a proposed transaction that would have provided the
necessary financing. As a part of these discussions, Mr. Samuel M. Bemiss,
III, Managing Director of Ewing Monroe Bemiss & Co. ("EMB&Co), was engaged in
June 1999 to assist the Company with due diligence studies and to render a
fairness opinion on the proposed transaction. Following a number of
discussions between BEI and such public company and following due diligence
conducted by BEI, Mr. Bemiss informed the BEI Board that he did not think that
the terms of the transaction proposed by such public company were fair, from a
financial point of view, to the stockholders of the Company.
Such public company had proposed to acquire BEI through the exchange of one
share of its common stock for each outstanding share of BEI's common stock. At
the time, the public company's stock was trading, as it had for the preceding
18 months, at a discount of approximately 30% to the price of BEI's stock, and
the public company was not willing to allow the exchange ratio for the
transaction to be determined by the public equity markets. In addition, the
management of the companies disagreed as to both potential for, and strategy
with respect to the development of, certain proprietary products and
technologies. Finally, the two companies had been unable to reach agreement
with respect to an overall financial and operational strategy for the combined
entity following the proposed transaction. Accordingly, the Company's
directors and management concluded that the transaction that had been proposed
in June should not be completed, and these discussions were terminated.
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During June and July, Mr. Bemiss further assisted the Company by initiating
discussions with several other companies, including Cooper, regarding a
possible transaction with the Company.
On August 2, 1999, Cooper sent to Richard W. Turner, the President and the
Chief Executive Officer of BEI ("Turner"), a draft nondisclosure and
nonsolicitation letter and a Preliminary Non-Binding Summary of Indicative
Business Terms (the "Proposal Summary") which outlined a proposal to acquire
the Base Business for $11,250,000 in cash, plus the assumption of up to
$350,000 in BEI Liabilities and the cancellation of a BEI royalty obligation
to Cooper related to the HTA.
On August 4, at a special teleconference meeting of the BEI Board, the BEI
Board and management discussed certain aspects of the proposed Asset Sale,
including (i) the likely time schedule for due diligence, negotiation,
documentation and closing of the proposed transaction; (ii) regulatory
requirements and stockholder notice and vote requirements; (iii) the terms of
a "no shop" agreement proposed by Cooper; and (iv) the tax consequences of the
proposed transaction. The BEI Board then authorized Mr. Bemiss and management
to proceed to complete negotiations and document the Asset Sale and authorized
the management to enter into a "no shop" agreement with Cooper. On August 4,
1999, BEI entered into a "no shop" agreement with Cooper, which provided,
among other things, that for 45 days from August 4, 1999, BEI would not,
subject to certain fiduciary obligations of the BEI Board, solicit, initiate,
or engage in discussions or negotiations with any third party regarding a
possible acquisition transaction with BEI.
Between August 5 and September 22, 1999, there were frequent meetings and
discussions between the Company's management, Cooper's management, Mr. Bemiss
and legal counsel for both parties regarding the drafts of the Asset Purchase
Agreement and the Related Agreements. These meetings and discussions were held
to refine the parties' understanding of the terms of the proposed transaction
and to reach agreement with respect to the documentation of these terms. Such
meetings focused primarily on the scope of the Company's representations and
warranties; the duration and extent of the Company's indemnification
obligations; the mechanics of possible adjustments to the purchase price; the
terms of the Company's noncompetition agreement; and the terms of
collaboration between the parties during the period of management transition.
Frequent meetings also took place during late September between the companies'
management teams regarding the amount of purchase price adjustments to be made
before and after closing. Following such discussions and further due diligence
by Cooper, the purchase price was reduced from $11,250,000 to $11,206,600.
On September 23, 1999 at a special teleconference meeting of the BEI Board,
management and Cooley Godward LLP, counsel to BEI, reported on the terms of
the draft Asset Purchase Agreement and the Related Agreements, including a
specific discussion on the purchase price adjustments set forth in the Asset
Purchase Agreement. Mr. Bemiss reviewed EMB&Co.'s financial analyses with
respect to the proposed Asset Sale and delivered an oral opinion (subsequently
confirmed in writing) that the consideration to be paid pursuant to the Asset
Purchase Agreement was fair to the BEI stockholders from a financial point of
view. After consideration of these presentations, the BEI Board unanimously
approved the Asset Purchase Agreement and the Asset Sale, concluding that the
Asset Sale was fair to, and in the best interests of, the BEI stockholders.
The BEI Board also authorized management to conclude negotiation of and
execute the Asset Purchase Agreement and the Related Agreements.
From September 24 through October 1, the parties and their legal counsel
held daily telephone conferences to resolve remaining issues. Of particular
importance to the Company was reaching agreement with Cooper on the terms of a
noncompetition agreement that would adequately protect Cooper's interests
relative to the Base Business without interfering with the Company's ability
to maximize the value of its HTA technology through its own activities or
through possible contractual or other arrangements with any third party.
The Board of Directors of CSAC approved the Asset Sale and the Asset
Purchase Agreement on September 29, 1999 by unanimous written consent.
The definitive Asset Purchase Agreement was executed on October 1, 1999.
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BEI's Reasons for the Asset Sale
The BEI Board believes that the Asset Sale is fair to, and in the best
interests of, BEI and its stockholders and the BEI Board has unanimously
approved the Asset Purchase Agreement and the Asset Sale.
The BEI Board believes that the Asset Sale will be beneficial to BEI and its
stockholders for several reasons, including the following:
. The proposed purchase price, as reduced by estimated purchase price
adjustments, was approximately 95% of the market capitalization of the
Company both at the time of Cooper's initial offer and at the time the
Asset Purchase Agreement was signed, notwithstanding that (i) the
Purchased Assets represented approximately 65% of the total assets of
the Company as reported on the July 3, 1999 balance sheet of the
Company, and (ii) the management believes that the value of the
Company's HTA technology is substantially in excess of that at which it
is carried on the Company's books;
. The Company has been unable to secure a minority equity or convertible
debt financing from traditional debt or equity markets on terms
acceptable to the Company to: (i) complete the expanded clinical trials
of the HTA system; (ii) aggressively launch the HTA product into the
market; and (iii) continue to build the Base Business; and
. The BEI Board believes that the Company's HTA technology has significant
commercial potential, but does not believe that the public capital
markets currently represent a realistic source of funding for BEI
adequate to complete the development and commercialization of the HTA.
The BEI Board believes that it can best enhance stockholder value by
applying the proceeds from the Asset Sale to the further development and
promotion of the HTA. The revenues derived from the HTA technology
currently represent approximately 4% of the Company's gross revenues for
the nine month period ended July 3, 1999.
In addition to the factors set forth above, in the course of its
deliberations concerning the Asset Sale, the BEI Board consulted with BEI's
legal and financial advisors as well as BEI's management team, and reviewed a
number of other factors relevant to the Asset Sale, including:
. reports from management and legal and financial advisors on specific
terms of the draft Asset Purchase Agreement and ancillary agreements;
. the need for BEI to secure the financing required to complete
development of the HTA and to launch the HTA in the U.S. market;
. the consideration to be paid to BEI pursuant to the Asset Purchase
Agreement as compared to the alternatives that were realistically
available to the Company, including (i) the proposed transaction with
the other public company, which represented a significantly lower
valuation of the Company, or (ii) the licensing of the HTA technology,
which, in the opinion of the BEI management, would not have enabled the
Company to realize the full potential commercial value of the HTA
technology;
. the belief that the terms of the Asset Purchase Agreement are
reasonable;
. the expected tax and accounting treatment of the Asset Sale; and
. financial presentations by EMB&Co. at the BEI Board meeting of September
23, 1999 and EMB&Co.'s opinion to the effect that, as of that date and
based upon and subject to certain matters stated in such opinion, the
consideration proposed to be paid pursuant to the Asset Purchase
Agreement was fair from a financial point of view to the BEI
stockholders.
The BEI Board also considered a number of potentially negative factors in
its deliberations concerning the Asset Sale, including:
. the possibility that the public announcement of the Asset Sale might
adversely affect BEI's relationships with certain distributors and
customers for HTA;
. the possibility of management disruption associated with the Asset Sale
and the risk that certain key technical and management personnel of BEI
might not continue with BEI;
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. the risk of market confusion and potential delay or reduction in orders
for products and services of the Base Business; and
. the history of litigation between the Company and Cooper and the risk
that that history might interfere with the consummation of the Asset
Sale.
The BEI Board believed that certain of these risks were unlikely to occur or
unlikely to have a material impact on BEI, while others could be avoided or
mitigated by BEI or Cooper, and that overall, the risks associated with the
Asset Sale were outweighed by the potential benefits of the Asset Sale.
The foregoing discussion of information and factors considered by the BEI
Board is not intended to be all-inclusive. In view of the wide variety of
factors considered by the BEI Board, the BEI Board did not find it practicable
to quantify or otherwise assign relative weight to the specific factors
considered. However, after taking into account all of the factors set forth
above, the BEI Board unanimously agreed that the Asset Purchase Agreement and
the consummation of the Asset Sale were fair to, and in the best interests of,
BEI and its stockholders and that BEI should proceed with the Asset Sale.
Recommendation of the BEI Board
FOR THE REASONS DISCUSSED ABOVE, THE BEI BOARD HAS APPROVED THE ASSET SALE
AND THE ASSET PURCHASE AGREEMENT AND HAS DETERMINED THAT THE ASSET SALE AND
THE ASSET PURCHASE AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, BEI
AND THE BEI STOCKHOLDERS. ACCORDINGLY, THE BEI BOARD HAS UNANIMOUSLY
RECOMMENDED THAT THE BEI STOCKHOLDERS VOTE FOR APPROVAL OF THE ASSET SALE
PROPOSAL.
Opinion of Financial Advisor to BEI
Opinion of Ewing Monroe Bemiss & Co.
BEI retained EMB&Co. to act as its financial advisor in connection with an
analysis of strategic alternatives, including a possible sale of assets to
CSAC. The BEI Board selected EMB&Co. to act as BEI's financial advisor based
on EMB&Co.'s qualifications, expertise and reputation as well as EMB&Co.'s
investment banking relationship and familiarity with BEI.
At the meeting of the BEI Board on September 23, 1999, EMB&Co. rendered its
oral opinion, subsequently confirmed in writing (the "Opinion"), that, as of
such date, based upon and subject to the various considerations set forth in
the Opinion, the consideration to be paid pursuant to the Asset Purchase
Agreement was fair from a financial point of view to the BEI stockholders.
The full text of the Opinion, which sets forth, among other things,
assumptions made, procedures followed, matters considered, and limitations on
the scope of the review undertaken by EMB&Co. in rendering the Opinion, is
attached as Annex B to this Proxy Statement. BEI stockholders are urged to
read the Opinion carefully and in its entirety. EMB&Co. did not recommend to
BEI that any specific consideration constituted the appropriate purchase price
for the Asset Sale. The Opinion addresses only the fairness of the
consideration proposed to be paid pursuant to the Asset Purchase Agreement
from a financial point of view to the BEI stockholders as of the date of the
Opinion, and does not constitute a recommendation to any stockholder as to how
such stockholder should vote at the BEI stockholders meeting. The summary of
the Opinion set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of the Opinion.
In rendering the Opinion, EMB&Co., among other things, (i) analyzed certain
publicly available financial statements and other information of BEI; (ii)
analyzed certain internal financial statements and other financial and
operating data concerning BEI prepared by the management of BEI; (iii)
analyzed certain financial projections relating to BEI prepared by the
management of BEI; (iv) discussed the past and current operations and
financial condition and the prospects of BEI with senior executives of BEI;
(v) reviewed the reported prices
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and trading activity for BEI Common Stock; (vi) compared the financial
performance of BEI and the prices and trading activity of BEI Common Stock
with those of certain other publicly-traded companies which EMB&Co. deemed to
be comparable and relevant; (vii) reviewed the financial terms, to the extent
publicly available, of certain business combination and asset purchase
transactions which EMB&Co. deemed to be relevant; (viii) participated in
discussions and negotiations among representatives of BEI and Cooper and their
respective legal advisors; (ix) reviewed the Asset Purchase Agreement and
related schedules and the Related Agreements; and (x) performed such other
analyses and considered such other factors as EMB&Co. deemed appropriate.
In rendering the Opinion, EMB&Co. assumed and relied upon, without
independent verification, the accuracy and completeness of the information
that it reviewed for the purposes of the Opinion. EMB&Co. assumed that the
financial projections provided by BEI were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of BEI. With respect to the information furnished by
BEI, and with respect to the information discussed with the management of BEI
regarding its views of future operations, EMB&Co. assumed that such
information was reasonably prepared and reflected the best currently available
estimates and judgments of BEI's management as to the competitive, operating
and regulatory environments and related financial performance of BEI for the
relevant periods. EMB&Co. did not make any independent valuation or appraisal
of the assets, liabilities or technology of BEI, and it was not furnished with
any such appraisals. EMB&Co. assumed that the Asset Sale would be accounted
for in accordance with generally accepted accounting principles and would be
consummated in accordance with the terms set forth in the Asset Purchase
Agreement. The Opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to EMB&Co. as
of, the date of the Opinion.
The following is a summary of the analysis performed by EMB&Co. in its
preparation of the Opinion, and reviewed with the BEI Board at a meeting held
on September 23, 1999. This analysis was provided to the BEI Board for
background information only and was one of the many factors considered by
EMB&Co. in rendering its Opinion. No conclusions can be independently drawn
from any individual part of the analysis described below.
Selected Public Company Analysis: EMB&Co. compared certain financial
information of the Company with corresponding publicly available information
of the following nine selected publicly traded corporations in the medical
device sector of the healthcare industry that EMB&Co. deemed comparable:
CONMED Corporation; Conceptus, Inc.; Everest Medical Corporation; Horizon
Medical Products, Inc.; Maxxim Medical, Inc.; MedAmicus, Inc.; Utah Medical
Products, Inc.; VidaMed, Inc.; and Vision-Sciences, Inc. EMB&Co. analyzed per
share common stock market prices of the selected publicly traded companies as
a multiple of: (i) earnings before interest, taxes, depreciation and
amortization ("EBITDA"); (ii) earnings before interest and taxes ("EBIT"),
(iii) earnings before interest and after taxes ("EBIAT"), (iv) earnings per
share for the twelve month period ended as of the latest reported fiscal
quarter-end with respect to each company; and (v) Institutional Broker's
Estimate Service estimates of projected earnings per share for each of the
companies for the fiscal years ending 1999 and 2000. EMB&Co. also analyzed the
aggregate market capitalization of the selected companies as a multiple of:
(i) book value, (ii) sales and (iii) total assets, in each case as of the
latest reported fiscal quarter end. Because BEI is not profitable and the Base
Business is only marginally profitable, comparison of earnings-based multiples
of the selected companies to BEI earnings data produced results that were not
meaningful. The ranges of market capitalization as multiples of book value,
sales and assets for the selected comparable publicly traded companies were as
follows: (i) book value: 0.93x to 4.02x, with a mean of 2.2x; (ii) sales:
0.99x to 4.40x, with a mean of 1.44x; and (iii) assets: 0.89x to 2.88x, with a
mean of 1.64x. EMB&Co. determined that Cooper's proposed purchase price for
the Base Business, representing multiples of 1.42 times book value, 1.43 times
sales, and 1.42 times assets were within the reference range implied by this
analysis.
Selected Precedent Transactions: Using publicly available information,
EMB&Co. analyzed the purchase prices and implied transaction multiples paid in
54 stock acquisition and asset purchase transactions completed since 1996
involving companies engaged in the manufacture, sale and distribution of
medical devices and in the wholesale distribution of medical products and
equipment. These included (target/acquiror): Avecor
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Cardiovascular Inc./Medtronic Inc.; Arterial Vascular Engineering/Medtronic
Inc.; Sofamor Danek Group Inc./Medtronic, Inc.; Circon Corp./Maxxim Medical
Inc.; Gull Laboratories/Meridian Diagnostics, Inc.; Navius Corp./Endosonics
Corp.; International Murex Technologies Corp./Abbott Laboratories; FemRx
Inc./Johnson & Johnson; Sherwood-Davis & Geck/Tyco International Ltd.;
Healthdyne Technologies Inc./Respironics Inc.; EndoVascular Technologies
Inc./Guidant Corp.; Brimfield Precision/Image Guided Technologies Inc.; Imagyn
Medical Inc./UroHealth Systems Inc.; Medwave Inc./MC Shipping Inc.; Imex
Medical Systems Inc./Nicolet Biomedical Inc.; Gynecare Inc./Johnson & Johnson;
Micro Bio-Medics Inc./Henry Schein Inc.; Biopsys Medical Inc./Johnson &
Johnson; Cardiometrics Inc./Endosonics Corp.; Columbia Medical Inc./Utah
Medical Products Inc.; Ventritex/St. Jude Medical Inc.; Target Therapeutics
Inc./Boston Scientific Corp.; Ideas for Medicine Inc./Cryolife Inc.; Gelman
Sciences Inc./Pall Corp.; Medex Inc./FCY Inc.; Aequitron Medical Inc./Nellcor
Puritan-Bennett; MDE Corp./Getinge Industrier AB; MediSense Inc./Abbott
Laboratories; InStent Inc./Medtronic Inc.; Ideas for Medicine, Inc./Cryolife
Inc.; Microsurge Inc./UroHealth Systems Inc./International Technidyne
Corp./Thermo Cardiosystems Inc.; Spectronic Instruments Inc./Thermo Optek
Corp.; Chiron Vision/Bausch & Lomb Inc.; Storz Instrument Co./Bausch & Lomb;
MPL Technologies Inc./DENTSPLY International Inc.; Linvatec Corp./CONMED
Corp.; Valleylab Inc./US Surgical Corp.; certain assets of Quest Medical
Inc./Atrion; Red Line Health Care Corp/McKesson Corp.; Stepic Corp./Horizon
Medical Products Inc.; Columbia Vital Systems/Horizon Medical Products Inc.;
Meer Dental Supply Co./Henry Schein Inc.; Med-E-Quip Locaters Inc./ Sparta
Surgical Supply; Care Management Inc./Suburban Ostomy Supply Co. Inc.; Concept
Medical Corp./Vivax Medical Corp.; Medical Supplies of America/Graham Field
Health Products; Peiser's Medical Supplies/Suburban Ostomy Supply Co. Inc.;
Medical Advances Inc./Intermagnetics General Corp.; Mediquip Sterilizer/COHR
Inc.; Radserv Inc./COHR Inc.; Champion Dental Services Inc./First Commonwealth
Inc.; Gateway Healthcare Corp./Gulf South Medical Supply Inc. and Val-U-Med
Inc./LifeQuest Medical Inc.
EMB&Co. analyzed the purchase prices paid in the selected precedent
transactions as a multiple of: (i) EBIT, (ii) EBITDA, (iii) net income, (iv)
sales and (v) assets. Because BEI is not profitable and the Base Business is
only marginally profitable, comparison of earnings-based multiples of the
selected comparable transactions to earnings data for the Base Business
produced results that were not meaningful. The ranges of purchase prices as
multiples of sales and assets for the selected precedent transactions were
0.4x to 7.15x sales, with a mean of 1.89x, and 0.71x to 8.53x assets, with a
mean of 3.58x.
No transaction utilized in the selected precedent transaction analysis as a
comparison is identical to the Asset Sale. Accordingly, an analysis of the
results of the foregoing comparisons necessarily involves complex
considerations and judgments concerning the financial and operating
characteristics of the Base Business and many other factors. Mathematical
analysis, such as determining the average, median or mean, is not in itself a
meaningful method of using selected precedent transaction or selected
comparable transaction data.
From the universe of precedent transactions, EMB&Co. selected the following
15 transactions that it considered to be most closely comparable in size,
and/or structure and/or business, and/or strategic justification
(target/acquiror): Stepic Corp./Horizon Medical Products Inc.; Columbia Vital
Systems/Horizon Medical Products; Med-E-Quip/Locaters Inc.; Linvatec
Corp./CONMED Corp.; Brimfield Precision/Image Guided Technologies Inc.; MPL
Technologies/DENTSPLY International Inc; Care Management Inc./Suburban Ostomy
Supply Co., Inc.; Concept Medical Corp./Vivax Medical Corp.; Medical Supplies
of America/Graham-Field Health Products; Spectronic Instruments Inc./Thermo
Optek Corp; Peiser's Medical Supplies/Suburban Ostomy Supply Co. Inc.; Ideas
for Medicine Inc./Cryolife Inc.; Mediquip Sterilizer/COHR Inc.; Gateway
Healthcare Inc./Gulf South Medical Supply Inc. and Val-U-Med/LifeQuest Medical
Inc. EMB&Co. analyzed the purchase prices paid in these 15 transactions as a
multiple of: (i) EBIT, (ii) EBITDA, (iii) net income, (iv) sales and
(v) assets. Because BEI is not profitable and the Base Business is only
marginally profitable, comparison of earnings-based multiples of the selected
comparable transactions to earnings data for the Base Business produced
results that were not meaningful. The ranges of purchase prices as multiples
of sales and assets for the selected comparable transactions were 0.41x to
1.79x sales, with a mean of 0.85x, and 1.61x to 6.57x assets, with a mean of
4.36x. EMB&Co. determined that Cooper's proposed purchase price for the Base
Business, representing multiples of 1.43x sales, and 1.42x assets were at the
high end of the reference range implied by the sales analysis and below the
reference range implied by the assets analysis.
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The audit of BEI's 1999 fiscal year results has not yet been completed.
However, based on preliminary unaudited financial results for 1999 and based
on management's current estimates of adjustments to the purchase price
pursuant to the terms of the Asset Purchase Agreement, the purchase price for
the Base Business is expected to represent a multiple of 1.37 times sales, or
a premium of 61.2% over the average multiple of sales paid in selected
comparable asset purchase transactions. The adjusted multiple of 1.37 times
sales remains within the reference ranges noted in the analyses above.
Pro Forma Analysis of the Asset Sale: EMB&Co. reviewed BEI management's
analysis of certain pro forma effects of the Asset Sale on the earnings and
capitalization of BEI. Such analysis was based on management's estimates of
BEI's performance for the fiscal year 1999, and internal projections for the
fiscal year 2000. Based on such analysis, EMB&Co. observed that, before taking
into account any one-time restructuring charges, the Asset Sale would result
in an increase in the Company's loss per share of $0.07 per share for the nine
months ended July 3, 1999.
EMB&Co. performed a variety of financial and comparative analyses for the
purpose of rendering the Opinion. While the foregoing summary describes all
material analyses and factors reviewed by EMB&Co. with the BEI Board, it does
not purport to be a complete description of the presentations by EMB&Co. to
the BEI Board or the analyses performed by EMB&Co. in arriving at the Opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. EMB&Co.
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Opinion. In addition, EMB&Co. may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so that the range of
valuations resulting from any particular analysis described above should not
be taken to be EMB&Co.'s view of the actual value of the Base Business of BEI.
In performing its analyses, EMB&Co. made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of BEI. The analyses performed
by EMB&Co. are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses or
assets do not purport to be appraisals or necessarily to reflect the prices at
which businesses or assets may actually be sold. The analyses performed were
prepared solely as part of EMB&Co.'s analysis of the fairness of the
consideration to be paid pursuant to the Asset Purchase Agreement, from a
financial point of view, to the BEI stockholders and were provided to the BEI
Board in connection with the delivery of the Opinion.
BEI has agreed to pay EMB&Co. a fee for its financial advisory services in
connection with the Asset Sale, including, among other things, rendering the
Opinion and making the presentation referred to above. Pursuant to a letter
agreement between BEI and EMB&Co. dated June 9, 1999, BEI has agreed to pay
EMB&Co., in the event the Asset Sale is consummated, a transaction fee of
$100,000 plus 5% of aggregate consideration received in excess of $10,000,000.
In addition, BEI has agreed to reimburse EMB&Co. for its reasonable out-of-
pocket expenses incurred in connection with its engagement, and to indemnify
EMB&Co. and certain related persons against certain liabilities and expenses
arising out of or in conjunction with its rendering of services under its
engagement, including certain liabilities under the federal securities laws.
Material Federal Income Tax Consequences
The following summary of the material tax consequences of the Asset Sale by
the Company is not intended to be tax advice to any person, nor is it binding
upon the Internal Revenue Service. In addition, no information is provided
herein with respect to the tax consequences of the Asset Sale under applicable
foreign or local laws.
The Company will recognize a gain on the Asset Sale equal to the amount
realized by the Company from the sale less the Company's adjusted basis in the
net assets sold. The amount realized will equal the sum of money received by
the Company in consideration for the assets plus the amount of the liabilities
assumed by CSAC. The Company anticipates that its available NOLs will offset
the taxable gain attributable to the Asset
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Sale. The Company will also be subject to an alternative minimum tax. The gain
on the Asset Sale will be included with the Company's alternative minimum
taxable income or loss for the tax year ending September 30, 2000 and may
result in alternative minimum tax liability. In addition, the Company and CSAC
will each pay one-half of the sales tax on the Asset Sale, which in the
aggregate is expected to be less than $7,500.
Consummation of the transaction will not result in any federal income tax
consequences to the BEI stockholders.
Accounting Treatment
The Asset Sale will be accounted for as a sale of assets, in accordance with
generally accepted accounting principles. The Company will recognize a gain,
for book purposes based upon the excess net proceeds to be received under the
Asset Purchase Agreement over the book value of the net assets sold.
Regulatory Matters
BEI and CSAC are aware of no governmental or regulatory approvals required
for consummation of the asset sale.
Rights of Appraisal
Under Delaware corporate law, BEI stockholders are not entitled to
dissenters' rights of appraisal with respect to the Asset Sale.
The Asset Purchase Agreement
Sale of Assets
BEI and its subsidiaries are engaged in the business of developing,
manufacturing, marketing and servicing a broad array of advanced systems and
devices for diagnostic and therapeutic procedures in the medical fields of
gynecology and gastroenterology. BEI also produces a variety of products for
use in various medical and surgical procedures that are sold by it under
original equipment manufacture labeling arrangements. BEI is currently
focusing its development and commercialization efforts on its new HTA product
and related accessories for treatment of excessive uterine bleeding through
endometrial ablation. Pursuant to the Asset Purchase Agreement, BEI will sell
its Base Business. The Base Business accounted for approximately 96% of BEI's
revenues for the nine month period ended July 3, 1999.
Liabilities Assumed
CSAC will assume the liabilities and obligations of BEI accruing from and
after the Closing Date for continued performance under certain contracts
related to the Base Business and certain purchase orders and other sales
orders that were incurred in the ordinary course of the business of the Base
Business (the "Assumed Contracts"). The "Closing Date" is the date no later
than two days after the date that all closing conditions set forth in the
Asset Purchase Agreement have been satisfied or waived or on such other date
to which the parties mutually agree. In addition, CSAC will be assuming
certain identified liabilities of BEI related to the Base Business, including
trade accounts payable, warranty obligations, accrued sales return obligations
and accrued royalty obligations, in such order of priority (the "Assumed
Liabilities"). The Assumed Liabilities (excluding certain liabilities related
to the performance of the Assumed Contracts) shall not exceed $350,000.
Asset Sale Consideration; Purchase Price Adjustments
The cash portion of the purchase price to be paid on the Closing Date will
be $11,206,600 minus the amount by which BEI estimates the inventory and net
receivables being transferred in the Asset Sale will be, in the
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aggregate, less than $3,600,000 (the "Estimated Shortfall") and the Sales
Shortfall amount. The purchase price is subject to several adjustments:
. Inventory and Net Receivables Statements. The purchase price is subject
to an upward or downward adjustment based on the amount of BEI's net
receivables and inventory transferred to CSAC on the Closing Date. BEI
will perform a physical inventory as of the Closing Date and will
prepare a written statement setting forth the value of the inventory as
of the Closing Date. BEI will also prepare a written statement which
sets forth the amount as of the Closing of BEI's net receivables and the
Assumed Liabilities. BEI will deliver such statements (the "Statements")
to CSAC for review, and if the Statements are acceptable to CSAC, the
amount of the purchase price will be adjusted downward dollar-for-dollar
if the value of the inventory and net receivables as reflected on such
Statements is less than $3,600,000 in the aggregate. The purchase price
will be adjusted upward dollar-for-dollar if the value of the inventory
and net receivables as reflected on such Statements is more than
$3,750,000. In either case, the adjustment will take into account and be
adjusted by the amount of the Estimated Shortfall paid at the time of
the Closing.
If CSAC objects to the Statements, the parties will attempt in good
faith to resolve the dispute, and if they are unable to resolve the
dispute, the matter will be submitted to binding resolution by an
independent accountant.
. Assumed Liabilities. If the Statements reflect that the Assumed
Liabilities are less than $350,000, CSAC will pay to BEI the amount by
which the Assumed Liabilities are less than $350,000.
. Sales Shortfall. The purchase price may be adjusted downward based on a
complex valuation matrix. The adjustment will depend on both (a) BEI's
actual sales for the nine month period ended October 2, 1999,
annualized, and (b) the sales mix of the Base Business during the same
nine month period. The methodology for calculating whether a Sales
Shortfall exists is set forth on Schedule 1.8(a) of the Asset Purchase
Agreement attached hereto as Annex A.
Use of Proceeds
The cash proceeds from the Asset Sale will be utilized by BEI for the
following activities:
. To pay expenses associated with the Asset Sale, which are estimated to
be $1,155,000. Such expenses include estimated professional fees to be
paid by BEI in connection with the Asset Sale ($465,000), employee
bonuses relating to the completion of the Asset Sale ($185,000),
estimated severance payments ($260,000), and the cost of products and
services associated with the Transition Agreement to be provided to CSAC
free of charge ($245,000).
. To repay the outstanding amounts owed under the credit facility with
Transamerica Business Credit Corporation, including accrued but unpaid
interest. As of October 31, 1999, the principal amounts outstanding to
Transamerica Business Credit Corporation under the credit facility were
$1,000,000 on the Term Loan (as defined below), with an interest rate of
14.14% and a maturity date of November 30, 2001 and $500,000 on the
Revolving Loan (as defined below), with an interest rate of 11.25% and a
maturity date of May 5, 2000.
. As working capital to finance completion of the FDA Phase III clinical
trials and initiate commercialization of the HTA product in the United
States.
. To fund BEI's ongoing operating expenses.
BEI's stockholders are not expected to receive any distribution from the
proceeds of the Asset Sale.
Representations and Warranties
The Asset Purchase Agreement contains various representations and warranties
made by BEI and certain representations and warranties made by CSAC. The
representations and warranties made by BEI include those regarding, among
other things, (i) the due organization, qualification, authority, and power of
BEI and each
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<PAGE>
subsidiary and similar corporate matters; (ii) the authorization, execution,
delivery, and enforceability of the Asset Purchase Agreement and the Related
Agreements of BEI and each subsidiary; (iii) the lack of conflicts with
charters or bylaws or violations of agreements or laws applicable to BEI and
each subsidiary; (iv) compliance of BEI and each subsidiary with laws and FDA
regulations, certain tax matters, certain environmental matters and other
matters related to BEI's business; (v) BEI's title to assets being purchased
by Cooper, and the lack of encumbrances upon and the condition and sufficiency
of such assets; (vi) certain contracts related to the Base Business to which
BEI or any subsidiary is a party, (vii) the absence of litigation;
(viii) insurance matters; (ix) BEI's accounts receivable; (x) the absence of
certain changes and events; (xi) no undisclosed liabilities and (xii) the
intellectual property being transferred. The representations by CSAC include
those regarding, among other things, (i) the due organization and
qualification of CSAC; (ii) the authorization, execution, delivery, and
enforceability of the Asset Purchase Agreement, and the Related Agreements;
and (iii) other matters related to CSAC's ability to enter into the Asset
Purchase Agreement and the Related Agreements and to consummate the
transactions contemplated thereby.
Conduct of BEI's Business Prior to the Asset Sale
During the period from the date of the Asset Purchase Agreement until the
Closing Date, BEI has agreed to, among other things, (i) conduct its
operations as they relate to the Base Business in the ordinary course of
business consistent with BEI's past practices; (ii) maintain and preserve the
assets, relationships, practices and policies related to the Base Business;
(iii) obtain the written consent of Cooper prior to changing BEI's pricing or
commission policies or sales incentive programs; (iv) not sell or dispose of
or permit any encumbrances to be placed on any intellectual property related
to the Base Business; (v) file necessary notices and obtain certain consents
of third parties; (vi) notify CSAC of events that may cause the
representations and warranties made by BEI to be materially untrue or
inaccurate; and (vii) not take any other action or enter into any transaction
that might reasonably be expected to cause or constitute a breach of any
representation or warranty made by BEI in the Asset Purchase Agreement.
In addition, BEI has agreed to give CSAC reasonable access to, among other
things, BEI's books, records, and work papers related to the Base Business,
and access to BEI's representatives and, with the consent of BEI, BEI's
vendors. In certain situations, CSAC is also permitted under the Asset
Purchase Agreement to contact certain customers of BEI. Any such contacts with
BEI's customers or vendors are to be made jointly with BEI.
Exclusivity
Subject to the BEI Board's good faith determination about its fiduciary
duties (after consultation with legal counsel), BEI cannot, and is required to
use its best efforts to cause its directors, officers and agents to not, enter
into an agreement with another party to consummate Another Transaction (as
defined below), negotiate regarding entering into Another Transaction or
provide non-public information to another party in connection with entering
into Another Transaction. In addition, BEI shall disclose to CSAC the terms of
Another Transaction that BEI negotiates or discusses as permitted by the Asset
Purchase Agreement. Another Transaction is defined as (i) the sale of the Base
Business or any of the Purchased Assets other than in the ordinary course, or
(ii) the sale of more than 50% of the voting securities of BEI.
Termination Fees
If BEI terminates the Asset Purchase Agreement because the BEI Board has
determined (after consultation with legal counsel) that its fiduciary duties
require it to consider and authorize Another Transaction, then BEI must pay
CSAC $300,000 upon such termination.
Conditions to the Asset Sale
The respective obligations of BEI and CSAC to effect the Asset Sale are
subject to the satisfaction or waiver in writing on or prior to the Closing
Date of certain conditions. CSAC's obligations under the Asset Purchase
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<PAGE>
Agreement are conditioned upon satisfaction or waiver on or prior to the
Closing Date of, among other things, the following:
(i) each representation and warranty of BEI contained in the Asset
Purchase Agreement and any Related Agreement shall have been true and
correct in all respects as of the Closing Date, except (a) for changes
contemplated by the Asset Purchase Agreement, (b) for those representations
and warranties that address matters only as of a particular date (which
shall have been true and correct as of such date) and (c) where the failure
or failures of such representations and warranties to be so true and
correct, individually or in the aggregate, has not resulted in a Material
Adverse Effect (as such term is defined in the Asset Purchase Agreement);
(ii) the obligations of BEI contained in the Asset Purchase Agreement and
any Related Agreement required to be performed or complied with in all
material respects on or before the Closing Date shall have been performed
or complied with in all respects on or before the Closing Date, except
where any failure to perform has not had and is not reasonably expected to
have a Material Adverse Effect (as such term is defined in the Asset
Purchase Agreement);
(iii) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by the Asset Purchase Agreement shall be in effect; and there
shall not be any action taken, or any law enacted, entered or enforced
which makes the consummation of the transactions contemplated by the Asset
Purchase Agreement illegal;
(iv) no legal proceeding presenting a material challenge to, or that is
reasonably likely to have the effect of preventing, delaying, making
illegal or seeking material damages in connection with, the Asset Sale
exists;
(v) the Asset Purchase Agreement and the consummation of the transactions
contemplated thereby shall have been duly approved and adopted by the
requisite affirmative vote of the stockholders of BEI and by the BEI Board;
(vi) all duly executed consents, certificates and approvals required for
or in connection with the Assumed Contracts (as identified in the Asset
Purchase Agreement) shall have been received;
(vii) BEI's lender, Transamerica Business Credit Corporation, shall have
consented to the transactions contemplated by the Asset Purchase Agreement
and released its encumbrances and liens on the Purchased Assets; and
(viii) the execution and delivery of the transition agreement, by BEI,
the noncompetition agreements by BEI and Richard Turner, and the bill of
sale, assignment and assumption agreement by BEI and, as required, by each
subsidiary.
BEI's obligations under the Asset Purchase Agreement are conditioned upon
satisfaction or waiver at or prior to the Closing Date of, among other things,
the following:
(i) each representation and warranty of CSAC contained in the Asset
Purchase Agreement and any Related Agreement shall be true and correct in
all respects as of the Closing Date, except (a) for changes contemplated by
the Asset Purchase Agreement, (b) for those representations and warranties
that address matters only as of a particular date (which shall have been
true and correct as of such date) and (c) where the failure or failures of
such representations and warranties to be so true and correct, individually
or in the aggregate, has not resulted in a Material Adverse Effect on the
business or financial condition of the consolidated group of CSAC, taken as
a whole;
(ii) the obligations of CSAC contained in the Asset Purchase Agreement
and any Related Agreement shall have been performed in all material
respects on or before the Closing Date;
(iii) the Asset Purchase Agreement and the consummation of the
transactions contemplated thereby shall have been duly approved and adopted
by the requisite affirmative vote of the stockholders of BEI and by the BEI
Board;
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<PAGE>
(iv) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by the Asset Purchase Agreement shall be in effect; and there
shall not be any action taken, or any law enacted, entered or enforced
which makes the consummation of the transactions contemplated by the Asset
Purchase Agreement illegal;
(v) no legal proceeding presenting a material challenge to, or that is
reasonably likely to have the effect of preventing, delaying, making
illegal or seeking material damages in connection with, the Asset Sale
exists;
(vi) the execution and delivery by CSAC of the transition agreement, a
noncompetition agreement to be entered into by BEI and a noncompetition
agreement to be entered into by Richard Turner, and bill of sale,
assignment and assumption agreement; and
(vii) the HTA-related royalty obligations of BEI to Cooper under a prior
agreement between the parties are terminated.
Termination
Either BEI or CSAC can terminate the Asset Purchase Agreement if:
. the Closing has not taken place on or before December 31, 1999;
. a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued a ruling
prohibiting the Asset Sale;
. the holders of a majority of the BEI Common Stock shall not have
approved the Asset Sale and the Asset Purchase Agreement;
. either BEI or CSAC has willfully breached the Asset Purchase Agreement
and such breach shall not have been cured within 10 business days of
receipt of notice thereof; or
. if the matters contained in an amendment to BEI's disclosure schedule to
the Asset Purchase Agreement constitute a material adverse effect as
described in the Asset Purchase Agreement.
BEI and CSAC may also mutually agree to terminate the Asset Purchase
Agreement at any time prior to the Closing.
Indemnification
Subject to certain limitations, pursuant to the terms of the Asset Purchase
Agreement, each of the parties has agreed to indemnify the other party and its
affiliates and their respective officers, directors, successors and assigns
against any and all losses, claims, shortages, damages, expenses (including
reasonable attorneys' and accountants' and other professionals' fees and
litigation expenses), assessments, taxes (including interest or penalties
thereon) and insurance premium increases.
BEI has agreed to indemnify CSAC and its related parties, as mentioned
above, in connection with (i) any inaccuracy or breach of any representation
or warranty of BEI or its subsidiaries contained in the Asset Purchase
Agreement or any Related Agreement; (ii) any breach of any agreement or
covenant of BEI or its subsidiaries contained in the Asset Purchase Agreement
or any Related Agreement; (iii) the Excluded Assets and the Excluded
Liabilities (as those terms are defined in the Asset Purchase Agreement); (iv)
all liabilities which arise out of events involving BEI or its subsidiaries
prior to the Closing Date; (v) non-compliance by BEI with any applicable "bulk
sales laws"; or (vi) any and all losses arising from or in connection with
taxes payable by BEI or any affiliate of BEI with respect to any period ending
on or prior to the Closing Date (or the portion ending on the Closing Date of
any period that includes but does not end on the Closing Date).
CSAC has agreed to indemnify BEI and its related parties, as mentioned
above, in connection with (i) any inaccuracy or breach of any representation
or warranty of CSAC contained in the Asset Purchase Agreement or any Related
Agreement; (ii) any breach of any agreement or covenant of Cooper contained in
the Asset Purchase
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<PAGE>
Agreement or any Related Agreement; (iii) any losses arising from CSAC's
ownership and operation of the assets purchased by Cooper as contemplated by
the Asset Purchase Agreement from and after the Closing Date, excluding any
losses as a result of any transaction between CSAC and BEI after the Closing
Date not contemplated by the Asset Purchase Agreement; or (iv) the Assumed
Liabilities.
The indemnification obligation of BEI as it relates to any breach of a
representation or warranty by BEI in general survives for 15 months after the
Closing Date. BEI's indemnification obligation with respect to certain other
representations and warranties of BEI, including those relating to BEI's title
to the Purchased Assets, authority to enter into the Asset Purchase Agreement
and the Related Agreements, compliance with the FDA and other laws,
sufficiency of assets sold to CSAC and rights to intellectual property,
survive for their respective statutes of limitations. The indemnification
obligation of BEI as it relates to covenants and other agreements of BEI under
the Asset Purchase Agreement survives until terminated by the terms of such
covenant or agreement.
The maximum amount that Purchaser Indemnified Persons can recover against
BEI for indemnification claims is the cash purchase price paid for the
Purchased Assets. In addition, Purchaser Indemnified Persons cannot recover
against BEI for any indemnification claims based upon breaches of
representations or warranties until the aggregate amount of indemnifiable
losses exceeds $125,000; once aggregate losses exceed $125,000, the total
amount of indemnifiable losses may be recovered, including the amount of
losses less than $125,000. Further, BEI's indemnification obligations with
respect to a breach of a representation and warranty relating to noncompliance
with laws, including FDA and similar international regulations is limited to
payment of FDA consultants' fees, plus fines and costs imposed by any
governmental entity as a result of such breach. In the event that such a
breach causes a governmental order to be issued that prevents CSAC from
selling a product, which is part of the Purchased Assets, for more than 90
days in any country, BEI must pay to CSAC that portion of the purchase price
attributable to the sales of such product by BEI in the country in which such
product is blocked from sale.
Indemnification under the Asset Purchase Agreement is CSAC's exclusive
remedy for any claims against BEI pursuant to the Asset Purchase Agreement or
any Related Agreement entered into thereunder, absent fraud or willful
misconduct on the part of BEI.
Post-Closing Covenants Related to Receivables
In the Asset Purchase Agreement, BEI (i) will guarantee to CSAC that the
accounts receivables included in the Asset Sale will be collectible in the
ordinary course of business and (ii) BEI shall, at the option of CSAC, pay to
CSAC an amount equal to the Net Receivables (as defined in the Asset Purchase
Agreement) to the extent such accounts receivable have not been collected by
the date of CSAC's written exercise of such option, which shall not be sooner
than the 180th day following the Closing Date; provided, however, that BEI
shall not be required to pay any amount to CSAC for any accounts receivable
for which the debtor has claimed in writing a right of offset or other defense
to payment based on any act or omission of CSAC following the Closing Date.
Related Agreements
As a condition to the consummation of the Asset Sale, the parties are
required to enter into a Transition Agreement. Also as a condition to the
consummation of the Asset Sale, Richard Turner and BEI are each required to
enter into Noncompetition Agreements with and for the benefit of CSAC. Forms
of the Transition Agreement and the Noncompetition Agreements are attached as
exhibits to the Asset Purchase Agreement included with this Proxy Statement as
Annex A and are incorporated herein by reference.
Transition Agreement
For three months following the Closing (and at CSAC's option, for up to an
additional three months), BEI will operate, on behalf of CSAC, certain aspects
of the Base Business. BEI's activities will include, among other things,
engineering, manufacture of products pursuant to a mutually agreed upon plan,
purchase of materials,
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<PAGE>
quality control, customer solicitation, invoicing and service and accounts
receivable collection. CSAC will reimburse BEI for BEI's costs to perform the
transition services, except that BEI will provide the first $245,000 of
products and services to CSAC without cost. BEI will pay approximately
$210,000 of retention bonuses and severance payments to induce certain BEI
employees to remain during the transition period.
CSAC will indemnify BEI against third party claims relating to the
Transition Agreement, except to the extent caused by BEI's breach, willful
misconduct or gross negligence. BEI will indemnify CSAC against third party
claims resulting from the gross negligence or willful misconduct of BEI or
BEI's wrongful failure to render the services or produce the products
contemplated by the Transition Agreement. BEI's total liability with respect
to services provided under the Transition Agreement will not exceed the total
of all service fees actually paid or due to BEI under the Transition Agreement
plus $245,000.
BEI Noncompetition Agreement
For five years following the Closing Date, BEI will be prohibited by the
Noncompetition Agreement to be entered into by BEI and CSAC (the "BEI
Noncompetition Agreement") from engaging in a business that competes with any
of BEI's products being sold to CSAC. This prohibition is effectively world-
wide. The HTA and HTA-related products are expressly carved out from this
prohibition.
If there is a change of control of or Joint Venture Arrangement (as defined
below) involving BEI, for a $250,000 payment to CSAC, an acquiror of BEI or
other third party in a Joint Venture Arrangement can narrow the noncompete
covenants of the BEI Noncompetition Agreement so that such party would be
prohibited only from "mimicking" and competing against the five principal
products CSAC is acquiring from BEI. This option is available only for the
first change of control or Joint Venture Arrangement to occur. A "Joint
Venture Arrangement" means an arrangement between BEI and a third person to
carry on a joint business activity in the form of a joint venture, partnership
or other contractual arrangement, including a licensing, supply or
distribution arrangement. A product is deemed to "mimic" one of the five
principal product if a bona fide credible argument can be made that such
product infringes a patent or patents which may at any time have been issued
for such principal product, even if such principal product is not at any time
protected by a patent.
BEI will also be precluded from (i) soliciting any employee of CSAC or any
other company in CSAC's Business Group (as defined in the BEI Noncompetition
Agreement) to leave the person's then current employment, (ii) hire any person
within six months after that person leaves the employ of CSAC or its Business
Group, or (iii) interfere with the relationship of CSAC and its Business Group
with their customers, suppliers, consultants and licensees, although
competition and non-exclusive business arrangements with such persons not
otherwise prohibited under the Noncompetition Agreement is permissible.
Finally, subject to certain exceptions, BEI will agree not to use or
disclose Confidential Information of the Base Business (as defined in the BEI
Noncompetition Agreement) for five years following the Closing.
Turner Noncompetition Agreement
Pursuant to the terms of the Noncompetition Agreement to be entered into
with Richard Turner and CSAC (the "Turner Noncompetition Agreement") for three
years following the Closing date, Richard Turner will be prohibited from
engaging in a business that competes with certain BEI products (the
"Competitive Products") being sold to CSAC (the "Competitive Activity"). This
prohibition is effectively world-wide. The HTA and HTA-related products are
expressly carved out from this prohibition.
Mr. Turner is not prohibited from serving as an employee of or consultant to
any entity whose sales to gynecological, infertility and family practice
medical markets (the "Proscribed Markets") do not exceed 25% of the total
sales of such entity, provided that none of Mr. Turner's activities as an
employee of or consultant to such entity would relate directly or indirectly
to any Competitive Activity. In addition, Mr. Turner may serve as an employee
of or consultant to any entity selling products or services to the Proscribed
Markets if such products do not include the Competitive Products or
functionally equivalent products.
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If BEI exercises the option described above in "BEI Noncompetition
Agreement" (the "Option") to narrow the noncompete covenants for an acquiror
of BEI or other third party engaging in a Joint Venture Arrangement with BEI
(the "Third Party"), then Mr. Turner, at the time the Option is exercised and
provided he has been continually employed or retained as a consultant of BEI
or of such Third Party, may, solely as an employee or consultant to BEI or
such Third Party, engage in any activity that does not "mimic" or compete
against the five principal products CSAC is acquiring from BEI.
Mr. Turner will also be precluded from (i) soliciting any employee of CSAC
or any other company in CSAC's Business Group (as defined in the Turner
Noncompetition Agreement) to leave the person's then current employment, (ii)
hire any person within six months after that person leaves the employ of CSAC
or its Business Group, or (iii) interfere with the relationship of CSAC and
its Business Group with their customers, suppliers, consultants and licensees,
although competition and non-exclusive business arrangements with such persons
not otherwise prohibited under the Turner Noncompetition Agreement are
permissible.
Finally, subject to certain exceptions, Mr. Turner will agree not to use or
disclose Confidential Information of the Base Business (as defined in the
Turner Noncompetition Agreement) for three years following the Closing.
Interests of Management or Directors in the Asset Sale
After executing the Asset Purchase Agreement, the Company entered into a
three-year employment agreement with Richard Turner, conditioned on the
closing of the Asset Sale (the "Employment Agreement"). The Employment
Agreement provides consideration to Mr. Turner in return for Mr. Turner
entering into the Turner Noncompetition Agreement, which, as described above,
subjects Mr. Turner to certain noncompete covenants for a period of three
years. The Employment Agreement obligates the Company to continue to pay Mr.
Turner his full salary and benefits through the end of the three-year term of
the Turner Noncompetition Agreement, and in the event he leaves the Company
during that time period, less any salary and benefits he receives from new
employment. The Employment Agreement also provides that the Company will pay
Mr. Turner a cash bonus of $80,000 upon the closing of the Asset Sale, in
satisfaction of certain bonus obligations to him under a January 1999
employment contract.
None of the other executive officers or directors of the Company has been
offered an employment contract with CSAC, has any interest or ownership in
Cooper, or in any other way stands to personally benefit as a result of the
consummation of the Asset Sale. The BEI Board may in its discretion award
bonuses to other executive officers in connection with consummation of the
Asset Sale.
Voting
Stockholders are requested in this proposal to approve and adopt the Asset
Purchase Agreement and to approve the Asset Sale pursuant to the Asset
Purchase Agreement. The affirmative vote of the holders of a majority of the
shares issued and outstanding as of the record date will be required to
approve and adopt the Asset Purchase Agreement and to approve the Asset Sale.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders. An abstention from voting or a broker non-vote
will have the practical effect of voting against approval of the Asset Sale
Proposal since a vote to abstain or a broker non-vote represents one less vote
cast in favor of such approval.
THE BEI BOARD RECOMMENDS
A VOTE "FOR" THE APPROVAL OF THE ASSET SALE PROPOSAL
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BEI'S BUSINESS
BEI currently develops, manufactures and markets a broad array of advanced
systems and devices for minimally invasive diagnostic and therapeutic
procedures in the field of gynecology. BEI has an existing Base Business of
systems and devices it markets to gynecologists in over 5,000 hospitals,
clinics and office-based practices in the United States and in 45 other
countries worldwide. Those systems and devices include both disposable and
reusable medical instrumentation used in the diagnosis and treatment of
selected high incidence gynecological conditions affecting the cervix, uterus
and other aspects of the reproductive system, as well as products used to
facilitate oncological procedures and perform pelvic reconstructive surgery.
Currently, BEI is focusing its new product development and commercialization
efforts on the Hydro ThermAblator (HTA) and related accessories to treat
menorrhagia, or excessive uterine bleeding.
For the reasons explained elsewhere in this Proxy Statement, BEI has entered
into the Asset Purchase Agreement to sell the Base Business and to concentrate
its future efforts on obtaining FDA approval to market the HTA and launching
this new product in the U.S. market. In the event the Asset Sale is not
consummated and BEI is unable to secure additional financing, BEI's ability to
continue as a going concern may be impaired.
Industry Overview
Women's healthcare represents a large and rapidly growing segment of
healthcare expenditures. Government spending on women's healthcare for
Medicare and Medicaid benefits alone is expected to exceed $200 billion
annually. Women rely on their gynecologists for specific healthcare needs from
puberty, through their childbearing years, to menopause and beyond. The
National Ambulatory Care Survey, conducted by the National Center for Health
Statistics, indicates that women in the United States make over 51 million
visits to OB/GYN offices annually. Additionally, as the women's population
ages, the number of visits annually and the incidence of gynecological
conditions requiring diagnosis and treatment will increase. The Company
believes that better informed women, combined with the fact that nearly half
of the gynecologists under the age of 45 are women, has resulted in a
heightened awareness of women's health issues. As a result, women are driving
the demand for and implementation of new and innovative diagnostic and
therapeutic procedures. In view of these developments, HMO's have become more
responsive to women's healthcare needs by increasingly authorizing patients to
go directly to gynecologists, who are more aware of the latest technologies
and procedures available for treating gynecological conditions than are the
patients' primary care physicians. Functioning as the gatekeeper, the
gynecologists are in a position to determine and recommend which technologies
and procedures are most appropriate for their patients.
Minimally invasive surgical techniques were developed in response to the
desire by physicians and patients for lower risk, less traumatic surgical
procedures. Minimally invasive procedures reduce anesthesia requirements, do
not require extensive post-operative follow-up, reduce the risk of post-
operative complications, and shorten the recovery period, allowing patients to
return to productive lifestyle activities sooner. Gynecologists have long
utilized minimally invasive techniques such as laparoscopy and hysteroscopy,
and have recently added endometrial ablation to their outpatient approach to
therapy.
The acceptance of these procedures by the healthcare industry and the
subsequent development of the ability to perform them on an outpatient basis
have contributed to cost containment and greater efficiency in the delivery of
healthcare services. In response to these pressures, hospitals are focusing on
a limited number of specialties and shifting an ever-increasing percentage of
surgical procedures to an outpatient basis to avoid the costs associated with
the patient remaining in the hospital overnight. Current estimates indicate
that outpatient surgery represents 70% of the total surgical market, and
includes laparoscopy, hysteroscopy and endometrial ablation. As a result,
freestanding outpatient surgery centers are the fastest growing segment of the
healthcare market.
BEI Business Strategy
The Company's goal has been to provide minimally invasive advanced systems
and devices to be used in an outpatient setting serving the specific needs of
gynecologists and their patients. Its special emphasis has been
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on the diagnosis and treatment of disorders and conditions of the cervix,
uterus and other aspects of the reproductive system and particularly to offer
advanced alternatives to existing procedures for the treatment of abnormal
bleeding and uterine fibroids.
Base Business
The Company's Base Business involves the manufacture and marketing of a line
of minimally invasive systems and devices for the diagnosis and treatment of
high incidence gynecological conditions affecting the cervix, uterus and other
aspects of the reproductive system, as well as products used to facilitate
oncological procedures and perform pelvic reconstructive surgery.
The Company currently sells a line of specialty instruments, procedure kits,
disposables and equipment for gynecologists, as outlined in the following
table. If the Asset Sale is consummated, the Company will no longer
manufacture, market, sell or service any of the following products, except the
HTA and related accessories:
<TABLE>
<CAPTION>
Clinical Target Key Products
--------------- ------------
<S> <C>
Cervix.................. . Bi-Safe I(TM) bipolar electrosurgical generator and
bipolar LLETZ electrode system, for removal of abnormal
tissue from the cervix*
. Colposcopy instruments, including biopsy forceps and
specula
. Gyne-Tech (TM) colposcopes systems, for tissue
destruction
. Gyne-Tech cryosurgical systems, for tissue destruction
. OS Finder(TM) dilator, for cervical canal access
. Plus II(TM) monopolar generator and monopolar LLETZ
Plus(TM) electrodes, for removal of abnormal tissue
from the cervix
Uterus.................. . Corson Office Hysteroscopy System, for examination and
therapy of the inner surface of the uterus***
. HTA, for treatment of excessive menstrual bleeding**
. Hysteroscopic Insufflator, for precise control of
uterine distension*
. Z-Sampler(TM) endometrial suction curette, for tissue
sampling to detect carcinoma or precancerous
conditions*
Infertility Diagnosis... . Corson Office Hysteroscopy System, for examination and
therapy of the inner surface of the uterus***
. Hysteroscopic Insufflator, for precise control of
uterine distension
. Laparoscopic Insufflator, with high flow capability to
maintain proper peritoneal cavity distension*
. OS Finder dilator, for cervical canal access***
. SHG catheter, for distension during sonohysterography
. Z-Sampler endometrial suction curette, for endometerial
dating and to monitor hormonal therapy effects*
. ZUI(TM) uterine injector, for hysterosalpingography
. ZUMI(TM) uterine manipulator/injector, for manipulation
of the uterus and injection of contrast media*
Oncological Surgery and . Endo-Sock(TM)/Mega Pouch, for laparoscopic tissue
Pelvic Reconstruction.. removal*
. Laparoscopic Insufflator, with high flow capability to
maintain proper peritoneal cavity distension*
. MIYA Hook(TM), for pelvic suspension surgery
. Nichols-Veronikis Ligature Carrier, for pelvic
suspension surgery*
. Soderstrom LAVH Manipulator(TM), for laparoscopically
assisted hysterectomy
</TABLE>
- --------
* Proprietary technologies for which the Company or the manufacturer owns or
licenses patents.
** Not available in the United States.
*** The Company will continue to sell these products, but only in conjunction
with its sales of its HTA product.
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<PAGE>
The HTA
Background
The Company has focused its recent efforts on the development and
commercialization of the patented HTA system for treatment of menorrhagia, or
excessive uterine bleeding. This new product and its potential are more fully
discussed below.
The female reproductive system consists of the uterus, ovaries and fallopian
tubes. The uterus is a highly vascular, muscular organ which lies below the
abdomen in the pelvis. Although the size and shape of a normal uterus can vary
significantly, the uterus is typically a pear shaped organ about 7 to 8 cm
long and 4 to 5 cm at its widest point. Within the uterus lies the cavity
where fetal development takes place 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.
Abnormal Uterine Bleeding
Approximately 2.5 million women each year in the United States seek medical
treatment from their gynecologists for abnormal uterine bleeding. Abnormal
uterine bleeding includes disorders of the menstrual cycle, such as irregular
bleeding, and menorrhagia, or excessive uterine bleeding (defined as total
blood loss exceeding 80 ml per menstrual cycle or prolonged bleeding beyond
seven days). Abnormal bleeding is considered a symptom of an anatomic
irregularity, hormonal imbalance or a systemic disease. Commonly, however, it
is the result of disorders within the uterus itself, such as fibroids and,
more rarely, endometrial cancer. Abnormal uterine bleeding can also be caused
by other factors, including medication side effects from post-menopausal
hormone replacement therapy, miscarriage and retained tissue after child
birth. Today, there are over 31 million post-menopausal women in the United
States and over seven million are receiving hormonal replacement therapy.
These women may experience a return to undesired menstrual bleeding as a
consequence of hormonal replacement therapy.
Various drug therapies and surgical approaches are available for treatment
of abnormal menstrual bleeding. Treatment of abnormal menstrual bleeding
usually begins conservatively with drug therapy and, if necessary, proceeds to
more invasive surgical methods.
33
<PAGE>
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.
Alternative Treatments
Rather than removing the uterus, alternative approaches to the treatment of
excessive uterine bleeding have been attempted.
The first successful endometrial ablation procedures, utilizing laser
photovaporization of the endometrium, were published in 1981 in the Journal of
the American Association of Gynecologic Laparoscopists. By 1990, reports
appeared regarding the successful use of a urologic resectoscope to deliver
electrosurgical current as the means of coagulating the endometrium. Both of
these surgical endometrial ablation techniques require significant distention
of the uterus to create working space. A risk of excessive absorption of non-
conductive (salt free) fluid into the vessels of the uterus also exists due to
the high pressures (100-150 mmHg) used to distend the uterine cavity. When
significant amounts of this non-physiologic fluid is absorbed, the resulting
fluid overload can cause hyponatremia (dilution of body fluids resulting in
electrolyte imbalance), pulmonary edema (fluid in the lungs), cerebral edema
(swelling of the brain), and even deaths have been reported.
Both of these surgical ablation techniques require the tedious "painting" of
the entire lining of the uterus to control depth of thermal destruction, as
well as attention to safety issues (i.e., perforation or hemorrhage)
throughout the typical 30-60 minutes required to complete treatment of the
entire lining of the uterus under general anesthesia. While these surgical
endometrial ablation techniques offer advantages over traditional
hysterectomy, clinical results are extremely dependent on the skill and
experience of the surgeon. In general, because of the technical proficiency
required to achieve good results, the time required to complete the procedure,
and the risks associated with laser and electrosurgical roller-ball ablation,
neither of these ablation techniques have become widely popular.
Other non-surgical techniques for treatment of excessive uterine bleeding
are under development and in various stages of FDA clinical trials, including
devices that employ fluid-filled heated balloons, electrodes on the surface of
a balloon, microwave energy, radio frequency (RF) currents, and cryosurgery
(freezing). One such device, the ThermaChoice balloon from Gynecare, a
subsidiary of Johnson & Johnson ("J&J"), has received permission from the FDA
to market in the United States. Valleylab announced earlier this year that it
will be conducting a limited clinical trial of the Vesta System for
endometrial ablation prior to FDA approval in the United States. The Vesta
System is currently under FDA investigation and is not for sale in the United
States.
The Company believes that these devices are limited in their effectiveness
due to their inability to fully conform with the convoluted surface of the
entire uterine lining, their inability to reach into narrow cornual areas, and
their inability to conform to the shape of a broad range of uterine sizes.
Further, these devices do not allow the gynecologist to visualize the uterine
cavity prior to treatment, to definitively confirm proper placement inside the
uterine cavity to observe treatment, or to immediately evaluate the effect of
treatment, because they do not include hysteroscopic capability. In March
1998, the United Kingdom Department of Health, Medical Devices
34
<PAGE>
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.
Comparison of Endometrial Ablation Technologies
<TABLE>
<CAPTION>
Compatibility
With Varying Pressurization
Method of Uterine Size & of Uterine
Device Technology Introduction Location of Energy Source Shape Cavity
----------------- ------------ ------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Balloon containing Blind Heater inside balloon,
heated fluid........... insertion inside uterus Low High, 150+ mmHg
Balloon with conductive External electrosurgical
electrodes............. Blind generator, electrodes
insertion inside uterus Low High, 150+ mmHg
Microwave probe......... Blind External microwave Low Not applicable
insertion generator, applicator
inside uterus
Cryogenic probe......... Blind External unit, probe
insertion inside uterus Low Not applicable
Conductive mesh Blind External electrosurgical Low Vacuum
electrode.............. insertion generator, electrode
inside uterus
Free fluid circulation Blind Heater inside probe,
probe.................. insertion inside uterus High Low, < 50 mmHg
Free fluid circulation Insertion with External Heater, High Low, < 50 mmHg
hysteroscope........... visual circulation to uterus
control,
connected to
video monitor
</TABLE>
The HTA Solution
The Company has developed the patented HTA technology as an alternative to
existing treatments for menorrhagia, or excessive uterine bleeding, as well as
other proposed ablation treatments currently under development.
Management believes that the patented HTA offers distinct advantages
compared to existing and emerging ablation technologies for the treatment of
excessive uterine bleeding:
. Integral hysteroscope provides visual confirmation of uterine anatomy
and instrument position, as well as continuous observation of treatment
effect.
. Variation in uterine size and shape are easily accommodated by freely
circulating heated saline.
. Freely circulating heated saline allows even and complete treatment of
the entire endometrium.
. Low pressurization of the uterine cavity reduces risk and patient
discomfort.
. Does not require extensive training prior to use.
. Clinical outcome is not dependent on user experience or variation in
technique.
. Minimally invasive short duration procedure with limited risk.
The Company's initial target market for the HTA is the 150,000
hysterectomies performed in the United States annually for menorrhagia or
excessive menstrual bleeding from benign causes. Additionally, the Company has
identified a market opportunity among the nearly two million women suffering
from abnormal uterine bleeding in the United States for whom the prospect of
long-term hormonal therapy or repeated D&C procedures is undesirable, or for
whom such treatments are ineffective. The Company also believes that a market
opportunity exists among the over seven million post-menopausal women who are
currently receiving hormonal replacement therapy that can result in an
undesirable resumption of menstrual bleeding. BEI also believes marketing
opportunities will develop among women seeking a cessation of menstruation,
either electively as a lifestyle choice or in conjunction with tubal
sterilization.
35
<PAGE>
The HTA System
The HTA has been designed to offer the gynecologist a minimally invasive,
non-surgical method to treat excessive uterine bleeding in an outpatient or
office setting. The HTA consists of a portable treatment unit, incorporating
microprocessor control of fluid temperature and fluid circulation. The mobile
unit provides a drawer for procedure supplies, and a shelf to house the
Company's Integrated Video System ("IVS") for display of the hysteroscopic
image on a video monitor. Precisely heated saline is circulated within the
patient's uterus, under the direct visual control of the gynecologist, for
approximately ten minutes to cause ablation of the entire endometrial lining.
By utilizing freely circulating heated saline at low pressure to distend the
uterine cavity, thermal energy is evenly transferred to all areas of the
uterine cavity including the areas of the cornua (the area where the fallopian
tubes enter the uterus) which can be difficult to treat with other devices.
The use of physiologic saline eliminates concerns about fluid absorption
overload, and low pressure prevents escape of fluid from the fallopian tubes.
The incorporation of a hysteroscopic telescope provides visual control during
introduction, positive visual confirmation of proper placement within the
uterine cavity as well as continuous visualization of the effects of the
treatment. The digital displays of the HTA control unit guide the user through
the HTA procedure, providing step-by-step visual prompts that facilitate ease
of use and consistent results. During the procedure an automated
microprocessor system controls the ablating temperature and monitors fluid
volume to measure and reduce possibilities of fluid absorption or loss and
assure consistent treatment effect without depending on user skill level. At
any time, the gynecologist can interrupt the treatment and, if desired, the
circulation of room temperature saline will rapidly cool the patient's uterus.
As a result of ablation of the endometrial lining of the uterus, the
regeneration of the endometrium and resulting periodic menstrual bleeding is
either significantly reduced or eliminated.
The need to provide a definitive diagnosis of uterine abnormalities led to
the development of hysteroscopy. A gynecologist may look inside the uterus
with a hysteroscope, a thin telescope-equipped device that is inserted through
the cervix. The hysteroscope is attached to a light source and camera allowing
the gynecologist to view the endometrial lining on a video monitor to identify
fibroids, make directed biopsies, and perform minimally invasive therapeutic
procedures. Direct visualization of the lining of the uterus provides a more
precise diagnosis of uterine abnormalities than D&C, HSG or ultrasound
imaging.
Gynecologists commonly use hysteroscopy; however, in the past most
hysteroscopic procedures have been done in the hospital environment, often in
the operating room under general anesthesia. This has been due to a number of
factors, including the high cost of complete hospital style hysteroscopy
systems, large diameter instrumentation that makes comfortable use in the
office with local anesthesia impractical, and the lack of third party payor
incentives for office based procedures.
The transition of hysteroscopic procedures from the hospital environment to
the gynecologist's office practice is being driven by the following: (i)
patient's desire to avoid hospitalization, (ii) physician's desire for
efficient use of time resulting in improved office economics, and (iii) third
party payors are providing incentives to relocate procedures to more cost-
effective environments. The Company believes that only 20-25% of the
approximately 19,000 gynecology practices in the United States are currently
equipped to offer office-based hysteroscopic procedures to their patients,
providing a significant business opportunity to the Company.
Results of Clinical Trials
The Company completed FDA required Phase I clinical trials in April 1996,
and was given permission to proceed to a Phase II trial of the HTA. Phase II
treatments of 20 patients were completed in December 1997. Follow-up outcome
data from the Phase II patients was compiled and submitted to the FDA in June
1998. This outcome data compared favorably with the results of alternative
therapies, showing an amenorrhea rate of 57.9%, at six months follow-up
examinations. When these patients whose menstrual bleeding was eliminated are
grouped with the remainder of the patients whose menstrual bleeding was
significantly reduced, the overall success rate was 94.7%. A protocol
violation related to pharmaceutical administration required that one patient
be removed from consideration in the study, with only one of the remaining 19
patients (5.3%) failing to show
36
<PAGE>
an improvement from HTA treatment. There is no assurance the Phase III results
will be consistent with the results obtained by the Company in its Phase II
trials or that they will support the safety and efficacy of the HTA.
The Company received approval to begin Phase III Clinical Trials in August
1998, and the first treatments were conducted in September 1998. BEI initiated
its Phase III clinical trials at 9 sites and enrolled 276 patients suffering
from menorrhagia, or excessive uterine bleeding. The study compared the safety
and efficacy of the HTA endometrial ablation treatment to electrosurgical
rollerball ablation, one of the current treatments for excessive uterine
bleeding. The Company completed the treatment phase of the clinical trials in
early August 1999. Data from examinations one year following treatment are
required for approval of its premarket approval ("PMA") application, but the
Company will submit six-month data to the FDA after review and analysis by its
contract research organization (Quintiles). There can be no assurance that any
data obtained from the Phase III trial will support the safety and
effectiveness of the HTA. Failure of the data to support the safety and
effectiveness of the HTA would have a material adverse effect on the Company's
business.
Certain international markets will require similar regulatory approvals. The
Company has received permission from Lloyd's Registered Quality Assurance Ltd.
("LRQA"), the Company's "notified body", to apply the CE Mark to the HTA and
to the sterile disposable HTA Procedure Kit. In February 1997, the Company
selectively initiated deliveries of HTA systems in some of those countries
where regulatory authorities permit sales. Since then treatment centers have
been established in Australia, Brazil, Canada, France, Hong Kong, Israel,
Italy, Germany, New Zealand, Portugal, Spain, Switzerland, and in the United
Kingdom. More recently, regulatory authorities in Australia and in Canada have
granted permission for the sale of the HTA system. Over 600 treatments using
the HTA have been completed worldwide, demonstrating its ease of use.
Management is encouraged by the follow-up of patients at selected
international sites, which now exceeds 24 months. The Company believes the
pattern of patient follow-up condition reflects results that are consistent
with traditional laser and electrosurgical ablation methods and superior to
other emerging technologies. See "Business--Government Regulation."
Sales and Marketing
Although the Company's sales and marketing strategy with respect to its Base
Business has been to increase market penetration through the expansion of its
direct sales and marketing activities targeting the more than 33,000
gynecologists practicing in the United States, the Company's shortage of
available funds will require decreasing this activity if the Asset Sale is not
consummated. BEI's domestic distribution network for its Base Business
currently includes approximately 11 inside sales personnel and two field
managers in addition to 14 independent manufacturers' representative
organizations, employing approximately 52 field representatives to market its
products directly to gynecologists in hospitals, surgical centers and office
based practices. They also represent manufacturers of other medical products
that are complementary with the Company's products and work on a straight
commission basis.
Internationally, BEI currently sells its Base Business products through
distributors in 45 countries, and distributors in 17 countries have begun
marketing the HTA. The Company may also rely on these distributors to assist
it in obtaining reimbursement approvals from both government and private
insurers in certain international markets. The Company does not currently have
distributors in a number of significant international markets that it has
targeted and would need to establish additional international distribution
relationships in order to sell its products, including the HTA, in those
markets. The Company has targeted the following additional countries for
expansion of its international marketing and distribution of the HTA: China,
Japan, Norway, Philippines, South Korea and Sweden.
As a part of its Base Business, the Company has offered electrosurgical
devices and disposable electrodes designed specifically for gastrointestinal
endoscopy. These products are sold through a separate network of independent
manufacturer's representatives. This range of gastrointestinal products is not
expected to provide a significant increase in future Base Business revenues.
Also, a variety of products are manufactured by BEI for
37
<PAGE>
sale by third parties under various original equipment manufacture ("OEM")
agreements, but the Company expects these OEM arrangements to decline as a
percentage of revenues of the Base Business. In fiscal 1998, revenue of
gastrointestinal endoscopy products and OEM revenue were 9.7% and 9.9% of
BEI's revenue, respectively, compared to 8.9% and 17.1% in fiscal 1997 and
15.5% and 14.5% in fiscal 1996.
The Company also markets products that are manufactured by third party
vendors, where the regulatory approval and compliance for these products has
been obtained and is controlled exclusively by the third party vendor. Any FDA
regulatory or compliance actions against these companies could affect the
third party vendor's ability to supply the Company, which in turn could have a
material adverse impact on the Base Business and the Company.
If the Asset Sale is not consummated and if BEI is able to secure adequate
financing, BEI plans to continue to support its gynecology sales and marketing
efforts through the participation in regional and national trade shows which
the Company believes will reinforce market presence, increase awareness of its
products, introduce new products, and develop actionable sales leads for its
sales force. Periodic distribution of its specialty office gynecology direct
mail catalog will also be continued. Promotional literature and new product
announcements will continue to be distributed via insertion with invoices and
insertion in merchandise shipments to leverage relationships with existing
customers as well as maintaining its on-line catalog (www.beimedical.com).
The Company plans to provide sponsorship for clinically-based seminars
conducted by the Company's clinical investigators to familiarize practitioners
with innovative systems and devices developed by the Company, such as the HTA.
Internationally, BEI will continue to support the efforts of its distributors
through sponsorship of guest speakers at national conventions and at clinical
seminars and through the sponsorship of postgraduate courses.
The Company anticipates that FDA approval to begin commercial sales of the
HTA in the United States will occur between October 2000 and April 2001. There
can be no assurance that the Company will be successful in obtaining FDA
approval on a timely basis, or at all.
Competition
The Company operates in a highly competitive industry. Many of the Company's
existing competitors have significantly greater financial resources and
manufacturing capabilities, are more established, have larger marketing and
sales organizations and have larger technical staffs than the Company. BEI
believes that its products compete primarily on the basis of price, design,
performance, reliability, delivery service and support.
Base Business. The principal competitors for the core gynecology products in
the Company's Base Business include Circon Corporation, CSI, a subsidiary of
The Cooper Companies, Inc., Karl Storz GmbH, Leisegang Medical, Inc., a
subsidiary of NetOptix Corporation, Olympus Corp., Utah Medical Products,
Inc., Wallach Surgical Devices, Inc., and Richard Wolf Medical Instruments
Corp.
HTA. One of the principal competitors for the Company's HTA is 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. While J&J has greater financial resources and more
established distribution channels than the Company to develop its presence as
a provider of an alternative treatment for dysfunctional uterine bleeding, BEI
management believes the introduction of the ThermaChoice endometrial ablation
product by J&J affirms BEI's market opportunity for non-surgical ablation
technology as well as establishes the presence of a competitor that is a
credible advocate of an alternate ablation technology. J&J entered the
ablation market when it purchased Gynecare, Inc. for approximately $80,000,000
in August 1997. Shortly thereafter, in December 1997, Gynecare received FDA
approval to market in the United States its ThermaChoice uterine balloon
therapy for dysfunctional uterine bleeding. The Company believes such FDA
authorization may have a complementary effect on the Company's prospects
because the launch of the J&J product has raised physician and public
awareness of non-surgical alternatives for hysterectomy avoidance. The
gynecological community has reported to the Company that it is receiving
strong interest from women about alternative treatments for dysfunctional
uterine bleeding. Gynecologists worldwide are beginning to adopt such
38
<PAGE>
alternative treatments, including BEI's HTA, which are becoming available to
serve these patients. BEI management believes that based upon patient results
12 months following international HTA treatments, the HTA procedure offers a
promising alternative to balloon ablation, as evidenced by reduction in
dysfunctional uterine bleeding. Management believes the HTA procedure brings
to the treatment of dysfunctional uterine bleeding the safety attendant with
direct visualization during treatment and the potential for complete treatment
of the endometrial lining of the uterine cavity. As a result, management
believes the HTA may prove to be valuable and competitive despite the
existence of J&J's ThermaChoice balloon.
Other principal competitors for the Company's HTA include Cavaterm, a
product of Wallsten Medical SA, which is being sold internationally, but is
not for sale in the United States. Valleylab, a subsidiary of U.S.
Surgical/Tyco, announced in February 1999 that it will be conducting a limited
clinical trial of the Vesta System for endometrial ablation prior to FDA
approval in the United States. The Vesta System is currently under FDA
investigation and is not for sale in the United States. Other technologies
available for sale internationally but not domestically include the Gynelase
product, (a laser intrauterine thermal therapy device) distributed by
Sharplan, and the Microsulis PLC MEA device which employs a hand-held
applicator to apply low power microwaves to the uterine cavity.
Other large healthcare companies may enter the market for minimally invasive
diagnostic and therapeutic gynecological products in the future. Competing
companies may succeed in developing technologies and products that are
efficacious or more cost effective than those currently offered or that may be
developed by BEI.
The Company believes that its ability to compete effectively depends on its
ability to continue to develop proprietary products that fulfill unmet
gynecological market needs and to anticipate changing marketplace demands, to
continue to attract and retain highly qualified personnel, to obtain the
required regulatory approvals, and to continue to manufacture and successfully
market high quality products.
Manufacturing
BEI's manufacturing operations consist primarily of the manufacture and
assembly of electromechanical equipment such as electrosurgery generators,
endoscope illuminators, endoscopes and electronic insufflators, all of which
are included in the Base Business, and the HTA. Some component fabrication and
assembly of various non-electrical products, both disposable and reusable, is
also performed. Approximately 29.3% of the Company's annual revenue in fiscal
1998 was derived from internally manufactured products. The Company also
utilizes contract manufacturers to make a variety of non-electrical medical
devices to Company design specifications, including hysteroscopy systems,
disposable catheters and reusable instruments, all of which are included in
the Base Business, and the disposable HTA procedure kit. 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, all of which are included in the Base Business.
Engineering efforts are continuing 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.
As a part of its Base Business, BEI also produces a variety of
electrosurgical generators, laparoscopic insufflators, endoscopic light
sources, and associated disposable products designed for use in various
medical/surgical procedures and sold under OEM labeling arrangements.
In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA itself or through third parties in accordance with the FDA
requirements, in commercial quantities, at high quality levels and at
reasonable costs. The Company has not yet produced the HTA in substantial
quantities, but expects that its manufacturing experience with other medical
electronic systems and consumable medical products will be transferable to the
HTA. Failure of the Company to produce the HTA in commercial quantities at
high quality levels and at commercially reasonable prices would have a
material adverse effect on the Company's business, financial condition and
results of operations.
39
<PAGE>
During fiscal 1996, BEI's manufacturing facilities received ISO 9001
certification from Lloyds Register Quality Assurance, Ltd. ("LRQA"). LRQA will
conduct semiannual audits in Teterboro, New Jersey. The most recent audit of
the Company's manufacturing facilities in Teterboro, New Jersey was in August
1999. The audit report did not include any negative observations or identify
any areas of noncompliance, thereby resulting in re-certification. This re-
certification dated effective September 1, 1999 will expire on August 31,
2002. Additionally, the Company's facilities and documentation procedures for
the manufacture of medical devices are required to conform to the FDA's
Quality System Regulations ("QSR") through its facilities inspection program.
The FDA most recently inspected the Company's manufacturing facilities in
Teterboro, New Jersey in September 1998 for compliance with the QSR. Upon
completion of the inspection, the FDA did not issue a Notice of Adverse
Findings. Withdrawal of QSR compliance status would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Research and Development; Technology
The Company's principal development effort has focused on proprietary
devices for minimally invasive procedures in gynecology. The Company's
internally funded research and development expenditures were $2,866,000,
$1,864,000 and $1,328,000 for the fiscal years 1998, 1997 and 1996,
respectively. Even if the Asset Sale is not consummated, the Company
anticipates that the majority of spending on research and development over the
next 12 months will be devoted to completing the HTA clinical trials and
gaining FDA approval of the product. If the Asset Sale is not consummated, the
Company would need to obtain additional financing to continue to engage in
such activities beyond the end of calendar year 1999. There is no assurance
such financing will be available on terms acceptable to the Company, if at
all.
Licenses, Patents and Proprietary Technology
The Company's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development
of its business.
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company's strategy regarding the protection of its proprietary
rights and innovations has been to seek patents on those portions of its
technology that it believes are patentable and to protect as trade secrets
other confidential and proprietary information.
As of October 2, 1999, the Company had a portfolio including 17 United
States patents, either licensed or owned, in addition to certain issued
foreign patents. Among the 17 patents issued in the United States, four
patents are related to the development of the HTA. Corresponding applications
have been filed in certain foreign countries relative to the HTA. The
Company's other patents relate to products in its Base Business and will
therefore be sold to CSAC if the Asset Sale is consummated. The Company's
policy is generally to file patent applications in foreign countries where
rights are available and the Company believes it is commercially advantageous
to do so. No assurance can be given that any patents from pending patent
applications or from any future patent applications will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held
valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held by the Company. The
Company also owns certain registered trademarks, and has applied for other
trademarks in certain foreign countries.
Inclusive to the patent portfolio, the Company holds the rights and title to
the patent for its Uterine Manipulator/Injector ZUMI product line, under an
agreement with the Estate of James H. Harris, M.D. This patent was issued in
1984 and is expected to expire in 2001. This ZUMI product line, which accounts
for a significant percentage of the Company's disposable instrument revenues,
will be sold to CSAC pursuant to the Asset Purchase Agreement.
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<PAGE>
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.
An adverse determination in a judicial or administrative proceeding or
failure to obtain necessary license could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company also relies upon trade secrets and technical know-how and
continuing technological innovations to develop and maintain its competitive
position. The Company typically requires its employees, consultants and
advisors to execute appropriate confidentiality and assignment of invention
agreements in connection with their employment, consulting or advisory
relationship with the Company. There can be no assurance, however, that these
agreements will not be breached or that the Company will have adequate
remedies for any such breach. Furthermore, no assurance can be given that
competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's proprietary technology, or that the Company can meaningfully protect
its rights in unpatented proprietary technology.
Government Regulation
The preclinical and clinical testing, manufacturing, labeling, distribution
and promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and other countries. Noncompliance
with applicable requirements can result in enforcement action by the United
States Food and Drug Administration, including, among other things, warning
letters, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution.
A medical device may be marketed in the United States only with the FDA's
prior authorization. Devices classified by the FDA as posing less risk are
placed in Class I or Class II and require the manufacturer to seek "510(k)
clearance" from the FDA prior to marketing. Such clearance generally is
granted when submitted information establishes that a proposed device is
"substantially equivalent" in intended use and safety and effectiveness to a
"predicate device," which is a legally marketed Class I or Class II device or
a "preamendment" (in commercial distribution before May 28, 1976) Class III
device for which the FDA has not called for PMA applications (defined below).
The Company's HTA system is classified by the FDA as a Class III device,
which is considered to pose the greatest risk to patients (e.g., life-
sustaining, life-supporting or implantable devices, or devices that are not
substantially equivalent to a predicate device). A Class III device generally
must undergo the FDA's PMA process, which requires the manufacturer to prove
the safety and effectiveness of the device to the FDA's satisfaction. A PMA
application must provide extensive preclinical and clinical trial data and
information about the device and its components regarding, among other things,
manufacturing, labeling and promotion. As part of the PMA review, the FDA will
inspect the manufacturer's facilities for compliance with the QSR, which
includes elaborate testing, control, documentation and other quality assurance
procedures.
Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review and, if so, the application is
accepted for filing. The FDA then commences an in-depth review of the PMA
application, which the Company believes typically takes one to three years,
but may take longer.
41
<PAGE>
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
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.
42
<PAGE>
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and hazardous substance
disposal. There can be no assurance the Company will not be required to incur
significant costs to comply with such laws and regulations in the future or
that such laws or regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company distributes products manufactured by third party vendors, where
the regulatory approval and compliance for these products has been obtained
and is controlled by the third party vendor. Any FDA regulatory or compliance
actions against these companies could affect the third party vendor's ability
to supply the Company or require the Company's participation in product
recalls, which in turn could have a material adverse impact on the Base
Business and the Company.
The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions of the Food, Drug and Cosmetic ("FDC") and
other provisions in the FDC Act affecting the regulation of devices. Among
other things, the changes will affect the IDE, 510(k) and PMA processes, and
also will affect device standards and data requirements, procedures relating
to humanitarian and breakthrough devices, tracking and postmarket
surveillance, accredited third party review, and the dissemination of off
label information. The Company cannot predict how or when these changes will
be implemented or what effect the changes will have on the regulation of the
Company's products.
Distribution of the Company's products outside the United States is also
subject to regulation, which varies widely from country to country. The time
required to obtain needed regulatory clearance by particular foreign
governments may be longer or shorter than that required for FDA clearance or
approval. In addition, the export by the Company of certain of its products
that have not yet been cleared or approved for domestic distribution may be
subject to FDA export restrictions. There can be no assurance that the Company
will receive on a timely basis, if at all, any foreign government or United
States export approvals necessary for the marketing of its products abroad.
In January 1995, the Medical Device Directive ("MDD") was fully implemented
in the European Union, which is intended to make European Union regulatory
requirements more consistent. Under MDD, the Company is subject to "prior
notice" of intent to conduct clinical studies in the European Union. This
process, similar to the FDA IDE process, requires regulatory documents and
test information to be submitted to the governmental agency of each country in
which the Company intends to conduct clinical studies. In order to commence
commercial marketing of its products in the European Union, the Company is
required to file for a CE Mark approval. In January 1998, the Company received
CE Mark approval for the HTA System from LRQA, an organization that certifies
the safety of medical device products and the quality assurance systems put in
place by the manufacturer of the medical device. There can be no assurance,
however, that the Company will be successful in obtaining CE Mark approval for
any other products in a timely manner, if at all, and any failure to receive
or delay in receiving such approval could have a material adverse effect on
the Company's business, financial condition and results of operations.
Employees
As of October 2, 1999, BEI had 61 full-time employees, including 10 in
research, development and engineering, 20 in marketing and sales, 20 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.
After completion of the Asset Sale and the Company's performance of
transition services for CSAC, the Company anticipates that the number of full-
time employees will be reduced to approximately 27.
43
<PAGE>
BEI PROPERTIES
The Company's principal executive offices are located in leased office space
in Teterboro, New Jersey. The Company operates one other facility in
Chatsworth, California, and maintains office space in various locations
throughout the United States for sales and technical support. BEI's principal
facilities are as follows:
<TABLE>
<CAPTION>
Location Description of Facility
-------- -----------------------
<S> <C>
Teterboro, New Jersey... Leased 24,400 square foot manufacturing, engineering, and administrative facility.
Chatsworth, California.. Leased 3,400 square foot administrative and marketing facility.
</TABLE>
The lease agreement for the Teterboro facility expires on June 8, 2004, and
the Company has the option to extend the term of this lease for five
additional years. The monthly base rent through February 2000 is approximately
$21,445, plus the Company's pro rata share of maintenance expenses and real
estate taxes with immaterial increases thereafter through the end of the lease
term. The lease agreement for the Chatsworth facility expires on May 31, 1999.
The monthly base rent is approximately $4,225, plus the Company's pro rata
share of certain operating expenses and real estate taxes.
Management believes that the current facilities are adequate and suitable
for the current operations of the Company. If the Asset Sale is consummated,
the Company will no longer have a need for the Chatsworth facility once the
Company has completed the transition services to be provided to CSAC.
LEGAL PROCEEDINGS INVOLVING BEI
From time to time, BEI may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.
44
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five years in the
period ended October 3, 1998 have been derived from the audited Consolidated
Financial Statements of BEI, which are included herein. The selected
consolidated financial data as of and for the periods ended June 27, 1998 and
July 3, 1999 have been derived from unaudited Consolidated Financial
Statements of BEI which, in the opinion of BEI management, have been prepared
on a basis substantially consistent with the audited financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the information for the period. The results of such interim
periods are not necessarily indicative of the results for the full fiscal
year. The data presented below should be read in conjunction with BEI's
audited Consolidated Financial Statements for each of the fiscal years in the
five year period ended October 3, 1998 and the unaudited Consolidated
Financial Statements as of and for the periods ended June 27, 1998 and July 3,
1999, which are included herein.
The data and the accompanying analysis in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" cover periods in
which the Company's operations include business segments which are now
operated by Technologies and include the results of those business segments as
discontinued operations by the Company. Continuing operations of the Company
are comprised of the medical device business carried on by the Company's
majority-owned subsidiary BEI Medical Systems Company, Inc. prior to the
Distribution, which subsequent to the Distribution comprised all of the
Company's operations. For further information see Note 1 to the Consolidated
Financial Statements, Technologies' Form 10, "General Form for Registration of
Securities", as amended (File No. 0-22799) and the Technologies Form 10-K for
the fiscal year ended September 28, 1997 (File No. 0-22799).
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------------------------------------------- -------------------
October 3, September 28, September 27, September 30, October 1, July 3, June 27,
1998 1997 1996 1995 1994 1999 1998
---------- ------------- ------------- ------------- ---------- -------- ---------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 9,651 $10,005 $ 9,357 $ 8,847 $ 8,678 $ 6,512 $ 7,246
Loss from continuing
operations............. (4,971) (4,348) (2,682) (2,350) (2,458) (4,891) (3,324)
Income (loss) from
discontinued
operations............. -- 4,583 4,571 (2,041) 714 -- --
Net income (loss)....... (4,971) 235 1,889 (4,391) (1,744) (4,891) (3,324)
Loss from continuing
operations per common
share, basic and
diluted................ $ (0.68) $ (0.64) $ (0.40) $ (0.36) $ (0.38) $ (0.65) $ (0.45)
Earnings (loss) from
discontinued per common
share, basic and
diluted................ -- 0.67 0.68 (0.30) 0.11 $ (0.65) $ (0.45)
Earnings (loss) per
common share, 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 7,497 7,316
Balance Sheet Data:
Cash and cash
equivalents............ $ 3,504 $ 9,271 $ 9,128 $ 9,023 $ 1,103 $ 2,429
Working capital(1)...... 8,284 11,085 38,102 35,923 40,189 5,075
Total assets(1)......... 17,388 22,584 115,011 113,738 112,432 12,922
Long-term debt
(excluding current
portion)............... -- 22 212 392 560 1,000
Stockholders'
equity(1).............. 14,440 17,660 55,972 53,319 57,829 9,710
</TABLE>
- -------
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for fiscal years 1996, 1995 and 1994.
45
<PAGE>
BEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, and those
discussed in the Company's Form 10-K for the year ended October 3, 1998.
The following discussion and analysis of financial condition and results of
operations reflects historical results prior to the proposed Asset Sale. The
Asset Sale will have a significant impact upon the financial condition and
results of operations of the Company, as both future revenues and revenue
generating assets will be significantly reduced (see "Summary Unaudited Pro
Forma Financial Data"), and the Company's product focus will become narrowed
and dependent upon the successful completion of the FDA Phase III clinical
trials and commercialization of the HTA technology (see "Risk Factors"). The
cash proceeds from the Asset Sale will be utilized by BEI (i) to pay expenses
associated with the Asset Sale, which are estimated to be $1,155,000. Such
expenses include estimated professional fees to be paid by BEI in connection
with the Asset Sale ($465,000), employee bonuses relating to the completion of
the Asset Sale ($185,000), estimated severance payments ($260,000), and the
cost of products and services associated with the Transition Agreement to be
provided to CSAC free of charge ($245,000); (ii) to repay the outstanding
amounts owed under the credit facility with TBCC, including accrued but unpaid
interest. As of October 31, 1999, the principal amounts outstanding to TBCC
under the credit facility were $1,000,000 on the Term Loan (as defined below),
with an interest rate of 14.14% and a maturity date of November 30, 2001 and
$500,000 on the Revolving Loan (as defined below), with an interest rate of
11.25% and a maturity date of May 5, 2000; (iii) as working capital to finance
completion of the FDA Phase III clinical trials and initiate commercialization
of the HTA product in the United States and (iv) to fund BEI's ongoing
operating expenses.
The Company's capital requirements to complete the development and
commercialization of the HTA depend on numerous factors including the timing
and receipt of regulatory clearances and approvals, the resources required to
initiate commercialization of the product in the United States and the extent
the HTA gains market acceptance and sales. The timing and amount of such
capital requirements cannot be predicted accurately. Consequently, although
the Company believes that the net proceeds from the Asset Sale plus existing
cash balances will provide adequate funding to meet the Company's capital
requirements for the next twenty-four months, the Company may need to raise
additional funds through public or private financing or other arrangements.
There can be no assurance that the Company will not require additional
financing or that such additional financing, if needed, will be available on
terms attractive to the Company, or at all. Any additional equity financing
may be dilutive to stockholders and debt financing, if available, may involve
covenants that are more restrictive than those associated with the Company's
current credit facility.
The following table sets forth, for the fiscal periods indicated, the
percentage of revenues represented by certain items in the Company's
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
-------------------- ---------------------
July 3, June 27,
1998 1997 1996 1999 1998
----- ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 58.4 59.7 61.9 59.6 58.5
Gross profit.................... 41.6 40.3 38.1 40.4 41.5
Operating expenses:
Selling, general and administra-
tive expenses.................. 90.0 78.8 69.6 83.1 86.3
Research, development and re-
lated expenses................. 29.7 18.6 14.2 38.2 24.5
Loss from operations............ (78.1) (57.1) (45.7) (80.9) (69.3)
Other income.................... 3.2 1.3 3.5 1.4 3.8
Interest expense................ (0.2) (0.7) (1.2) (0.4) (0.3)
Loss before income taxes........ (75.1) (56.5) (43.4) (79.9) (65.8)
Income taxes (benefit).......... (23.6) (13.0) (14.8) (4.8) (19.9)
Loss from continuing opera-
tions.......................... (51.5) (43.5) (28.6)
Income from discontinued opera-
tions.......................... -- 45.8 48.8
Net income (loss)............... (51.5)% 2.3% 20.2% (75.1)% (45.9)%
</TABLE>
46
<PAGE>
Nine-months Ended July 3, 1999 and June 27, 1998
Revenues for the nine-months ended July 3, 1999, were $6,512,000 a decrease
of $734,000 or 10.1% from the comparable nine-month period ended June 27,
1998. The lower revenue principally reflects the impact of reduced shipments
of reusable instruments to both domestic and international customers generally
due to soft market conditions and increased competition. Revenues from these
products declined $520,000 or 16.0% in the nine-month period ended July 3,
1999 compared to the nine-month period ended June 27, 1998. Additionally,
revenues from disposable instruments declined by $96,000 reflecting the market
impact early in the fiscal year of a temporary supply shortfall from one
outside vendor and revenues from gastrointestinal products declined $106,000
or 15.9%. Partially offsetting the above were increased international revenues
from shipments of the Company's HTA system for endometrial ablation. HTA
revenues for the nine-months ended July 3, 1999 increased to $260,000 or 10.2%
from the comparable period of fiscal 1998. The higher HTA revenue in fiscal
1999 reflects increased adaptation of the HTA procedure in certain
international markets. The HTA system is now available for sale in 18
countries. Additionally, revenues from OEM products increased in fiscal 1999
to $818,000, a 7.8% increase.
Gross profit as a percentage of revenues decreased to 40.4% in the first
nine-months of fiscal 1999 compared to 41.5% for the first nine-months of
fiscal 1998. The decrease was principally due to a change in the product mix,
with a larger portion of lower margin products being sold during the nine-
months ended July 3, 1999 compared to the comparable period of fiscal 1998,
and higher overhead absorption costs resulting from the reduced volume.
Partially offsetting the reduction in gross margins were decreases in direct
labor and overhead costs of $336,000 for the nine-month period ended July 3,
1999, compared to the prior period. This decrease resulted primarily from the
consolidation of the Company's manufacturing and distribution facilities that
occurred in the fourth quarter of fiscal 1998.
Selling, general and administrative expenses decreased $839,000 to
$5,414,000 or 83.1% of revenues for the nine-months ended July 3, 1999
compared to $6,253,000 or 86.3% of revenues for the nine-month period in
fiscal 1998. The decline in expenses reflects reduced amortization of
intangible assets of $397,000 following the sale of a previously acquired
product line, as well as the impact of a non-compete agreement that became
fully amortized during the third quarter of fiscal 1998. Selling expenses
declined approximately $251,000 for the nine-months ended July 3, 1999
compared to the same period in fiscal 1998, reflecting lower commissions and
marketing expenses as a result of Company efforts to reduce selling costs.
Additionally, the decrease reflects the absence in fiscal 1999 of one-time net
charge of $102,000 incurred in fiscal 1998. Nine-month fiscal 1998 results
included the benefit of $723,000 representing the reversal of previously
expensed legal fees which were reimbursed by the Company's insurance carrier
partially offset by a charge of approximately $354,000 related to the
consolidation of the Company's facilities and a charge of $471,000 to reduce
the carrying value of certain intangible assets to their net realizable value.
The $354,000 provision for relocating the Company's corporate headquarters and
consolidation of its production facilities to a new facility in New Jersey
included charges for duplicate facilities of $140,000, severance and personnel
relocation costs of $125,000 and moving and other related costs of $89,000.
Research, development and related expenses as a percentage of revenues were
38.2% or $2,485,000 for the nine-months ended July 3, 1999 compared to 24.5%
or $1,772,000 for the same period of fiscal 1998. The increased spending
reflects expenses associated with recruiting and treating patients as part of
the HTA Phase III clinical trials in the United States. The Company received
approval from the Food and Drug Administration ("FDA") to proceed to the Phase
III portion of the HTA clinical trials in July 1998 and in September 1998
began to treat patients under the approved protocol. The Company was required
to enroll 276 patients at its 9 U.S. clinical sites under the Phase III
protocol. As of August 6, 1999, all treatments were completed. Data from
examinations one year following treatment is one of the requirements for FDA
approval.
Interest income declined to $87,000 in the nine-month period ended July 3,
1999 compared to $272,000 in the prior period, as a result of lower average
cash balances during the period.
47
<PAGE>
Interest expense increased to $28,000 in the nine-month period ended July 3,
1999 compared to $21,000 in the prior period, as a result of the Company's
$1,000,000 term note and related credit facility which the Company entered
into in May 1999.
Income tax benefit was 6.1% of the pretax loss in the nine-month period
ended July 3, 1999 compared to 30.3% of the pretax loss in the comparable
period of fiscal 1998. The income tax benefit reflects the Company's ability
to carry back losses and collect a refund against prior years' taxes paid on
the earnings of previously discontinued operations. The amount of carryback
available to the Company is limited to the taxes paid on earnings of the
previous two fiscal years and the lower effective tax rate in fiscal 1999
results from the reduced amount of remaining carryback available to the
Company compared to fiscal 1998. The remaining carryback available to the
Company is approximately $75,000, which will be recognized in the fourth
quarter of fiscal 1999.
Fiscal years 1998, 1997 and 1996
Revenue
In fiscal year 1998, the Company's revenues decreased 3.5% to $9,651,000
from $10,005,000 in fiscal year 1997. Revenues from gynecological products in
fiscal year 1998 increased approximately 3.8% over fiscal year 1997 reflecting
an increase in shipments of disposable catheter products and specialty
stainless steel instruments. Additionally, international revenues from the
Company's new HTA grew 40.3% to $275,000 in fiscal year 1998 compared to
$196,000 in fiscal year 1997. However, offsetting the above was a decline in
OEM shipments from $1,710,000 in fiscal year 1997 to $950,000 in fiscal year
1998 reflecting the Company's decision to reduce marketing efforts related to
its lower-margin OEM products in order to focus on its core of higher-margin
women's healthcare products. Additionally, sales of several of the Company's
OEM products declined on a year to year basis due to increased competition.
The Company's revenues increased 6.9% to $10,005,000 in fiscal year 1997
from $9,357,000 in fiscal year 1996. Revenues from gynecology products in
fiscal year 1997 increased 3.2% compared to fiscal year 1996 due to higher
shipments of disposable catheters and reusable instruments. Additionally, OEM
shipments increased to $1,710,000 in fiscal year 1997 compared to $1,360,000
in fiscal year 1996 reflecting shipments of special orders for minimally
invasive surgery equipment in fiscal year 1997 and increased shipments of
disposable catheters. Sales of the HTA for endometrial ablation also
contributed $196,000 in revenue in fiscal year 1997 following introduction of
the system in certain international markets in that year. Partially offsetting
the above was a decline in revenue from orthopedic products following the sale
of the product line in fiscal year 1996.
The Company's revenues from international customers were approximately
15.5%, 14.3% and 13.8% of the Company's revenue for fiscal years 1998, 1997
and 1996, respectively. International revenues can vary significantly as a
percentage of revenues depending on the timing of shipments and size of
orders.
Cost of Sales and Gross Profit
Cost of sales as a percentage of revenue was 58.4%, 59.7% and 61.9% in
fiscal years 1998, 1997 and 1996, respectively.
The decrease in cost of sales as a percentage of revenue in fiscal year 1998
compared to fiscal year 1997 reflects a more favorable product mix resulting
primarily from the decline in lower margin OEM revenues compared to the total
revenue, plus reduced labor and overhead expenses following the Company's
facilities consolidation, which was completed at the end of the third fiscal
quarter of 1998.
The decrease in cost of sales as a percentage of revenue in fiscal year 1997
from fiscal year 1996 resulted primarily from improved overhead absorption
resulting from higher sales volume plus reduced overhead spending resulting
from lower personnel costs.
48
<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
(originally estimated to be $471,000 during the third quarter of fiscal 1998)
associated with the sale of the Company's GyneSys and HysteroSys product lines
to Ethicon, Inc. and relocation and plant shutdown expenses of $329,000
associated with the Company's facilities consolidation (originally estimated
to be $354,000 during the third quarter of fiscal 1998). The $329,000
provision for relocating the Company's corporate headquarters and
consolidation of its production facilities to a new facility in New Jersey
included charges for duplicate facilities of $140,000, severance and personnel
relocation costs of $115,000 and moving and other related costs of $74,000.
Additionally, the Company incurred 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 CSI, which fees were reimbursed by
the Company's insurance carrier.
Fiscal year 1997 selling, general and administrative expenses increased by
$1,366,000 from $6,517,000 in fiscal year 1996 to $7,883,000 in fiscal year
1997. The higher expenses resulted from increased selling expense of $698,000
due to expansion of the domestic sales force, higher marketing and promotional
expenses, and the launch of the HTA in international markets. Fiscal year 1997
expenses also included higher administrative and legal costs primarily
associated with the Distribution of the common stock of BEI Technologies to
the shareholders of BEI Electronics and other legal matters. See Note 1 of
Notes to Consolidated Financial Statements.
Research, Development and Related Expenses
The Company's internally funded research, development and related expenses
as a percentage of revenue were 29.7%, 18.6% and 14.2% for fiscal years 1998,
1997 and 1996, respectively.
Development expense increased from $1,864,000 in fiscal year 1997 to
$2,866,000 in fiscal year 1998 due to increased spending to support the Phase
II and Phase III portions of the HTA clinical trials in the United States.
Research and development expenses in fiscal year 1997 increased from fiscal
year 1996 primarily because of increased spending for the development of the
HTA and other new products and the Phase II clinical trials of the HTA.
The Company believes that the continued timely development of new products
and enhancements to its existing products is essential to maintaining its
competitive position. Accordingly, the Company anticipates that such expenses
will continue to increase in absolute amount, but may fluctuate as a
percentage of revenue.
Interest Expense and Other Income
Interest expense as a percentage of revenue decreased to 0.2% in fiscal year
1998 from 0.7% in fiscal year 1997 and decreased to 0.7% in fiscal year 1997
from 1.2% in fiscal year 1996 as existing debt was paid down and no new debt
incurred.
Other income in fiscal years 1998, 1997, and 1996 was comprised of interest
income earned on highly liquid investments. Other income in fiscal year 1998
increased as a percentage of revenue to 3.2% from 1.3% in fiscal year 1997
reflecting the larger average cash balance over the course of fiscal year 1998
compared to fiscal year 1997.
49
<PAGE>
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 BEI are each
responsible for the payment of 100% of the portion of federal and state taxes
related to their and their respective subsidiaries activities for the periods
prior to the Distribution in which both parties were included in consolidated
income tax returns and are entitled to their portion of any income tax refunds
for the same periods. For the periods after the Distribution, BEI is entitled
to 100% of any carryback of losses or credits to prior years.
Discontinued Operations
Net income for business segments now operated by BEI Technologies, Inc. was
$4.6 million in each of fiscal years 1997 and 1996, respectively.
Liquidity and Capital Resources
The Company's capital requirements depend on numerous factors, including the
progress of the Company's clinical research and product development programs,
the timing and receipt of regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing its
products. The Company's capital requirements also depend on the resources
required to expand and develop a direct sales force in the United States and
to expand the Company's manufacturing capacity, and the extent to which the
Company's products gain market acceptance and sales. The timing and amount of
such capital requirements cannot be predicted accurately. The Company is
currently seeking additional financing. Consequently, although the Company
believes its existing cash balances together with operating revenues,
additional tax refunds and funds available as a result of a financing
arrangement with Transamerica Business Credit Corporation ("TBCC") in May 1999
(see below) will provide adequate funding to meet the Company's liquidity
requirements for the remainder of the current calendar year, there can be no
assurance that additional financing will be available on terms favorable to
the Company, or at all. In the event the Company is unable to generate
sufficient cash flows from operations or to secure additional sources of
capital, its ability to continue as a going concern may be impaired. Any
additional equity financing may be dilutive to stockholders and debt
financing, if available, may involve restrictive covenants and may also be
dilutive to stockholders.
During the first nine months of fiscal 1999, cash used by operations was
$2,043,000 principally due to the $4,891,000 net loss for the period,
partially offset by changes in operating assets and liabilities of $2,848,000
resulting primarily from a reduction in refundable income taxes of $1,961,000
reflecting the receipt of a federal income tax refund related to fiscal year
1998, non-cash charges for depreciation and amortization of $590,000 and
reductions in accounts receivable and inventory aggregating $750,000, which
were partially offset by reductions in accounts payable and accrued expenses
aggregating $715,000.
Cash used in investing activities during the first nine months of fiscal
1999 of $12,000 consisted of purchases of equipment. Cash received from
financing activities consisted of $1,000,000 from the issuance of long-term
debt (see below).
Cash used in financing activities consisted of $21,000 in scheduled payments
made on long-term debt.
50
<PAGE>
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
aggregating $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 during fiscal 1998, which generated $579,000 in cash,
consisted of $975,000 from the sale of a product line offset by purchases of
equipment of $372,000 and purchases of patents and licenses of $24,000.
During fiscal 1998, 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 as of July 3, 1999.
As of May 7, 1999, the Company signed an agreement with TBCC to provide up
to $2,500,000 in senior secured financing. Key components of the agreement are
as follows:
TBCC is providing the Company with a Revolving Credit Facility under which
the Company may from time to time borrow an aggregate amount not to exceed the
lesser of $1,000,000 or an amount equal to 85% of the amount of the Company's
eligible accounts receivable as defined in the agreement (the "Revolving
Loan"). In addition to the Revolving Loan, TBCC is providing the Company with
a Senior Term Loan not to exceed $1,500,000 (the "Term Loan"). The Term Loan
was made in an initial disbursement in the amount of $1,000,000 on May 7,
1999; with an additional disbursement of $500,000 to be made upon the closing
of an equity issuance by the Company generating net proceeds of not less than
$2,000,000. All borrowings under the TBCC agreement are collaterized by all of
the assets of the Company.
The term of the Revolving Loan is one year from the date of the agreement
and may be renewed upon the agreement of both parties. The interest rate on
the Revolving Loan will be the Base Rate (defined below) plus 3.0% per annum,
provided that the interest rate in effect in each month will not be less than
9.0% per annum, and provided that the interest charged for each month in
respect of the Revolving Credit Facility shall be a minimum of $3,000,
regardless of the amount of the obligations outstanding. Base Rate means the
highest prime, base or equivalent rate of interest announced from time to time
by Citibank, N.A. (which may not be the lowest rate of interest charged by
such bank).
The term of each disbursement of the Term Loan is for 30 months after the
date of such disbursement and the interest on the Term Loan accrues at a rate
of 14.14% per annum. In connection with the loan-term borrowings under the
TBCC agreement, the Company may be subject to market risks resulting from
charges in the variable interest rate as provided in the agreement. At July 3,
1999, the fair value of the borrowings outstanding under the term loan
approximates its carrying value.
As of October 31, 1999, the amounts outstanding to TBCC under the credit
facility were $1,000,000 on the Term Loan, with an interest rate of 14.14%,
and $500,000 on the Revolving Loan, with an interest rate of 11.25%.
Concurrent with the above transaction, the Company provided TBCC with a
seven-year warrant to purchase 92,308 shares of common stock at an initial
exercise price of $1.625 per share, subject to adjustment. The warrant is
currently exercisable.
Year 2000 Compliance: Modification of Management Information Systems
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such Year 2000
requirements, especially those with internally developed systems.
51
<PAGE>
The Company and third parties, with which the Company does business, rely on
numerous computer programs in their day-to-day operations. The Company's Year
2000 project is divided into the following major sections: infrastructure and
applications software, commonly referred to as "IT Systems", third party
suppliers and customers, commonly referred to as "External Agents", process
control and instrumentation and Company products.
IT Systems. The Company has completed its assessment of Year 2000 issues as
they relate to the Company's IT systems. This analysis included such
activities as order taking, billing, purchasing/accounts payable, general
ledger/financial, and inventory. Systems critical to the Company's business
are commercial packages available from third party vendors and currently in
use with little modification. According to information provided by the
suppliers of these products, the versions of these systems in use are believed
to be Year 2000 compliant in storage, calculation, and function. The Company
has upgraded these systems where necessary and believes that all mission
critical software is now Year 2000 compliant, based upon representation from
the vendors. The Company has used both internal and external resources to test
the versions of the software believed to be Year 2000 compliant and has found
no discrepancy. The Company is executing a plan to resolve the remaining
software and hardware issues. The Year 2000 analysis and upgrading of existing
systems are being performed as a part of the Company's routine maintenance of
computer systems and are not anticipated to be material to the Company's
financial results.
External Agents. The Company has sent questionnaires and letters of inquiry
to the External Agents to assist the Company in assessing the Year 2000
readiness of its External Agents and evaluate the scope of the Company's
exposure. To date, the Company is not aware of any External Agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that External Agents will be Year 2000 ready. The inability of External Agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by External Agents
is not determinable.
Process Control and Instrumentation. All other items with potential Year
2000 issues continue to be inventoried and evaluated by the Company. These
include such items as telephone systems, security systems, HVAC, copiers, FAX
machines, production equipment, tools and other process systems. The Company
anticipates that the assessment phase of this part of the project will be
completed in the third calendar quarter. To date, the Company has not
discovered any year 2000 issues with any of these items. Although the Company
is in the early phases of this portion of the Year 2000 project, based upon a
preliminary review the Company does not anticipate costs related to this
portion of the project to be material to the financial results of the Company.
Company Products. In addition, BEI has reviewed the Year 2000 issue as it
relates to the electronic products manufactured for sale by the Company. The
Company believes that none of its products are date sensitive or will require
modification to become Year 2000 compliant. Accordingly, the Company does not
believe the Year 2000 issue presents a material exposure as it relates to the
Company's products.
The Company currently believes that it has an effective program in place to
resolve the Year 2000 issues in a timely manner, however the Company has not
yet completed all necessary phases of the Year 2000 project. In the event that
the Company does not complete any additional phases, the Company would be
unable to efficiently take customer orders, manufacture and ship products,
invoice customers or collect payments. In addition, disruptions in the economy
generally resulting from Year 2000 issues could materially adversely affect
the Company.
The Company currently believes it does not need a year 2000 contingency
plan. All of the Company's major systems have been upgraded or determined to
be compliant. Any remaining Year 2000 compliance issues should be minor and
will be dealt with as they are identified. The Company will continue to
monitor and evaluate the potential impact of the Year 2000 issue and adjust
the plans accordingly.
52
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. This statement
requires that all derivatives be recorded in a company's balance sheet as
either an asset or liability measured at its fair value and that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statements No. 133." This statement
defers for one year the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. Because the Company does not enter into
financial instruments for trading or speculative purposes and does not
currently utilize derivative financial instruments, management does not
anticipate that the adoption of the new Statement will have any effect on the
Company's consolidated financial position or results of operations.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the
United States and, as such, are not subject to material foreign currency
exchange rate risk. The Company is subject to the following interest rate
market risks: (i) the Company has cash and cash equivalents on which interest
income is earned at variable rates; (ii) the Company also has a $1,000,000
credit facility at a variable interest rate, which is affected by the general
level of U.S. interest rates. The Company believes its market risk exposures
are not material.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of October 2, 1999 by: (i) each director;
(ii) each executive officer; (iii) all executive officers and directors of the
Company as a group; and (iv) all those known by the Company to be beneficial
owners of more than five percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Number of Percent of
Shares Total (2)
--------- ----------
<S> <C> <C>
Mr. Charles Crocker(3)................................... 1,557,904 20.3%
One Post Street
Suite 2500
San Francisco, CA
Brinson Partners, Inc.(4)................................ 404,300 5.3%
209 S. LaSalle Street
Chicago, IL
SoGen International Fund, Inc.(5)........................ 400,000 5.2%
1221 Avenue of the Americas
8th Floor
New York, NY 10020
Dimensional Fund Advisors, Inc.(6)....................... 460,800 6.0%
1299 Ocean Avenue
Penthouse
Santa Monica, CA
Hollybank Investment, LP (7)............................. 927,000 12.1%
One Financial Center, Suite 1600
Boston, MA
Mr. Samuel Dickstein(8).................................. 55,457 *
Mr. Thomas W. Fry(8)..................................... 54,020 *
Dr. Ralph M. Richart(8).................................. 105,161 1.4%
Mr. Richard W. Turner(8)................................. 375,012 4.7%
Dr. Lawrence A. Wan(8)................................... 29,250 *
Mr. Gary D. Wrench(8)(9)................................. 93,047 1.2%
All executive officers and directors as a group (7 per-
sons)(10)............................................... 2,269,851 27.8%
</TABLE>
- --------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of the Company and upon any Schedules 13D or 13G
filed with the Securities and Exchange Commission (the "Commission").
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that each
of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
(2) Applicable percentages are based on 7,685,707 shares outstanding on
October 2, 1999, adjusted as required by rules promulgated by the
Commission.
(3) Includes 400,000 shares held by Mr. Crocker as trustee for his adult
children, as to which Mr. Crocker disclaims beneficial ownership. Also
includes 54,936 shares held in a trust of which Mr. Crocker is
beneficiary and sole trustee. Mr. Crocker, acting alone, has the power to
vote and dispose of the shares in each of these trusts.
54
<PAGE>
(4) Represents shares held by Brinson Partners, Inc. ("Partners") which has
the sole power to vote and dispose of the shares held by it and shares
held by Brinson Trust Company ("Trust") which has the sole power to vote
and dispose of the shares held by it. Trust is a wholly-owned subsidiary
of Partners, which is a wholly-owned subsidiary of Brinson Holdings, Inc.
("Holdings"). Holdings may be deemed to share the power to vote and
dispose of all shares held by Partners and Trust, and Partners may be
deemed to share the power to vote and dispose of all shares held by
itself or Trust. Therefore, both Holdings and Partners each may be deemed
a beneficial owner of all the shares held by Partners and Trust.
(5) SoGen International Fund, Inc. shares with Societe Generale Asset
Management Corp. the power to vote and dispose of all shares held by it.
(6) Represents shares held by Dimensional Fund Advisors, Inc., DFA Investment
Dimensions Group Inc. and The DFA Investment Trust Company. Officers of
Dimensional Fund Advisors, Inc. have sole power to vote and dispose of
shares beneficially owned by it, including shares held by DFA Investment
Dimensions Group Inc. and The DFA Investment Trust Company.
(7) Represents shares held by Hollybank Investments, LP ("Hollybank") which
has the sole power to vote and dispose of the shares held by it and
includes 88,000 shares held by Dorsey R. Gardner, general partner of
Hollybank, who has the sole power to vote and dispose of his shares. Mr.
Gardner, as general partner of Hollybank, may be deemed to beneficially
own shares held by Hollybank. Except to the extent of his interest as a
limited partner in Hollybank, Mr. Gardner disclaims such beneficial
ownership.
(8) Includes shares which certain officers and directors have the right to
acquire within 60 days after the date of this table pursuant to
outstanding options as follows: Mr. Dickstein, 39,667 shares; Mr. Fry,
12,649 shares; Mr. Turner, 375,012 shares; Dr. Wan, 10,000 shares; Mr.
Wrench, 31,028 shares; and all executive officers and directors as a
group, 468,356 shares. Also includes shares which certain officers and
directors have the right to vote pursuant to unvested portions of
restricted stock awards as follows: Dr. Richart, 5,014 shares; Dr. Wan,
4,453 shares; Mr. Wrench, 7,200 shares; and all executive officers and
directors as a group, 16,667 shares.
(9) Includes 45,276 shares held in a revocable trust of which Mr. Wrench and
his wife, Jacqueline Wrench, are beneficiaries and sole trustees. Mr. and
Mrs. Wrench, acting alone, each has the power to vote and dispose of such
shares. Also includes 16,743 shares which Mr. Wrench, acting alone, has
power to vote and dispose of.
(10) Includes the shares described in the Notes above, as applicable.
55
<PAGE>
EXPERTS
The consolidated financial statements of BEI Medical Systems Company, Inc.
at October 3, 1998 and September 29, 1997, and for each of the three years in
the period ended October 3, 1998, appearing in this Proxy Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of Ernst & Young LLP, BEI's independent
public accountants, will be present at the Special Meeting where they will
have an opportunity to respond to appropriate questions of stockholders and to
make a statement if they so desire.
OTHER MATTERS
The BEI Board knows of no other matters that will be presented for
consideration at the Special Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the BEI Board
/s/ Thomas W. Fry
Thomas W. Fry
Corporate Secretary
November 10, 1999
56
<PAGE>
INDEX TO ANNEXES
<TABLE>
<S> <C>
Asset Purchase Agreement dated October 1, 1999, as amended by the
Amendment No. 1 to Asset Purchase Agreement, dated November 2, 1999
between BEI and CSAC.................................................. Annex A
Opinion rendered by Financial Advisor to BEI Board, dated September 23,
1999.................................................................. Annex B
</TABLE>
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at July 3, 1999 (unaudited) and
October 3, 1998.......................................................... F-2
Unaudited Condensed Consolidated Statements of Operations for the nine
month periods ended July 3, 1999 and June 27, 1998....................... F-3
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
month periods ended July 3, 1999 and June 27, 1998....................... F-4
Notes to Unaudited Condensed Consolidated Financial Statements............ F-5
Audited Consolidated Financial Statements
Report of Independent Auditors............................................ F-7
Consolidated Balance Sheets at October 3, 1998 and September 27, 1997..... F-8
Consolidated Statements of Operations for the fiscal years ended October
3, 1998, September 27, 1997 and September 28, 1996....................... F-9
Consolidated Statements of Stockholders' Equity for the fiscal years ended
October 3, 1998,
September 27, 1997 and September 28, 1996................................ F-10
Consolidated Statements of Cash Flows for the fiscal years ended October
3, 1998, September 27, 1997 and September 28, 1996....................... F-11
Notes to Consolidated Financial Statements................................ F-12
</TABLE>
F-1
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
----------- ----------
(See note
(Unaudited) below)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 2,429 $ 3,504
Trade receivables, net................................. 1,675 1,897
Inventories (Note 2)................................... 2,559 3,087
Refundable income taxes................................ 423 2,384
Other current assets................................... 201 360
------- -------
Total current assets..................................... 7,287 11,232
Property, plant and equipment, net....................... 611 820
Tradenames, patents and other, net....................... 1,656 1,846
Goodwill, net............................................ 3,173 3,353
Other assets............................................. 195 137
------- -------
Total assets............................................. $12,922 $17,388
======= =======
Liabilities and stockholder's equity
Current liabilities
Trade accounts payable................................... $ 664 $ 1,551
Accrued expenses and other liabilities................... 1,548 1,376
Current portion of long-term debt........................ -- 21
Total current liabilities................................ 2,212 2,948
Long-term debt, less current portion (Note 4)............ 1,000 --
Stockholders' equity..................................... 9,710 14,440
------- -------
Total liabilities and stockholders' equity............... $12,922 $17,388
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Note: The balance sheet at October 3, 1998 has been derived from the audited
consolidated balance sheet at the date but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
F-2
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------- -------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues................................ $ 2,347 $2,293 $ 6,512 $ 7,246
Cost of sales........................... 1,389 1,350 3,878 4,239
------- ------ -------- --------
Gross Profit............................ 958 943 2,634 3,007
Selling, general and administrative
expenses............................... 1,869 1,757 5,414 6,253
Research, development and related
expenses............................... 902 778 2,485 1,772
------- ------ -------- --------
2,771 2,535 7,899 8,025
Loss from operations.................... (1,813) (1,592) (5,265) (5,018)
Interest income......................... 25 54 88 272
Interest expense........................ (29) (2) (29) (21)
------- ------ -------- --------
Loss before income taxes................ (1,817) (1,540) (5,206) (4,767)
Income tax benefit...................... (107) (563) (315) (1,443)
------- ------ -------- --------
Net loss................................ $(1,710) $ (977) $ (4,891) $ (3,324)
======= ====== ======== ========
Loss per common shares (Note 3):
Loss per common share, basic and
diluted.............................. $ (0.23) $(0.13) $ (0.65) $ (0.45)
======= ====== ======== ========
Weighted average shares outstanding... 7,540 7,428 7,497 7,316
======= ====== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------
July 3, June 27,
1999 1998
-------- ---------
<S> <C> <C>
Net cash used in operating activities...................... $ (2,043) $ (3,717)
Cash flows from investing activities
Purchases of equipment..................................... (12) (247)
Purchases of patents and licenses.......................... -- (108)
-------- --------
Net cash used in investing activities...................... (12) (355)
Cash flows from financing activities
Proceeds from long-term borrowings......................... 1,000 --
Payments on long-term debt................................. (21) (158)
-------- --------
Net cash provided by (used in) financing activities........ 979 (158)
Net decrease in cash and cash equivalents.................. (1,075) (4,230)
-------- --------
Cash and cash equivalents at beginning of period........... 3,504 9,271
-------- --------
Cash and cash equivalents at end of period................. $ 2,429 $ 5,041
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
July 3, 1999
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ending October 2, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto in the
Company's Annual Report on Form 10-K for the year ended October 3, 1998.
On September 27, 1997, BEI Electronics, Inc. ("Electronics") distributed to
holders of Electronics common stock one share of common stock of BEI
Technologies, Inc. ("Technologies"), a newly formed subsidiary, for each share
of Electronics common stock held (the "Distribution"). In connection with the
Distribution, Electronics transferred to Technologies all of the assets,
liabilities and operations of its BEI Sensors & Systems Company, Inc. and
Defense Systems Company, Inc. business segments. After the Distribution, the
sole asset of Electronics was its investment in its subsidiary, BEI Medical
Systems Company, Inc. ("Medical"). On November 4, 1997, Electronics merged
with Medical and became one company with Electronics as the surviving
corporation (the "Merger"). After the Merger, Electronics changed its name to
BEI Medical Systems Company, Inc. (the "Company").
2. Inventories
<TABLE>
<CAPTION>
July 3, October 3,
1999 1998
----------- ------------
(dollars in thousands)
-------------------------
<S> <C> <C>
Finished products.................................. $ 1,821 $ 2,128
Work in process.................................... 136 196
Materials.......................................... 602 763
----------- -----------
Inventories........................................ $ 2,559 $ 3,087
=========== ===========
</TABLE>
3. Loss Per Share
As a result of the net loss for all periods presented, weighted average
shares used in the calculation of basic and diluted loss per share are the
same. Weighted average shares exclude unvested restricted stock, which
amounted to 151,000 and 338,000 shares at July 3, 1999 and June 28, 1998
respectively. Common stock equivalents are excluded from the loss per share
for all periods presented because the effect would be anti-dilutive.
4. Note Payable
As of May 7, 1999, the Company signed an agreement with Transamerica
Business Credit Corporation ("TBCC") to provide up to $2,500,000 in senior
secured financing. Key components of the agreement are as follows:
TBCC is providing the Company with a Revolving Credit Facility under
which the Company may from time to time borrow an aggregate amount not to
exceed the lesser of $1,000,000 or an amount equal to 85%
F-5
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
July 3, 1999
of the amount of the Company's eligible accounts receivable as defined in
the agreement (the "Revolving Loan"). In addition to the Revolving Loan,
TBCC is providing the Company with a Senior Term Loan not to exceed
$1,500,000 (the "Term Loan"). The Term Loan was made in an initial
disbursement in the amount of $1,000,000; on May 7, 1999 with an additional
disbursement of $500,000 to be made upon the closing of an equity issuance
by the Company generating net proceeds of not less than $2,000,000. All
borrowings under the TBCC agreement are collaterized by all of the assets
of the Company.
The term of the Revolving Loan is one year from the date of the agreement
and may be renewed upon the agreement of both parties. The interest rate on
the Revolving Loan will be the Base Rate (defined below) plus 3.0% per
annum, provided that the interest rate in effect in each month will not be
less than 9.0% per annum, and provided that the interest charged for each
month in respect of the Revolving Credit Facility shall be a minimum of
$3,000, regardless of the amount of the obligations outstanding. Base Rate
means the highest prime, base or equivalent rate of interest announced from
time to time by Citibank, N.A. (which may not be the lowest rate of
interest charged by such bank).
The term of each disbursement of the Term Loan is for 30 months after the
date of such disbursement and the interest on the Term Loan accrues at a
rate of 14.14% per annum.
Concurrent with the above transaction, the Company provided TBCC with a
seven-year warrant to purchase 92,308 shares of common stock at an initial
exercise price of $1.625 per share, subject to adjustment. The warrant is
currently exercisable.
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BEI Medical Systems Company, Inc.
We have audited the accompanying consolidated balance sheets of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 3, 1998
and September 27, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 3, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BEI Medical
Systems Company, Inc. at October 3, 1998 and September 27, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 3, 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
November 13, 1998
F-7
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,504 $ 9,271
Trade receivables, less allowance for doubtful
accounts (1998--$174; 1997--$112).................. 1,897 1,958
Inventories (Note 4)................................ 3,087 2,939
Refundable income taxes............................. 2,384 10
Other current assets................................ 186 286
Deferred income taxes (Note 8)...................... 174 --
------- -------
Total current assets.................................. 11,232 14,464
Plant and equipment:
Equipment........................................... 1,569 1,461
Leasehold improvements.............................. 31 130
------- -------
1,600 1,591
Less allowances for depreciation and amortization..... 780 780
------- -------
Net plant and equipment............................... 820 811
Other assets:
Tradenames, patents and related assets, less
amortization (1998--$4,560; 1997--$4,142).......... 1,846 3,708
Goodwill, less amortization (1998--$1,457; 1997--
$1,215)............................................ 3,353 3,595
Other............................................... 137 6
------- -------
Total other assets.................................... 5,336 7,309
------- -------
Total assets.......................................... $17,388 $22,584
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................. $ 1,551 $ 346
Accrued expenses and other liabilities (Note 6)..... 1,376 2,785
Current portion of long-term debt (Note 7).......... 21 190
Deferred income taxes............................... -- 58
------- -------
Total current liabilities............................. 2,948 3,379
Long-term debt, less current portion (Note 7)......... -- 22
Minority interest in consolidated subsidiary (Note
1)................................................... -- 1,523
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity (Notes 2, 9 and 10):
Preferred stock ($.001 par value; authorized
2,000,000 shares; none issued)..................... -- --
Common stock ($.001 par value; authorized 20,000,000
shares; issued and outstanding; 1998--7,778,296
shares; 1997--7,114,513 shares).................... 10 10
Additional paid-in capital.......................... 16,291 14,204
Retained earnings (deficit)......................... (1,525) 3,446
------- -------
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
======= =======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Year ended
---------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
Revenue............................... $ 9,651 $ 10,005 $ 9,357
Cost of sales......................... 5,638 5,972 5,792
--------- --------- ---------
Gross profit.......................... 4,013 4,033 3,565
Selling, general and administrative
expenses............................. 8,688 7,883 6,517
Research, development and related
expenses............................. 2,866 1,864 1,328
--------- --------- ---------
11,554 9,747 7,845
--------- --------- ---------
Loss from operations.................. (7,541) (5,714) (4,280)
Other income.......................... 312 136 324
Interest expense...................... (21) (70) (110)
--------- --------- ---------
Loss before income taxes.............. (7,250) (5,648) (4,066)
Income tax benefit (Note 8)........... (2,279) (1,300) (1,384)
--------- --------- ---------
Loss from continuing operations....... (4,971) (4,348) (2,682)
Income (loss) from discontinued
operations, net of income taxes of
$1,788 and $1,412, for 1997 and 1996,
respectively......................... -- 4,583 4,571
--------- --------- ---------
Net (loss) income..................... $ (4,971) $ 235 $ 1,889
========= ========= =========
Loss from continuing operations per
common share, basic and diluted...... $ (0.68) $ (0.64) $ (0.40)
Earnings (loss) from discontinued
operations per common share, basic
and diluted.......................... -- 0.67 0.68
--------- --------- ---------
Earnings (loss) per common share,
basic and diluted (Note 2)........... $ (0.68) $ 0.03 $ 0.28
========= ========= =========
Weighted average shares outstanding
(Note 2)............................. 7,354,416 6,816,702 6,737,399
========= ========= =========
Dividends per common share (Note 2)... $ -- $ 0.08 $ 0.08
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Unearned
Additional Retained Restricted
Common Paid-In Earnings Treasury Stock and
Stock Capital (Deficit) Stock Other Total
------ ---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at September
30, 1995............... $ 9 $24,112 $ 41,721 $(11,793) $ (730) $ 53,319
Net income for 1996... 1,889 1,889
Stock options
exercised............ 842 842
Employee Stock
Purchase Plan
offering (Note 11)... 225 225
Restricted Stock Plan
(Note 10)............ 594 (188) 406
Purchase of treasury
stock--(15,000 shares
at $10.27 average
per share)........... (154) (154)
Cash dividends........ (555) (555)
--- ------- -------- -------- ------- --------
Balances at September
28, 1996............... 9 25,773 43,055 (11,947) (918) 55,972
Net income for 1997... 235 235
Stock options
exercised............ 1 866 867
Restricted Stock Plan
(Note 10)............ 815 (475) 340
Purchase of treasury
stock--
(135,000 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
Distribution........... 10 14,204 42,727 -- (1,393) 55,548
Distribution.......... (39,281) 1,393 (37,888)
--- ------- -------- -------- ------- --------
Balances at September
27, 1997............... 10 14,204 3,446 -- -- 17,660
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.
F-10
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
October 3, September 27, September 28,
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 (used in) provided by financing
activities of continuing operations.... (174) (1,709) 1,168
Net cash provided by discontinued
operations (Note 3).................... -- 6,344 4,825
------- ------- -------
Net (decrease) increase in cash and cash
equivalents............................ (5,767) 143 105
Cash and cash equivalents at beginning
of year................................ 9,271 9,128 9,023
------- ------- -------
Cash and cash equivalents at end of
year................................... $ 3,504 $ 9,271 $ 9,128
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998
1. Basis of Presentation
On September 27, 1997, BEI Electronics, Inc. ("Electronics") distributed to
holders of Electronics common stock one share of common stock of BEI
Technologies, Inc. ("Technologies"), a newly formed subsidiary, for each share
of Electronics common stock held ("the Distribution"). In connection with the
Distribution, Electronics transferred to Technologies all of the assets,
liabilities and operations of its BEI Sensors & Systems Company, Inc.
("Sensors") and Defense Systems Company, Inc. ("Defense") business segments.
Accordingly, the results of operations of the segments have been presented as
discontinued operations for all periods presented.
As of September 27, 1997, the sole asset of BEI Electronics was its
investment in BEI Medical Systems Company, Inc. On November 4, 1997,
Electronics merged with its subsidiary, BEI Medical Systems Company, Inc.
("Medical"), and became one company with Electronics as the surviving
corporation (the "Merger"). As a result of the Merger, each outstanding share
of common stock of Medical at that date (other than shares held by
Electronics) was automatically converted into the right to receive 5.51615
shares of Electronics common stock. Certificates for Electronics common stock
were issued, rounded down to the nearest whole number of shares. Fractional
shares of Electronics common stock that would have otherwise been issued in
connection with the Merger have been redeemed by Electronics pro rata based on
the last reported sale price of Electronics common stock on the last trading
day preceding the merger. After the Merger, Electronics changed its name to
BEI Medical Systems Company, Inc. (the "Company").
The following table shows the conversion as of November 4, 1997 of the 6%
minority interest in Medical common stock to Electronics common stock at a
conversion rate of 5.51615 shares of Electronics common stock for every one
share of Medical common stock held.
<TABLE>
<CAPTION>
Common Shares
---------------------------
Pre-Merger Post-Merger
Medical Common Electronics
Stock Common Stock
-------------- ------------
<S> <C> <C>
Johnson & Johnson................................ 52,131 287,561
Management....................................... 12,650 69,778
Others........................................... 15,721 86,716
------ -------
80,502 444,055
====== =======
</TABLE>
Prior to the merger of Medical with Electronics, Medical had shares of
Series A and B preferred stock outstanding which were converted to Medical
common stock on a share-for-share basis.
2. Summary of Significant Accounting Policies
Operations
The Company is a manufacturer of diagnostic and therapeutic products focused
on gynecology and women's health issues. In the U.S., the Company utilizes
independent manufacturers' representative 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
F-12
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
provide adequate funding to meet the Company's liquidity requirements for the
next twelve months, there can be no assurance that additional financing will
be available on terms favorable to the Company, or at all. In the event the
Company is unable to generate sufficient cash flows from revenues or secure
additional sources of capital, its ability to continue as a going concern may
be impaired. Any additional equity financing may be dilutive to stockholders
and debt financing, if available, may involve restrictive covenants and/or
also be dilutive to stockholders.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest September 30. Fiscal
year 1998 contained 53 weeks. Fiscal years 1997 and 1996 each contained 52
weeks.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's products are sold to commercial customers throughout the
United States and in various foreign countries. The Company performs ongoing
credit evaluations of its commercial customers and generally does not require
collateral. The Company maintains reserves for potential credit losses.
Historically, such losses have been within the expectations of management.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized as units are shipped.
Inventories
Inventories are carried at the lower of cost (first-in, first-out method) or
market.
Depreciation and Amortization
Plant and equipment are recorded at cost. Depreciation and amortization are
provided in amounts sufficient to amortize the cost of such assets over their
estimated useful lives, which range from three to ten years, using the
straight-line method.
F-13
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
Long-Lived Assets
The Company accounts for any impairment of its long-lived assets using
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 121 ("FAS No. 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." Long-lived assets
consists of plant and equipment, patents, and trade names, related
noncompetition agreements and goodwill acquired in purchase acquisitions.
Patents and noncompetition agreements are being amortized on a straight-line
basis over their terms. Trade names are amortized on a straight-line basis
over ten to twenty-five years. Goodwill consists of the excess of cost over
fair value of net tangible assets acquired in purchase acquisitions. Goodwill
is amortized by the straight-line method over twenty years. The carrying value
of long-lived assets will be reviewed if the facts and circumstances suggest
that they may be impaired. Impairment is determined based on undiscounted
future cash flows over the expected period of use. If impairment is indicated,
the carrying value of long-lived assets would be reduced to fair value. In
connection with the sale of the Company's GyneSys and HysteroSys product
lines, intangible assets of $1,133,000 were sold. Based upon the final sales
price of these assets, the Company reduced the carrying value of the
intangible assets to be disposed of to net realizable value. The total amount
of the charge, $531,000, has been included in selling, general and
administrative expenses for the year ended October 3, 1998.
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.
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.
F-14
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
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.
3. Discontinued Operations
Technologies was incorporated on June 30, 1997 in the State of Delaware, as
a wholly owned subsidiary of Electronics. On September 27, 1997, Electronics
distributed to holders of Electronics common stock one share of common stock
of Technologies for each share of Electronics common stock held on September
24, 1997. In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its Sensors and
Defense business segments. Accordingly, the financial position and results of
operations of Sensors and Defense are shown as discontinued operations for all
periods presented.
4. Inventories
<TABLE>
<CAPTION>
1998 1997
------ ------
(dollars in
thousands)
<S> <C> <C>
Finished products.............................................. $2,128 $1,843
Work in process................................................ 196 230
Materials...................................................... 763 866
------ ------
Inventories.................................................... $3,087 $2,939
====== ======
</TABLE>
Included in fiscal year 1998 finished goods is $245,000 of inventory which
is currently subject to FDA approval prior to its sale in the United States.
5. Bank Credit Agreements
The Company had no bank credit agreements at October 3, 1998 and September
27, 1997.
F-15
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
6. Accrued Expenses and Other Liabilities
<TABLE>
<CAPTION>
1998 1997
------ ------
(dollars in
thousands)
<S> <C> <C>
Insurance reimbursement....................................... $ -- $ 946
Noncompetition contract....................................... -- 562
Professional fees............................................. 134 205
Employee compensation......................................... 268 337
Taxes......................................................... 141 136
Commissions................................................... 180 127
Royalties and related costs................................... 130 102
Tax refund payable to BEI Technologies........................ 327 --
Other......................................................... 196 370
------ ------
Accrued Expenses and Other Liabilities........................ $1,376 $2,785
====== ======
</TABLE>
7. Long-Term Debt
<TABLE>
<CAPTION>
1998 1997
----- -----
(dollars in
thousands)
<S> <C> <C>
Note payable to the previous owner of Zinnanti Surgical
Instruments, Inc. with interest at 5.0%; payable in monthly
installments of $10,883 through December 1998.................. $ 21 $ 147
Note payable to a related party................................. -- 60
Asset purchase agreement with zero interest; payable in monthly
installments through 1998...................................... -- 5
---- -----
21 212
Less current portion............................................ 21 190
---- -----
Long-term debt.................................................. $ -- $ 22
---- -----
</TABLE>
Interest of approximately $7,000, $11,000 and $31,000 was paid on long-term
debt by Medical during fiscal 1998, 1997 and 1996, respectively. Interest of
approximately $35,000, $50,000 and $96,000 was paid on noncompetition
agreements by Medical during fiscal 1998, 1997 and 1996, respectively. In
connection with the Distribution, Technologies assumed Electronics'
obligations related to the service and repayment of $22.4 million in Senior
Notes. The interest expense related to the notes was allocated to Technologies
for fiscal years 1996 and 1997.
F-16
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of October 3, 1998 and
September 27, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(dollars in
thousands)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and property basis difference.............. $ 20 $ 12
Accrued expenses........................................ -- 213
------- -------
Total deferred tax liabilities............................ 20 225
Deferred tax assets:
Intangibles............................................. 465 536
Other................................................... 193 98
Inventory valuation..................................... 92 85
State net operating loss carryovers..................... 1,177 1,177
Allowance for bad debt.................................. 51 55
------- -------
Total deferred tax assets................................. 1,978 1,951
------- -------
Valuation allowance for deferred tax assets............... (1,784) (1,784)
------- -------
Net deferred tax assets/(liabilities)..................... $ 174 $ (58)
======= =======
</TABLE>
The valuation allowance reflects uncertainties regarding realizability of
deferred tax assets related to certain intangibles and state net operating
loss carryovers. As of October 3, 1998, the Company has net operating loss
carryforwards for state income tax purposes of approximately $19.6 million,
which expire from 2001 through 2004. The Company has no net operating loss
carryforwards for federal income tax purposes.
Significant components of the benefit for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Current (credit)
Federal........................................ $(2,046) $(1,039) $(1,358)
State.......................................... -- -- --
------- ------- -------
Total current.................................... (2,046) (1,039) (1,358)
Deferred (credit)
Federal........................................ (233) (261) (23)
State.......................................... -- -- (3)
------- ------- -------
Total deferred................................... (233) (261) (26)
------- ------- -------
Total income tax (benefit)....................... $(2,279) $(1,300) $(1,384)
======= ======= =======
</TABLE>
F-17
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Income tax credit at the statutory rate of 34%.. $(2,465) $(1,920) $(1,382)
Federal income tax effect of state income tax-
es............................................. -- -- 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.
9. Stockholders' Equity
The Company's preferred stock may be issued from time to time in one or more
series. The BEI Board 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 BEI Board authorized the purchase from time
to time in open market transactions of up to 300,000 and 500,000 shares of
common stock, respectively. During fiscal year 1996, the Board approved an
additional repurchase of up to 200,000 shares on the open market. At the end
of fiscal year 1997, 934,424 shares had been repurchased at a cost of
$6,969,178 under this program. The treasury stock shares were then retired at
September 27, 1997.
10. Stock Option and Restricted Stock Plans
In 1982, the Company's stockholders voted to adopt an incentive stock option
plan. The plan provided for option prices based on the fair market value of
the stock on the date the option is granted. The Incentive Stock Option Plan
of 1982 terminated December 15, 1991. The remaining 24,000 options outstanding
under the plan at an exercise price of $3.75 were exercised during fiscal year
1997. No shares were outstanding or available for grant at September 27, 1997.
In November 1987, the Company's stockholders voted to adopt an additional
incentive stock option plan and a supplemental (nonqualified) stock option
plan. The incentive stock option plan provides for option prices based on the
fair market value of the stock on the date the option is granted, as
determined by the Board of
F-18
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
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
unvested, were converted to options for common stock of Technologies, at a
rate of approximately 1.07 options for Technologies stock for every 1.0
Electronics option held and the Electronics options were cancelled. The
exercise price of the options was also adjusted so that the aggregate value of
all outstanding options was the same after the Distribution as before.
See Note 1--Basis of Presentation for more information.
Transactions relating to the Amended 1987 Stock Option Plan are summarized
as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Common Price Price
Shares Per Share Per Share
--------- ----------- ---------
<S> <C> <C> <C>
Options outstanding at September 30,
1995..................................... 610,395 $2.88-$9.13 $5.71
Granted................................. 11,000 $6.00-$7.13 $6.42
Exercised............................... (115,922) $2.88-$9.13 $6.27
Terminated.............................. (48,511) $5.00-$9.13 $7.80
-------- ----------- -----
Options outstanding at September 28,
1996..................................... 456,962 $2.88-$9.13 $5.36
Exercised............................... (137,866) $2.88-$7.25 $5.33
Terminated.............................. (3,500) $3.75-$9.13 $7.95
-------- ----------- -----
Options outstanding prior to
Distribution............................. 315,596 $2.88-$9.13 $5.35
Distribution conversion to Technologies
options.................................. (315,596) $2.88-$9.13 $5.35
-------- ----------- -----
Options outstanding as of September 27,
1997..................................... -- -- --
Conversion of BEI Medical................. 595,739 $0.31-$3.74 $0.48
Granted................................. 203,489 $1.94-$4.00 $3.04
Exercised............................... (55,161) $ 0.31 $0.31
-------- ----------- -----
Options outstanding at October 3, 1998.... 744,067 $0.31-$4.00 $1.19
======== =========== =====
</TABLE>
F-19
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
As of October 3, 1998, 243,687 shares were available for grant under the
Amended Plan. Details of the 744,067 options outstanding as of October 3, 1998
were as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Options Contractual Price Per Number Price
Prices Outstanding Life (Years) Share Exercisable Per Share
-------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.31 366,821 6.8 $0.31 366,821 $0.31
$0.54 52,403 7.3 $0.54 28,960 $0.54
$0.70 107,564 7.6 $0.70 53,782 $0.70
$1.94 95,000 9.5 $1.94 -- --
$3.74 13,790 8.4 $3.74 3,448 $3.74
$4.00 108,489 9.1 $4.00 -- --
----------- ------- --- ----- ------- -----
$0.31-$4.00 744,067 7.7 $1.19 453,011 $0.40
=========== ======= === ===== ======= =====
</TABLE>
In July 1995, Medical's stockholders adopted an incentive stock option plan
and a supplemental (nonqualified) stock option plan for Medical stock. The
incentive stock option plan provided for option prices based on Medical's fair
market value of the stock on the date the option is granted, as determined by
the BEI Board. The supplemental stock option plan required that the exercise
price of each option shall not be less than 85% of the fair market value on
the date the option is granted.
Transactions related to the incentive and supplemental Medical stock option
plans of 1995 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Common Price Price
Shares Per Share Per Share
--------- ------------ ---------
<S> <C> <C> <C>
Options outstanding at September 30,
1995................................... 85,500 $ 1.72 $ 1.72
Granted............................... 34,800 $ 3.00-$3.85 $ 3.48
-------- ------------ ------
Options outstanding at September 28,
1996................................... 120,300 $ 1.72-$3.85 $ 2.23
Granted............................... 2,500 $ 20.65 $20.65
Exercised............................. (9,000) $ 1.72 $ 1.72
Terminated............................ (5,800) $ 3.00 $ 3.00
-------- ------------ ------
Options outstanding at September 27,
1997................................... 108,000 $1.72-$20.65 $ 2.66
Options converted to Electronics........ (108,000) $1.72-$20.65 $ 2.66
-------- ------------ ------
Options outstanding at October 3, 1998.. -- -- --
======== ============ ======
</TABLE>
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 BEI Board 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
F-20
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
key individuals subject to forfeiture if employment terminated prior to the
end of prescribed periods. In January 1997, the Restricted Plan was amended to
increase the shares reserved for issuance under the plan from 350,000 to
700,000. As of October 3, 1998, 589,926 shares had been granted and of these,
517,850 shares were outstanding and are included in the Company's total common
stock outstanding. Of the outstanding shares, 197,801 had vested. There are
182,150 shares reserved for future issue. The market value at the date of
grant of shares awarded under the plan is recorded as unearned restricted
stock. The market value of shares granted is amortized to compensation expense
over the periods of vesting. No compensation expense for Medical was recorded
in fiscal 1997 or 1996. In fiscal 1998, $79,000 of compensation expenses was
recorded.
Pro forma information regarding net loss and net loss per common share,
basic and diluted is required by SFAS No. 123, and has been determined as if
the Company had been accounting for its employee stock options under the fair
value method of that Statement. The fair value of these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 1998: weighted-average risk-free interest rate of
4.92%; no dividends; volatility factors of the expected market price of the
Company's common stock of 0.562 for 1998 and a weighted average expected life
of the options of 9.3 years for 1998.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1998 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal year 1998 was $2.10. The Company's pro forma net loss was $5,036,000
for 1998 and pro forma net loss per common share, basic and diluted was $0.68.
The pro forma disclosures presented for fiscal year 1998 may not necessarily
be indicative of the pro forma effect of SFAS No. 123 for future periods in
which options may be granted.
The impact of the calculation required by SFAS No. 123 on pro forma results
of operations and earnings (loss) per share was determined to be immaterial
for fiscal years 1997 and 1996.
11. Employee Benefit Plans
The Company has a defined contribution retirement plan for the benefit of
all eligible employees. The plan qualifies under Section 401(k) of the
Internal Revenue Code thereby allowing eligible employees to make tax-
deductible contributions to the plan. Non-discretionary employer contributions
are based on a fixed percentage of total eligible employee compensation and a
formula based matching of the participant's contribution to the plan.
Additional contributions are at the discretion of the BEI Board. 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 BEI Board may
F-21
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
authorize the participation by employees (excluding certain highly compensated
employees) in offerings of its common stock. Under the purchase plan,
employees may have up to 10% of their salary withheld to be used to purchase
shares of common stock at a price equal to not less than 85% of the fair
market value of the stock at specified applicable dates. The purchase plan was
suspended as of August 1, 1996, due to efforts to simplify the Company's
equity accounts to support analysis of various organizational alternatives. At
that date, 459,174 shares had been issued and 140,826 shares were reserved for
purchase over the ten-year life of the purchase plan. This plan will terminate
May 31, 1999 unless extended.
12. Lease and Other Commitments
Leases
Operating leases consist principally of leases for structures and land.
Certain of the operating leases contain various options for renewal and/or
purchase of the related assets for amounts approximating their fair market
value at the date of exercise of the option. The future minimum payments for
operating leases consisted of the following at October 3, 1998 (dollars in
thousands):
<TABLE>
<S> <C>
1999................................................................. $ 355
2000................................................................. 318
2001................................................................. 312
2002................................................................. 311
2003................................................................. 306
Thereafter........................................................... 204
------
Total minimum lease payments......................................... $1,806
======
</TABLE>
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):
<TABLE>
<S> <C>
1999.................................................................... $33
2000.................................................................... 33
---
Total minimum royalty payments.......................................... $66
===
</TABLE>
F-22
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
The Company has also entered into a number of other license and royalty
agreements that require payments based upon revenues on the sales of certain
products ranging from 4% to 10% of revenue. Except for the endometrial
ablation technology agreement mentioned above, there are no minimum
requirements. Total royalty expense attributable to various license agreements
amounted to approximately $314,000, $270,000 and $238,000 for fiscal 1998,
1997 and 1996, respectively.
Other Commitments
In connection with a $1.5 million equity investment in Medical in February
1996, Johnson & Johnson Development Corporation ("J&J") received a right of
first negotiation to manufacture and/or distribute any product primarily
intended for use in endometrial ablation acquired or developed after the date
of the agreement ("Ablation Products") and the right to consult in connection
with FDA applications with respect to such Ablation Products.
The right of first negotiation is effective for a ninety-day period
commencing on the earlier of i.) J&J's notice to the Company of its desire to
manufacture and/or distribute an Ablation Product and ii.) the date the
Company notifies J&J of approval from the FDA to market an Ablation Product.
In the event that the parties are unable to agree upon mutually acceptable
terms, then the Company may either manufacture and/or distribute the Ablation
Product itself or enter into an agreement with a third party on terms that in
the aggregate are not materially less favorable to the Company than those
offered by J&J. In addition, the Company may enter into agreements with third
parties prior to the J&J negotiation period, provided such agreements are
terminable by the Company within two years after the Company and J&J enter
into a manufacturing and/or distribution agreement. Depending upon the timing
and progress of clinical trials, the Company expects that the HTA system may
be subject to J&J's right of negotiation and consultation.
The Company entered into a consulting agreement with a director of the
Company to assist with medical research and clinical information. In
consideration for these services, the Company has issued 50,000 shares of
restricted stock, approximately 20,000 of which vested immediately upon
issuance and the remainder will vest ratable from October 1998 through March
2000. The agreement also provides for commissions on sales of the HTA in the
Far East and Latin America territories at $1,000 per unit and a 2% commission
on certain disposable units sold.
13. Contingencies and Litigation
In July 1998, the Company settled a lawsuit commenced in 1993 by CSI, 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
F-23
<PAGE>
BEI MEDICAL SYSTEMS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
October 3, 1998
management's best estimates, which rely upon numerous assumptions regarding
future events, including vendor supplied software, the availability of certain
resources, third-party remediation plans and other factors.
These estimates, however, may prove not to be accurate, and results could
differ materially from those anticipated. Factors that could result in
material differences include, without limitation, the availability of
personnel with appropriate training and experience, the ability to identify,
assess, remediate and test all relevant computer codes and embedded
technology, and similar uncertainties. In addition, Year 2000-related issues
may lead to possible third-party claims, the impact of which cannot yet be
estimated. No assurance can be given that the aggregate cost of defending and
resolving such claims, if any, would not have a material adverse effect on the
Company.
14. Sales
Revenue from continuing operations to customers in foreign countries
amounted to $1,500,000, $1,430,000 and $1,287,000 in fiscal 1998, 1997 and
1996, respectively. In fiscal 1998, 1997 and 1996, foreign revenue did not
exceed 10% of consolidated revenue in any individual geographic area.
15. Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for
fiscal 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended
------------------------------------
Dec. 27, Mar. 28, Jun. 27, Oct. 3,
1997 1998 1998 1998
-------- -------- -------- -------
(dollars in thousands except per
share amounts)
<S> <C> <C> <C> <C>
Revenue.............................. $ 2,418 $ 2,535 $2,293 $ 2,405
Gross profit......................... 923 1,141 943 1,006
Loss from continuing operations...... (1,196) (1,151) (977) (1,647)
Net loss............................. $(1,196) $(1,151) $ (977) $(1,647)
Loss from continuing operations per
common share, basic and diluted..... $ (0.17) $ (0.16) $(0.13) $ (0.22)
Earnings from discontinued operations
per common share, basic and
diluted............................. -- -- -- --
Loss per common share, basic and
diluted............................. $ (0.17) $ (0.16) $(0.13) $ (0.22)
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
Dec. 28, Mar. 29, Jun. 28, Sep. 27,
1996 1997 1997 1997
-------- -------- -------- --------
(dollars in thousands except per
share amounts)
<S> <C> <C> <C> <C>
Revenue................................ $2,584 $2,550 $2,472 $2,399
Gross profit........................... 1,152 1,090 938 853
Loss from continuing operations........ (746) (833) (1,136) (1,633)
Income from discontinued operations.... 35 1,452 1,696 1,400
Net income (loss)...................... ($711) $ 619 $ 560 ($233)
Loss from continuing operations per
common share, basic and diluted....... ($0.11) ($0.12) ($0.17) ($0.24)
Earnings from discontinued operations
per common share, basic and diluted... $ 0.01 $ 0.21 $ 0.25 $ 0.21
Earnings (loss) per common share, basic
and diluted........................... ($0.10) $ 0.09 $ 0.08 $(0.03)
</TABLE>
F-24
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
between:
BEI MEDICAL SYSTEMS COMPANY, INC.,
a Delaware corporation
and
COOPERSURGICAL ACQUISITION CORP.,
a Delaware corporation
----------------
Dated as of October 1, 1999
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 1 SALE OF ASSETS; RELATED TRANSACTIONS; DEFINITIONS............ 1
1.1 Sale of Assets............................................... 1
1.2 Instruments of Conveyance and Transfer and Assumption........ 1
1.3 Further Assurances........................................... 1
1.4 Assignments of Contracts and Rights.......................... 2
1.5 Power of Attorney; Right of Endorsement...................... 2
1.6 Liabilities Being Assumed.................................... 2
1.7 Liabilities Not Being Assumed................................ 3
1.8 Purchase Price............................................... 3
Delivery of Estimated Inventory and Net Receivables
1.9 Statement.................................................... 3
1.10 Purchase Price Adjustment.................................... 3
1.11 Sales Taxes.................................................. 5
1.12 Closing...................................................... 5
1.13 Definitions.................................................. 5
Section 2 REPRESENTATIONS AND WARRANTIES OF THE SELLER................. 5
2.1 Organization and Qualification; Subsidiaries................. 6
2.2 Authority Relative to this Agreement; Vote Required.......... 6
2.3 No Conflict; Required Filings and Consents................... 7
2.4 Compliance; Permits.......................................... 7
2.5 SEC Filings; Financial Statements............................ 7
2.6 Absence of Certain Changes or Events......................... 8
2.7 No Undisclosed Liabilities................................... 9
2.8 Contracts.................................................... 9
2.9 Title to Property............................................ 10
2.10 Brokers...................................................... 10
2.11 Intellectual Property Rights................................. 10
2.12 Litigation................................................... 11
2.13 Opinion of Financial Advisor................................. 11
2.14 Accounts and Notes Receivable................................ 11
2.15 Suppliers, Consultants and Vendors........................... 11
2.16 Customers.................................................... 12
2.17 Conflicts of Interest........................................ 12
2.18 Tax Matters.................................................. 12
2.19 FDA and Certain Other Compliances............................ 13
2.20 Insurance.................................................... 14
2.21 Environmental Matters........................................ 14
2.22 Sufficiency of Assets........................................ 14
2.23 Disclosure................................................... 14
Section 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.............. 15
3.1 Due Organization............................................. 15
3.2 Authority; Binding Nature of Agreements...................... 15
3.3 Non-Contravention; Consents.................................. 15
3.4 Brokers...................................................... 16
Section 4 PRE-CLOSING COVENANTS........................................ 16
4.1 Access and Investigation..................................... 16
4.2 Operation of Business........................................ 16
4.3 Filings and Consents......................................... 17
4.4 Notification of Certain Changes; Supplements to Schedules.... 17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
4.5 Public Announcements......................................... 18
4.6 Reasonable Efforts........................................... 18
4.7 Exchange Proceeds............................................ 18
4.8 Allocation of Purchase Price................................. 18
4.9 Exclusivity.................................................. 19
4.10 Special Payment to Purchaser Based Upon Another Transaction.. 19
4.11 Stockholders' Meeting........................................ 20
4.12 Subsidiary Approval.......................................... 20
4.13 Insurance.................................................... 20
Section 5 CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION TO CLOSE.. 20
5.1 Accuracy of Representations.................................. 20
5.2 Performance of Obligations................................... 20
5.3 No Proceedings............................................... 20
5.4 No Prohibition............................................... 21
5.5 Stockholder and Board of Directors Approval.................. 21
5.6 Opinion of the Seller's Counsel.............................. 21
5.7 Consents and Approvals....................................... 21
5.8 Related Documents............................................ 21
5.9 Seller Certificates.......................................... 21
5.10 Release of Encumbrance....................................... 22
5.11 Integrated Video Systems..................................... 22
Section 6 CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATION TO CLOSE..... 22
6.1 Accuracy of Representations.................................. 22
6.2 Performance of Obligations................................... 22
6.3 No Proceedings............................................... 22
6.4 No Prohibition............................................... 23
6.5 Stockholder Approval......................................... 23
6.6 Opinion of the Purchaser's Counsel........................... 23
6.7 Consents and Approvals....................................... 23
6.8 Related Documents............................................ 23
6.9 Purchaser's Certificates..................................... 23
6.10 Termination of Royalty Obligation............................ 24
Section 7 INDEMNIFICATION.............................................. 24
7.1 Generally.................................................... 24
7.2 Assertion of Claims.......................................... 25
7.3 Notice and Defense of Third Party Claims..................... 25
7.4 Survival of Representations and Warranties................... 26
7.5 Limitations on Indemnification............................... 26
7.6 Attorneys' Fees.............................................. 27
Section 8 TERMINATION.................................................. 28
8.1 Termination Events........................................... 28
8.2 Termination Procedures....................................... 28
8.3 Effect of Termination........................................ 28
8.4 Nonexclusivity of Termination Rights......................... 29
Section 9 POST CLOSING COVENANTS....................................... 29
9.1 Access to Records............................................ 29
9.2 Use of Seller's Labels, Etc.................................. 29
9.3 Physical Transfer of Purchased Assets........................ 29
9.4 Collection of Accounts Receivable............................ 30
Collection of Invoices Representing Evaluation Inventory,
9.5 Etc.......................................................... 30
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 10 MISCELLANEOUS PROVISIONS...................................... 31
10.1 Further Assurances............................................ 31
10.2 Fees and Expenses............................................. 31
10.3 Notices....................................................... 31
10.4 Headings...................................................... 32
10.5 Counterparts.................................................. 32
10.6 Governing Law................................................. 32
10.7 Successors and Assigns; Parties in Interest................... 32
10.8 Remedies Cumulative; Specific Performance..................... 33
10.9 Waiver........................................................ 33
10.10 Amendments.................................................... 33
10.11 Severability.................................................. 33
10.12 Entire Agreement; Confidential Disclosure Agreement........... 33
10.13 Knowledge..................................................... 33
10.14 Construction.................................................. 34
</TABLE>
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<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A: --Form of Bill of Sale
Exhibit B: --Certain Definitions
Exhibit C: --Statement of Allocation
Exhibit D: --Form of Opinion of Counsel for the Seller
Exhibit E: --Form of Transition Agreement
Exhibit F: --Form of Non-Competition Agreement with the Seller
Exhibit G: --Form of Non-Competition Agreement with Richard W. Turner
Exhibit H: --Form of Opinion of Counsel for the Purchaser
Schedule 1.1: --List of Purchased Assets
Schedule 1.6: --List of Assumed Liabilities
Schedule 1.7: --List of Excluded Liabilities
Schedule 1.8(a): --Sales Shortfall Calculation
Schedule 1.10(a): --Inventory Valuation Rules
Schedule 5.7: --Consents and Approvals
SELLER DISCLOSURE SCHEDULE
Section 1.1 --List of Purchased Assets
Section 1.6 --List of Assumed Liabilities
Section 1.7 --List of Excluded Liabilities
Section 1.8 --Sales Shortfall Calculation
Section 1.10 --Inventory Valuation Rights
Section 1.11 --Sales Taxes
Section 2.1 --Good Standing and Qualification
Section 2.3 --No Conflict; Required Filing and Consents
Section 2.4 --Compliance; Permits
Section 2.5 --SEC Filings; Financial Statements
Section 2.6 --Absence of Certain Changes or Events
Section 2.7 --Undisclosed Liabilities
Section 2.8 --Contracts
Section 2.9 --Title to Property
Section 2.10 --Brokers
Section 2.11 --Intellectual Property Rights
Section 2.14 --Accounts and Notes Receivable
Section 2.15 --Suppliers, Consultants and Vendors
Section 2.16 --Customers
Section 2.17 --Conflicts of Interest
Section 2.18 --Tax Matters
Section 2.19 --FDA and Other Compliances
Section 2.20 --Insurance
Section 2.21 --Environmental Matters
iv
<PAGE>
DEFINED TERMS INDEX
<TABLE>
<CAPTION>
Term Location
- ---- --------
<S> <C>
Accountant's Determination.................................. Section 1.10(c)
Acquisition Expenses........................................ Section 4.9
Agreement................................................... Exhibit B
Affiliate................................................... Exhibit B
Another Transaction......................................... Section 4.9(a)
Approvals................................................... Section 2.1
Assumed Contracts........................................... Section 1.6
Assumed Liabilities......................................... Section 1.6
Bill of Sale................................................ Section 1.2
Blocked Jurisdiction........................................ Section 7.5(b)
Business.................................................... Recital B
CERCLA...................................................... Exhibit B
CERCLIS..................................................... Exhibit B
CGMP........................................................ Section 2.19(c)(i)
Control..................................................... Exhibit B
Claim....................................................... Section 9.4(e)
Closing..................................................... Section 1.12
Closing Date................................................ Section 1.12
Code........................................................ Section 2.18(a)
Compliance Claim............................................ Section 7.5(b)
Consent..................................................... Exhibit B
Debtor...................................................... Section 9.4(e)
Disputed Receivable......................................... Section 9.4(e)
DGCL........................................................ Section 2.2
Encumbrance................................................. Exhibit B
Environmental, Health and Safety Laws....................... Exhibit B
Examination Period.......................................... Section 1.10(b)
Exchange Proceeds........................................... Section 4.7
Estimated Inventory......................................... Section 1.9(a)
Estimated Inventory and Net Receivables Holdback Amount..... Section 1.9(b)
Estimated Inventory and Net Receivables Statement........... Section 1.9(a)
Estimated Net Receivables................................... Section 1.9(a)
Excluded Assets............................................. Section 1.1
Excluded Liabilities........................................ Section 1.7
FDA......................................................... Section 2.19(a)
GAAP........................................................ Exhibit B
Governmental Entity......................................... Exhibit B
Hazardous Materials......................................... Exhibit B
HTA......................................................... Recital A
Indemnified Persons......................................... Exhibit B
Indemnifying Persons........................................ Exhibit B
Inventory................................................... Section 1.10(a)
Inventory Statement......................................... Section 1.10(a)
Law......................................................... Exhibit B
Liabilities................................................. Exhibit B
Losses...................................................... Exhibit B
Lost Sales Amount........................................... Section 7.5(b)
Knowledge................................................... Section 10.13
Material Adverse Effect..................................... Exhibit B
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Term Location
- ---- --------
<S> <C>
MDRs........................................................ Section 2.19(c)(iv)
Net Receivables............................................. Section 1.10(a)(ii)
Non-Competition Agreements.................................. Section 5.8(ii)
Objection Notice............................................ Section 1.10(c)
Orders...................................................... Exhibit B
Permitted Encumbrances...................................... Exhibit B
Permits..................................................... Exhibit B
Person...................................................... Exhibit B
Physical Inventory.......................................... Section 1.10(a)
Pre-Closing Period.......................................... Section 4.1
Proceedings................................................. Section 2.12
Products.................................................... Exhibit B
Proprietary Matter.......................................... Section 2.11(a)(i)
Purchase Price.............................................. Section 1.8(c)
Purchased Assets............................................ Section 1.1
Purchaser................................................... Preamble
Purchaser Indemnified Persons............................... Exhibit B
Purchaser Indemnifying Persons.............................. Exhibit B
Purchaser Losses............................................ Exhibit B
Related Document, Documents................................. Section 5.8
Receivable.................................................. Section 9.4(e)
Representatives............................................. Exhibit B
Requesting Party............................................ Section 9.1
Sale........................................................ Exhibit B
Sales Shortfall............................................. Exhibit B
Seller...................................................... Preamble
Seller Disclosure Schedule.................................. Section 2
Seller Indemnified Persons.................................. Exhibit B
Seller Indemnifying Persons................................. Exhibit B
Seller Losses............................................... Exhibit B
Seller Permits.............................................. Section 2.4(b)
Seller SEC Reports.......................................... Section 2.5(a)
Settlement Agreement........................................ Section 1.10(c)
Special Tax Losses.......................................... Exhibit B
Statement of Allocation..................................... Section 4.8
Statements.................................................. Section 1.10(b)
Stockholders Meeting........................................ Section 8.1(d)
Subsidiaries................................................ Section 1.1
Survival Date............................................... Section 7.4
Tax Return.................................................. Exhibit B
Taxes....................................................... Exhibit B
Third Party Claim........................................... Section 7.3
Transaction Taxes........................................... Section 1.11
Transition Agreement........................................ Section 5.8(i)
</TABLE>
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<PAGE>
THIS ASSET PURCHASE AGREEMENT is entered into as of October 1, 1999, by and
between: BEI MEDICAL SYSTEMS COMPANY, INC., a Delaware corporation (the
"Seller"), and COOPERSURGICAL ACQUISITION CORP., a Delaware corporation (the
"Purchaser").
RECITALS
A. The Seller and its subsidiaries are engaged in the business of
developing, manufacturing, marketing and servicing a broad array of advanced
systems and devices for diagnostic and therapeutic procedures in the medical
fields of gastroenterology and gynecology. The Seller also produces a variety
of products for use in various medical and surgical procedures that are sold
by it under original equipment manufacture labeling arrangements. The Seller
is currently focusing its development and commercialization efforts on its new
Hydro ThermAblator ("HTA") product and related accessories for treatment of
excessive uterine bleeding through endometrial ablation.
B. The Seller desires to sell its non-HTA business (hereinafter called the
"Business")
C. The Seller and its subsidiaries desire to sell to the Purchaser, and the
Purchaser desires to purchase from the Seller and its subsidiaries, certain of
the assets of the Seller and its subsidiaries, subject to the Purchaser's
assumption of certain specified liabilities of the Seller, in each case
related to the Business, on the terms and subject to the conditions contained
in this Agreement.
ACCORDINGLY, in consideration of the premises and the mutual representations
hereinafter set forth, the parties hereto hereby agree as set forth below.
Section 1. Sale Of Assets; Related Transactions; Definitions.
1.1 Sale Of Assets.
The Seller shall cause to be sold, assigned, transferred, conveyed and
delivered to the Purchaser, free and clear of all Encumbrances, and the
Purchaser shall purchase from the Seller and its subsidiaries (the
"Subsidiaries") which own or have rights to the assets that are identified on
Schedule 1.1 (which assets are collectively referred to in this Agreement as
the "Purchased Assets"), at the Closing (as defined in Section 1.5), all of
the Seller's and the Subsidiaries' right, title and interest in, to and under
the Purchased Assets which exist at the Closing, on the terms and subject to
the conditions set forth in this Agreement. The Seller shall not sell, assign,
transfer, convey or deliver to the Purchaser at the Closing and shall
specifically retain any asset of the Seller that is not identified on Schedule
1.1 (which assets are collectively referred to in this Agreement as the
"Excluded Assets").
1.2 Instruments of Conveyance and Transfer and Assumption.
At the Closing, the Seller and the Subsidiaries shall execute and deliver to
the Purchaser, and the Purchaser shall execute and deliver to the Seller, a
bill of sale, assignment and assumption agreement, substantially in the form
of Exhibit A attached hereto (the "Bill of Sale"), and such other deeds,
endorsements, assignments and other good and sufficient instruments of
conveyance and transfer as shall be necessary or desirable to transfer, convey
and assign to the Purchaser good title to the Purchased Assets free and clear
of any and all Encumbrances. The Seller shall take all reasonable legal steps
that may be necessary to put the Purchaser in possession and operating control
of the Purchased Assets.
1.3 Further Assurances.
The Seller shall promptly pay or deliver to the Purchaser any Purchased
Asset which may be received by the Seller or a Subsidiary after the Closing.
The Seller shall at its expense, at any time and from time to time after the
Closing, upon the reasonable request of the Purchaser, do, execute,
acknowledge and deliver, and cause
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to be done, executed, acknowledged or delivered, all such further acts, deeds,
assignments, transfers, conveyances, powers of attorney or assurances as may
be reasonably required to transfer, assign, convey, grant and confirm to the
Purchaser, or to aid and assist in the collection of or reducing to possession
by the Purchaser, the Purchased Assets, or to vest in the Purchaser good title
to the Purchased Assets as herein provided.
1.4 Assignments of Contracts and Rights.
Anything contained in this Agreement to the contrary notwithstanding, this
Agreement shall not constitute an agreement or an attempted agreement to
transfer, sublease or assign any contract (or any claim or right or any
benefit arising thereunder or resulting therefrom) if the attempted transfer,
sublease or assignment thereof, without the consent of any other party
thereto, would constitute a breach thereof or in any way adversely affect the
rights of the Purchaser thereunder. The Seller shall use commercially
reasonable efforts to obtain the consent of the other party to any contract to
the transfer, sublease or assignment thereof to the Purchaser in all cases in
which such consent is required for the transfer, sublease or assignment of any
such contract. If any such consent is not obtained and the Closing occurs, the
Seller shall provide for the Purchaser the benefits of such contract,
including (a) adherence to reasonable procedures established by the Purchaser
for the immediate transfer to the Purchaser of any payments or other funds
received by the Seller thereunder and (b) enforcement for the benefit of the
Purchaser of any and all rights of the Seller thereunder against the other
party or parties thereto arising out of the breach or cancellation thereof by
such other party or parties or otherwise.
1.5 Power of Attorney; Right of Endorsement.
Effective as of the Closing, the Seller and each Subsidiary hereby
constitute and appoint the Purchaser as the true and lawful attorney of the
Seller and each Subsidiary, with full power of substitution, in the name of
the Seller and each Subsidiary, on behalf of and for the benefit of the
Purchaser, solely (a) to collect all Purchased Assets, (b) to endorse, without
recourse, checks, notes and other instruments attributable to the Purchased
Assets and the Assumed Liabilities (as defined in Section 1.6), (c) to
institute and prosecute all proceedings which the Purchaser may reasonably
deem proper in order to collect, assert or enforce any claim, right or title
in, to or under or otherwise attributable to the Purchased Assets and the
Assumed Liabilities, (d) to defend and compromise all actions, suits or
proceedings with respect to any of the Purchased Assets or the Assumed
Liabilities and (e) to do all such acts and things with respect to the
Purchased Assets or the Assumed Liabilities as the Purchaser may reasonably
deem advisable. The foregoing powers are coupled with an interest and shall
not be revocable by the Seller or any Subsidiary, directly or indirectly, by
the dissolution of the Seller or any Subsidiary or in any other manner. The
Purchaser shall retain for its own account any amounts collected pursuant to
the foregoing powers with respect to the Purchased Assets, and the Seller and
each Subsidiary shall promptly pay to the Purchaser any amounts it receives
after the Closing with respect to the Purchased Assets.
1.6 Liabilities Being Assumed.
Upon the terms and subject to the conditions of this Agreement, the
Purchaser shall assume the following and only the following liabilities and
obligations of the Seller (a) all liabilities and obligations (excluding those
arising from a breach by the Seller or any Subsidiary of any Assumed Contract)
accruing from and after Closing pursuant to the contracts identified on
Schedule 1.1 (the "Assumed Contracts") and (b) effective as of the Closing,
and from and after the Closing, the Purchaser shall pay or assume, perform and
discharge when due the liabilities of Seller related to the Business which are
identified on Schedule 1.6 (collectively, the "Assumed Liabilities"). Anything
contained in this Agreement to the contrary notwithstanding, in no case shall
the Assumed Liabilities described on Schedule 1.6 or any liabilities
associated with the Assumed Contracts (excluding any royalty payments accruing
from and after the Closing and the cost of performance by the Purchaser after
the Closing under those Assumed Contracts specifically identified in Schedule
1.6 which relate to sales of Products or acquisition of inventory by the
Purchaser after the Closing) exceed $350,000. To reach $350,000, the Assumed
Liabilities shall be assumed by the Purchaser in the following order of
priority: first, to the extent of any trade accounts payable up to $350,000;
second, up to $25,000 of warranty obligations up to the difference between
$350,000 and the lesser amount of trade accounts payable so assumed; third, to
the extent of
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the amount at Closing of any accrued sales return obligations up to the
difference between $350,000 and the sum less than $350,000 of the amount of
trade accounts payable and warranty obligations so assumed; and last, the
amount at Closing of any accrued royalty obligations, up to any remaining
difference between $350,000 and the sum less than $350,000 of the amount of
trade accounts payable, warranty obligations and sales return obligations so
assumed.
1.7 Liabilities Not Being Assumed.
Anything contained in this Agreement to the contrary notwithstanding, the
Purchaser is not assuming any Liabilities of the Seller other than the Assumed
Liabilities, whether or not relating to the Purchased Assets or the Business,
all of which Liabilities shall at and after the Closing remain the exclusive
responsibility and obligation of the Seller. Without limiting the generality
of the foregoing, the Purchaser is not assuming any of the Liabilities
identified on Schedule 1.7 (collectively, the "Excluded Liabilities").
1.8 Purchase Price.
Subject to Section 1.10, as the aggregate consideration for the sale of the
Purchased Assets to the Purchaser:
(a) at the Closing, the Purchaser shall pay to the Seller, by wire
transfer of immediately available funds, $11,206,600, minus an amount equal
to (i) the Sales Shortfall described on Schedule 1.8(a), if any, and (ii)
the Estimated Inventory and Receivables Holdback Amount as defined in
Section 1.9, if any; and
(b) at the Closing, the Purchaser shall assume the Assumed Liabilities.
(c) The "Purchase Price" means $11,206,600, as adjusted pursuant to
Section 1.10, less the Sales Shortfall plus the amount of the Assumed
Liabilities.
1.9 Delivery of Estimated Inventory and Net Receivables Statement.
(a) The Seller, in consultation with the Purchaser, shall prepare and
deliver to the Purchaser as soon as practicable, and in no case less than
three Business Days prior to the Closing Date, a statement (the "Estimated
Inventory and Net Receivables Statement") setting forth (i) their good faith
estimate of the value at Closing of the Inventory (the "Estimated Inventory")
and the Net Receivables (the "Estimated Net Receivables"). The Estimated
Inventory and Estimated Net Receivables shall be determined in accordance with
the guidelines set forth in Section 1.10(a) and 1.10(b), respectively.
(b) The "Estimated Inventory and Net Receivables Holdback Amount" means the
amount, if any, by which the Estimated Inventory plus Estimated Net
Receivables, as reflected on the Estimated Inventory and Receivables Statement
is, in the aggregate, less than $3,600,000.
1.10 Purchase Price Adjustment.
(a) Preparation of Statements.
(i) As of the Closing, a physical inventory ("Physical Inventory") will
be taken of all the inventory of the Seller and each Subsidiary included in
the Purchased Assets (the "Inventory") at which Representatives of the
Purchaser may be present, in a manner to be agreed upon by the Seller and
the Purchaser and to be performed by the Seller. Promptly after completion
of the Physical Inventory, the Seller shall prepare and deliver to the
Purchaser within 30 days of Closing a written statement which sets forth
the value of the Inventory as of the Closing based on the Physical
Inventory (the "Inventory Statement"). The value of the Inventory shall be
determined in accordance with GAAP, as modified in accordance with the
methodology set forth on Schedule 1.10(a).
(ii) The Seller shall also prepare and deliver to the Purchaser with the
Inventory Statement a written statement which sets forth the value as of
the Closing of the Net Receivables and the Assumed Liabilities
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for each category set forth in Schedule 1.6. "Net Receivables" means the
Seller's accounts receivable included in the Purchased Assets as of the
Closing (determined in accordance with GAAP) minus the Seller's reserve for
doubtful accounts receivable (such reserve to be calculated in accordance
with GAAP based on the historical experience of the Seller). The value of
the Assumed Liabilities shall be determined in accordance with GAAP,
adjusted in accordance with the methodology set forth in Schedule 1.6.
(b) Review of the Statements. Promptly after the Inventory and other
statements referred to in Section 1.10(a) (collectively, the "Statements") are
delivered to the Purchaser pursuant to Section 1.10(a), the Purchaser shall
conduct an examination of the Statements. The Seller shall give the Purchaser
and its Representatives timely and reasonable access to such of the Seller's
working papers, documents, financial information and other information used in
the preparation of the Statements as the Purchaser reasonably deems necessary
or desirable in connection with such examination. The Purchaser shall complete
its examination of the Statements during the Examination Period. The
"Examination Period" shall commence upon delivery by the Seller to the
Purchaser of the Statements and end on the earliest of (i) thirty (30) days
after such delivery, (ii) the date the Purchaser delivers an Objection Notice
to the Seller and (iii) the date the Purchaser notifies the Seller that the
Purchaser accepts the Statements. The Statements as prepared by the Seller and
examined by the Purchaser shall be conclusive and binding on the parties
hereto for purposes of this Agreement, subject to the resolution of any
disputes in accordance with Section 1.10(c).
(c) Disputes. The Purchaser may object during the Examination Period by
providing the Seller a written notice describing in reasonable detail the
Purchaser's objections to any item or valuation on the Statements (an
"Objection Notice"). The Purchaser's failure to deliver an Objection Notice to
the Seller within thirty (30) days after the Seller's delivery of the
Statement to the Purchaser shall constitute the Purchaser's binding acceptance
of the Statements and all matters identified therein. If the Seller and the
Purchaser fail to resolve any objection described on an Objection Notice
within ten (10) days after the date the Objection Notice is delivered to the
Seller, then, at the request of either party, the Seller and the Purchaser
shall meet in an attempt to resolve an objection described on the Objection
Notice and reach a written agreement (the "Settlement Agreement"). If the
parties enter into a Settlement Agreement, the Statements shall be deemed to
be as agreed therein. If the parties are unable to resolve the objection
described on the Objection Notice within twenty (20) days after receipt by
Seller of such Objection Notice, then the Seller and the Purchaser shall
select an independent accounting firm of recognized national standing (or, if
the parties cannot agree upon a selection, they shall select such accounting
firm by lot from among the five largest accounting firms in the United States)
which shall resolve such objection as promptly as possible. The accounting
firm selected shall not at the time of selection be performing services for
either the Purchaser or the Seller. A decision by the independent accounting
firm as to the resolution of such objection shall be (absent an agreement of
the parties regarding an error that is manifest) conclusive and binding upon
the parties for purposes of this Agreement (the "Accountant's Determination").
The Accountant's Determination shall be (1) in writing, (2) made in accordance
with GAAP as modified by the standards provided for in this Agreement for the
Statements and (3) nonappealable and incontestable by the Seller and the
Purchaser and each of their respective Affiliates and successors and not
subject to collateral attack for any reason. All fees and costs payable to the
independent accounting firm referred to in this Section shall be borne by the
Purchaser and the Seller equally.
(d) Payments. (i) If the value of the Inventory and the Net Receivables is
in the aggregate greater than $3,750,000, then the Purchaser shall pay to the
Seller an amount equal to the amount by which the value of the Inventory and
the Net Receivables exceeds $3,750,000, plus the Estimated Inventory and
Receivables Holdback Amount. If such value of the Inventory and the Net
Receivables is in the aggregate less than $3,600,000, then the Seller shall
pay to the Purchaser an amount equal to the amount by which $3,600,000 exceeds
the value of the Inventory and the Net Receivables, minus the Estimated
Inventory and Receivables Holdback Amount up to the amount of such excess and
the Purchaser shall pay to the Seller any excess of the Estimated Inventory
and Receivables Holdback Amount over the amount by which $3,600,000 exceeds
the value of the Inventory and Net Receivables, if any. If such value of the
Inventory and the Net Receivables is in the aggregate equal to or less than
$3,750,000 and equal to or greater than $3,600,000, then the Purchaser shall
pay to the Seller an amount equal to the Estimated Inventory and Receivables
Holdback Amount.
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(ii) If the value of the Assumed Liabilities is less than $350,000,
then the Purchaser shall pay to the Seller an amount equal to the amount
by which the value of the Assumed Liabilities is less than $350,000.
(iii) Each value referred to subparagraphs (i) and (ii) above shall be
as determined in the Statements or, in the case of a dispute, as
determined in a Settlement Agreement or in the Accountant's
Determination.
(iv) All payments to be made pursuant to this Section 1.10(d) shall be
made by wire transfer of immediately available funds.
(e) Schedule of Payments. Any payments required to be made pursuant to
Section 1.10(d) shall be made as follows: (i) if the Purchaser shall not have
delivered an Objection Notice to the Seller in accordance with the provisions
of Section 1.10(c), then the payment required to be made pursuant to Section
1.10(d) shall be made no later than five (5) days after the end of the
Examination Period, and (ii) if the Purchaser shall have delivered an
Objection Notice to the Seller in accordance with the provisions of Section
1.10(c), then payment of any undisputed amounts shall be paid no later than
five (5) days after the end of the Examination Period, and the payment
required to be made pursuant to Section 1.10(d) with respect to any disputed
amounts shall be made within five (5) days after the resolution of the
dispute, whether by the Settlement Agreement or upon the Accountant's
Determination as provided in Section 1.10(c).
1.11 Sales Taxes.
The parties shall each bear one-half of any sales taxes, use taxes, transfer
taxes, documentary charges, recording fees or similar taxes, charges or fees
that may become payable in connection with the sale of the Purchased Assets to
the Purchaser (the "Transaction Taxes"). If one of the parties pays less than
one-half of the total Transaction Taxes, such party shall pay to the other
party a sum equal to the difference between one-half of the total Transaction
Taxes and the amount of Transaction Taxes so paid by such party. Each party
shall timely pay the amount of Transaction Taxes it is obligated to pay to the
appropriate Governmental Entity, and shall thereafter send evidence to the
other party that such Transaction Taxes have been paid.
1.12 Closing.
The closing of the sale of the Purchased Assets to the Purchaser, and the
transactions contemplated herein, (the "Closing") shall take place at Cooley
Godward LLP, One Maritime Plaza, 20th Floor, San Francisco, CA 94111, no later
than two days after the date that all closing conditions set forth in Sections
5 and 6 have been satisfied or waived or on such other date to which the
parties mutually agree (the "Closing Date").
1.13 Definitions.
Certain capitalized terms used and not defined in this Agreement have the
meanings given to them in Exhibit B attached hereto.
Section 2. Representations and Warranties of the Seller.
The Seller represents and warrants, to and for the benefit of the Purchaser
that, except as set forth in the Disclosure Schedule delivered by the Seller
to the Purchaser on the date hereof (the "Seller Disclosure Schedule"):
2.1 Organization and Qualification; Subsidiaries.
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. The Seller and each Subsidiary has all
the requisite corporate power and authority and is in possession of all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and orders ("Approvals") necessary to own, lease and
operate its Purchased Assets and to carry on its business as it is now being
conducted. The Seller and each Subsidiary is duly qualified or licensed as a
foreign corporation to do
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business, and is in good standing, in all the jurisdictions listed on Section
2.1 of the Seller Disclosure Schedule, which constitute jurisdictions where
the character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except for
such failures to be so duly qualified or licensed and in good standing that
would not have a Material Adverse Effect. The Purchaser has been furnished
with true, correct and complete copies of the Certificate of Incorporation and
By-laws (or comparable charter documents) of the Seller and each Subsidiary.
Except as set forth in Section 2.1(a) of the Seller Disclosure Schedule,
neither the Seller nor any Subsidiary has (a) engaged within the last five (5)
years in any business or activity other than the Business or (b) used within
the last five (5) years any trade name or assumed name other than its
corporate name set forth in the this Agreement (including the Seller
Disclosure Schedule). A true and complete list of all of the Seller's direct
and indirect subsidiaries, together with the jurisdiction of incorporation of
each subsidiary, is set forth in Section 2.1(b) of the Seller Disclosure
Schedule. Except as set forth in Section 2.1(b) of the Seller Disclosure
Schedule, the Seller does not own or hold, directly or indirectly, any equity
interest or debt obligation (excluding accounts receivable arising in the
ordinary course of the Business, consistent with past practice) of any other
Person that relates to the Business.
2.2 Authority Relative to this Agreement; Vote Required.
(a) The Seller and each Subsidiary has all necessary corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and each Related Document to which it is or will be a party and (subject only,
with respect to the Sale, to the approval and adoption of this Agreement and
approval of the Sale by the holders of at least a majority of the outstanding
shares of the Seller and Subsidiary common stock entitled to vote in
accordance with the Delaware General Corporation Law ("DGCL") and the Seller's
and each Subsidiary's Certificate of Incorporation and By-Laws) to consummate
the transactions contemplated hereby and thereby. The execution and delivery
of this Agreement and each Related Document to which it is or will be a party
by the Seller and each Subsidiary and the consummation by the Seller and each
Subsidiary of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of the
Seller and each Subsidiary, and no other corporate proceedings on the part of
the Seller or any Subsidiary are necessary to authorize this Agreement and
each Related Document to which it is or will be a party or to consummate the
transactions so contemplated hereby and thereby (other than the approval and
adoption of this Agreement and the approval of the Sale by the holders of at
least a majority of the outstanding shares of Seller and Subsidiary common
stock entitled to vote in accordance with the DGCL and the Seller's and each
Subsidiary's Certificate of Incorporation and By-Laws). As of the date hereof,
the Board of Directors of the Seller has determined that the Sale, upon the
terms and subject to the conditions of this Agreement, is advisable to and in
the best interests of the Seller and its stockholders. This Agreement and each
Related Document to which it is or will be a party has been, or upon the
execution thereof will be, duly and validly executed and delivered by the
Seller and each Subsidiary party thereto.
(b) Assuming the due authorization, execution and delivery by the Purchaser,
this Agreement and each Related Document to which it is or will be a party
constitutes or will constitute a legal, valid and binding obligation of the
Seller and each Subsidiary party thereto, enforceable against the Seller and
each Subsidiary in accordance with its terms, except as such enforceability
may be limited by any applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors'
rights generally, and except as the availability of equitable remedies may be
limited by the application of general principles of equity (regardless of
whether such equitable principles are applied in a proceeding at law or in
equity).
(c) The approvals of the holders of a majority of the outstanding shares of
the Seller common stock and the common stock of each Subsidiary are the only
votes of the holders of any class or series of the Seller's and each
Subsidiary's capital stock necessary to approve the Sale and this Agreement.
2.3 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 2.3 of the Seller Disclosure Schedule,
the execution and delivery of this Agreement and each Related Document to
which it is or will be a party by the Seller and each Subsidiary party
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thereto does not, and the performance of this Agreement and each Related
Document to which it is or will be a party by the Seller and such Subsidiary,
and of the transactions contemplated hereby and thereby, will not:
(i) conflict with or violate (with or without notice or lapse of time or
both) the Certificate of Incorporation or By-Laws of the Seller or such
Subsidiary,
(ii) conflict with or violate (with or without notice or lapse of time or
both) any Law applicable to the Seller or any such Subsidiary or by which
its or any of their respective properties is bound or affected, or
(iii) result in any violation or breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or impair the Seller's or any such Subsidiary's rights or alter the
rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of the Seller or any of its subsidiaries pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Seller or any of
its subsidiaries is a party or by which the Seller or any of its
subsidiaries or its or any of their respective properties is bound or
affected,
(b) The execution and delivery of this Agreement and each Related Document
by the Seller and each Subsidiary party thereto does not, and the performance
of this Agreement and each Related Document to which it is or will be a party
by the Seller and each such Subsidiary will not, require the Seller or any
Subsidiary to obtain any consent, approval, authorization or permit of, or to
file with or notify, any Governmental Entity.
2.4 Compliance; Permits.
(a) Except as disclosed in Section 2.4 of the Seller Disclosure Schedule,
neither the Seller nor any Subsidiary is in conflict with, or in default or
violation of, (i) any Law applicable to the Seller or any Subsidiary or by
which its or any of the Purchased Assets are bound or affected or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Seller or any
Subsidiary is a party or by which the Seller or any Subsidiary or any of its
or their respective properties is bound or affected, except for any such
conflicts, defaults or violations which would not reasonably be expected to
have a Material Adverse Effect.
(b) Except as disclosed in Section 2.4 of the Seller Disclosure Schedule,
the Seller and each Subsidiary hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and approvals from
Governmental Entities which are material to their respective operation of the
Business as it is currently being conducted, or the current use or ownership
of the Purchased Assets (collectively, the "Seller Permits"). The Seller and
each Subsidiary is in compliance with the terms of the Seller Permits.
2.5 SEC Filings; Financial Statements.
(a) Except as disclosed in Section 2.5 of the Seller Disclosure Schedule,
all forms, reports, statements and other documents required to be filed by the
Seller with the SEC since September 28, 1997 (excluding the exhibits filed
therewith) (the "Seller SEC Reports") (i) were prepared in all material
respects in accordance with the applicable requirements of the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as
the case may be, and (ii) did not at the time they were filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) The consolidated financial statements (including, in each case, any
related notes or schedules thereto) contained in the Seller SEC Reports were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated therein or in the notes thereto
or, in the case of unaudited interim financial statements, as permitted by
Form 10-Q of the SEC), and fairly presented in all material respects the
consolidated financial position of the Seller and its consolidated
subsidiaries as at the
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respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments.
2.6 Absence of Certain Changes or Events.
Except as contemplated by this Agreement, or as set forth in Section 2.6 of
the Seller Disclosure Schedule, during the period from July 3, 1999 to the
date of this Agreement, none of the following have occurred:
(a) any change, event or condition (or any development involving a
prospective change, event or condition) shall have occurred or be
threatened which has, or is reasonably likely to have, a Material Adverse
Effect;
(b) any change in tax or accounting methods, principles or practices by
the Seller or any Subsidiary affecting the Purchased Assets, the Business
or its Liabilities, except as required by any change in GAAP or change in
Law;
(c) any material revaluation by the Seller or any Subsidiary of any of
the Purchased Assets, including without limitation, writing off notes or
accounts receivable;
(d) any damage, destruction or loss that has had or is reasonably likely
to have a Material Adverse Effect on the Purchased Assets;
(e) any cancellation of any material debts or waiver or release of any
material right or claim of the Seller or any Subsidiary relating to the
Business or the Purchased Assets;
(f) entering into or executing any arrangement, agreement or
understanding involving an amount exceeding $20,000 relating to the
Business to which the Seller or any Subsidiary is a party which cannot be
terminated by it on notice of 30 days or less without cost or penalty;
(g) any adoption of a plan of liquidation or resolutions providing for
the liquidation, dissolution, merger, consolidation or other reorganization
of the Seller or any Subsidiary other than as contemplated by this
Agreement;
(h) any delay or failure to repay when due any material obligation of the
Seller or any Subsidiary that relates to the Business or the Purchased
Assets;
(i) any general uniform increase in the compensation of employees
(including, without limitation, any increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment) of the Seller or any
Subsidiary, or any increase in any such compensation payable to any
officer, director or key employee;
(j) any change in the manner in which products or services of the
Business are marketed (including, without limitation, any change in prices)
or sold, any change in the manner in which the Seller extends discounts or
credits to customers or any change in the manner or terms by which the
Seller collects its accounts receivable or otherwise deals with customers;
(k) any acquisition or disposition of the Purchased Assets, including
Proprietary Matter, other than the purchase of raw materials or the sale of
inventories for fair value in the ordinary course of business consistent
with past practice;
(l) any forward purchase commitments or sales commitment for the Business
not disclosed in Section 2.8 of the Seller Disclosure Schedule;
(m) any changes in the practices and policies of the Seller with respect
to the collection of accounts receivable, payment of accounts payable or
the ordering or shipping of products related to the Business;
(n) any other transactions relating to the Business or the Purchased
Assets other than in the ordinary course of business consistent with past
practice; or
(o) any agreement by the Seller or any Subsidiary to do any of the things
described in the preceding clauses (a) through (n) other than as expressly
provided for herein.
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2.7 No Undisclosed Liabilities.
Except as indicated in Section 2.7 of the Seller Disclosure Schedule or the
Seller SEC Reports filed prior to the date hereof, neither the Seller nor any
Subsidiary has any Liabilities (including all Liabilities for Taxes) which
would be required to be disclosed in financial statements, including the
footnotes thereto, prepared in accordance with GAAP, and which are not
adequately reflected or reserved against in the Seller's balance sheet as of
July 3, 1999, including the footnotes thereto, except such as have arisen in
the ordinary course of business consistent with past practice since such date.
2.8 Contracts.
Other than contracts or agreements which may be terminated by the Seller on
notice of 30 days or less or which involve annual payments of less than
$6,000, Section 2.8 of the Seller Disclosure Schedule lists all contracts and
agreements to which: (a) the Seller or any Subsidiary is a party, (b) that are
currently in force and (c) that relate to the Purchased Assets or the
Business, including:
(i) contracts that restrict the Business;
(ii) distribution agreements;
(iii) supply agreements;
(iv) service agreements;
(v) indemnification or guaranty agreements pursuant to which the
Seller or any Subsidiary may incur a Liability;
(vi) agreements pertaining to the purchase or sale of any assets or
businesses entered into outside the ordinary course of business,
(vii) joint marketing or development agreements;
(viii) agreements pursuant to which the Seller or any Subsidiary may
draw funds as borrowed money and any related security agreements;
(ix) license agreements (other than commercial shrink-wrap licenses),
whether the Seller or any Subsidiary is a licensee or licensor; and
(x) other agreements requiring the Seller or any Subsidiary to expend
in excess of $50,000 in the aggregate for all such agreements after the
date hereof.
All such contracts and agreements are duly and validly executed by the
Seller or by one or more of its Subsidiaries, as applicable, and, to the
Seller's knowledge, by all other parties thereto, are in full force and effect
as of the date of this Agreement and, to the Seller's knowledge, will be in
full force and effect on the Closing Date. No event has occurred which, after
notice or the passage of time or both, would constitute a default by the
Seller or any Subsidiary under any such contract. To the Seller's knowledge,
all such contracts and agreements will continue, after the Closing Date, to be
enforceable in accordance with their respective terms against the Seller or
the Subsidiary party thereto until their respective expiration dates. The
Seller and each Subsidiary party thereto has performed all of the obligations
under such contracts required to be performed by it to date, and there exists
no default, or any event which upon the giving of notice or the passage of
time, or both, would give rise to a default in the performance by the Seller
and each such Subsidiary or, to the Seller's knowledge, any other party to any
such contracts of their respective obligations thereunder. The Purchaser has
been furnished with true, complete and correct copies of all written contracts
and Section 2.8 of the Seller Disclosure Schedule (including by incorporated
reference) contains summary descriptions of all oral items listed on Section
2.8 of the Seller Disclosure Schedule (including by incorporated reference).
2.9 Title to Property.
Except as set forth in Section 2.9 of the Seller Disclosure Schedule, the
Seller and its Subsidiaries, as applicable, have good and defensible title to
the Purchased Assets, free and clear of all Encumbrances, except
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Permitted Encumbrances; and all leases pursuant to which the Seller or any
Subsidiary leases a Purchased Asset from others are in full force and effect
as of the date of this Agreement in accordance with their respective terms,
and neither the Seller nor any Subsidiary is currently in default under any of
such leases nor, to the Seller's knowledge, is any other party in default
under any of such leases and, to the Seller's knowledge, there is not under
any of such leases any existing event of default (or event which with notice
or lapse of time, or both, would constitute an event of default). Section 2.9
of the Seller Disclosure Schedule identifies each item of tangible personal
property included in the Purchased Assets and specifies the premises of the
Seller or its Subsidiaries on which such item is located.
2.10 Brokers.
Except as set forth in Section 2.10 of the Seller Disclosure Schedule, no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Seller. To
the extent the Seller has agreed to pay any brokerage commission, finder's fee
or similar commission or fee in connection with any of the transactions
contemplated by this Agreement, it will be solely responsible for the payment
of such commission or fee.
2.11 Intellectual Property Rights.
(a) Section 2.11 of the Seller Disclosure Schedule contains summary
information (including where applicable the federal registration number and
the date of registration or application for registration and the name in which
registration was applied for) concerning:
(i) trade secrets, patents, registered copyrights, trademarks, trade
names and service marks, and all currently pending applications for any
thereof relating to the Purchased Assets, owned, licensed or otherwise used
by the Seller and/or any Subsidiary (collectively, "Proprietary Matter");
and
(ii) any licenses or options to obtain rights or licenses granted by the
Seller or any Subsidiary to others covering any Proprietary Matter, other
than implied licenses to customers of the Seller or any Subsidiary for
Proprietary Matter embedded in a Product sold by the Seller or any
Subsidiary to such customers.
(b) Except in each case as set forth on Section 2.11 of the Seller
Disclosure Schedule:
(i) the Seller owns, or has the right to use all the Proprietary Matter
and to sell, license and dispose of, and has the right to bring actions for
the infringement of all owned and exclusively licensed Proprietary Matter,
and such Proprietary Matter constitutes all intellectual property rights
necessary or required for the conduct of the Business, and such rights to
use, sell, license, dispose of and bring actions are exclusive with respect
to Proprietary Matter owned by the Seller;
(ii) there are no royalties, honoraria, fees or other payments payable by
the Seller to any Person by reason of the ownership, use, license, sale or
disposition of the Proprietary Matter;
(iii) no activity, service or procedure currently conducted or proposed
to be conducted by the Seller or any Subsidiary and related to the Business
violates or shall violate any contract, instrument, license, commitment,
lease or similar document of the Seller or any Subsidiary with any third
Person relating to any intellectual property rights, or infringes any trade
secrets, patents, copyrights, trademarks, trade names, or service marks or
other intellectual property rights of any other Person;
(iv) the Seller has taken the steps described on Section 2.11 of the
Seller Disclosure Schedule designed to safeguard and maintain (i) the
secrecy and confidentiality of confidential or proprietary information
related to the Business and (ii) the proprietary rights of the Seller and
each Subsidiary in all of its Proprietary Matter;
(v) in the conduct of the Business, neither the Seller nor any Subsidiary
has infringed upon, misappropriated or otherwise come into conflict with
any intellectual property rights of any Person or committed any acts of
unfair competition, and neither the Seller nor any Subsidiary has received
from any Person in the past five years any notice, charge, complaint, claim
or assertion thereof; and
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(vi) in the conduct of the Business, neither the Seller nor any
Subsidiary has sent to any Person in the past five years, or otherwise
communicated to any Person, any notice, charge, complaint, claim or other
assertion of any present, impending or threatened infringement by or
misappropriation of, or other conflict with, any intellectual property
rights of the Seller or any Subsidiary by such other Person or any acts of
unfair competition by such other Person, nor, to the Knowledge of the
Seller, is any such infringement, misappropriation, conflict or act of
unfair competition occurring or threatened.
2.12 Litigation.
There are no actions, suits or proceedings ("Proceedings") relating to the
Business or the Purchased Assets pending or, to the Seller's knowledge,
threatened in writing against the Seller or any Subsidiary, whether at law or
in equity, whether civil or criminal in nature or before or by any
Governmental Entity, nor is the Seller or any Subsidiary subject to any order,
judgment, writ, injunction or decree relating to the Business or the Purchased
Assets.
2.13 Opinion of Financial Advisor.
The Seller has been advised by its financial advisor, Ewing Monroe Bemiss &
Co., that in its opinion, as of the date hereof, the Sale is fair from a
financial point of view to the holders of shares of the Seller's common stock.
2.14 Accounts and Notes Receivable.
Except as set forth on Section 2.14 of the Seller Disclosure Schedule and
except for allowances for bad debt reflected on the Seller's balance sheet as
of July 3, 1999, all accounts receivable and notes receivable relating to the
Business owing to the Seller or any Subsidiary as of the date hereof
constitute, and all such accounts receivable and notes receivable owing to the
Seller or any Subsidiary as of the Closing shall constitute, valid and
enforceable claims arising from bona fide transactions in the ordinary course
of business, and, to the Seller's knowledge, there are no asserted claims,
refusals to pay or other rights of set-off against any thereof. Section 2.14
of the Seller Disclosure Schedule, sets forth an aging schedule of the
accounts receivable related to the Business.
2.15 Suppliers, Consultants and Vendors.
Except in the ordinary course of business, no material supplier, consultant
or vendor to the Seller or any Subsidiary in connection with the Business has
canceled or otherwise terminated, or, to the Seller's knowledge, threatened in
writing to cancel or otherwise terminate, its relationship with the Seller or
any Subsidiary or has decreased, limited or otherwise modified, or to the
Seller's knowledge, threatened to decrease, limit or otherwise modify, the
services, supplies or materials it provides to the Seller or any Subsidiary.
2.16 Customers.
Except as set forth in Section 2.16 of the Seller Disclosure Schedule, no
customer of the Seller or any Subsidiary in connection with the Business, to
which or whom more than $50,000 of annual sales were made in either of fiscal
years 1999 or 1998, has notified the Seller or any Subsidiary that it intends
to terminate or materially curtail its relationship and dealings with the
Seller or any Subsidiary.
2.17 Conflicts of Interest.
Except as set forth on Schedule 2.17 of the Seller Disclosure Schedule,
neither the Seller or any Subsidiary, nor any officer, employee, agent or
other Person acting on behalf of the Seller or any Subsidiary has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business)
to any customer, supplier, employee or agent of a customer or
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supplier, or official or employee of any Governmental Entity or other Person
who was, is, or may be in a position to help or hinder the Business (or assist
in connection with any actual or proposed transaction) that (a) might subject
the Seller to any damage or penalty in any proceeding, (b) if not given in the
past, would have resulted in a Material Adverse Effect, or (c) if not
continued in the future, could reasonably be expected to result in a Material
Adverse Effect. There is not now, and there has never been, any employment by
the Seller or any Subsidiary of, or beneficial ownership in the Seller or any
Subsidiary by, any governmental or political official in any jurisdiction in
which the Seller or any Subsidiary has conducted or proposes to conduct the
Business.
2.18 Tax Matters.
(a) Except as set forth on Section 2.18 of the Seller Disclosure Schedule,
the Seller and each other Person included in any consolidated or combined Tax
Return and part of an affiliated group, within the meaning of Section 1504 of
the Internal Revenue Code of 1986, as amended (the "Code"), of which the
Seller is a common parent:
(i) has timely paid or caused to be paid all Taxes required to be paid by
it through the date hereof and as of the Closing Date (including any Taxes
shown due on any Tax Return);
(ii) has filed or caused to be filed in a timely and proper manner
(within any applicable extension periods) all Tax Returns required to be
filed by it with the appropriate governmental entities in all jurisdictions
in which such Tax Returns are required to be filed; and
(iii) has not requested or caused to be requested any extension of time
within which to file any Tax Return, which Tax Return has not since been
filed.
(b) The Seller has previously made available to the Purchaser true, correct
and complete copies of all Tax Returns filed by or on behalf of the Seller and
each Subsidiary for all completed Tax years of such Company that remain open
for audit or review by the relevant Taxing authority. All such Tax Returns
were true, complete and correct in all material respects.
(c) Except as set forth in Section 2.18(c) of the Seller Disclosure
Schedule:
(i) the Seller has not been notified by the Internal Revenue Service or
any other taxing authority that any issues have been raised (and no such
issues are currently pending) by the Internal Revenue Service or any other
taxing authority in connection with any Tax Return of the Seller and each
Subsidiary, there are no pending Tax audits and no waivers of statutes of
limitations have been given or requested with respect to the Seller or any
Subsidiary; no Tax Liens have been filed against the Seller or any
Subsidiary and remain undischarged, other than for Taxes not yet due and
payable; and no unresolved deficiencies or additions to Taxes have been
proposed, asserted or assessed against the Seller or any Subsidiary;
(ii) the Seller is not, and has not ever been, a party to any Tax sharing
agreement with any Person;
(iii) the Seller is not a foreign Person within the meaning of Treasury
Regulation Section 1.1445-2(b), and the Purchaser has been furnished with a
true and accurate certificate from the Seller so stating which complies in
all respects Treasury Regulation with Section 1.1445-2(b)(2).
2.19 FDA and Certain Other Compliances.
(a) Except as set forth on Section 2.19 of the Seller Disclosure Schedule,
the Seller and each Subsidiary is in substantial compliance, in all material
respects, with all Laws administered or issued by the United States Food and
Drug Administration (the "FDA") and any other Governmental Entities in foreign
jurisdictions performing functions similar to those performed by the FDA. All
Products, where required by Laws applicable thereto, are being manufactured
and marketed under a valid Section 510(k) clearance letter or PMA issued by
the FDA and Section 2.19 of the Seller Disclosure Schedule lists each such
510(k) clearance letter and PMA and includes a copy thereof. Such Section also
lists those of the Products which are being marketed without a valid Section
510(k) clearance letter or PMA issued by the FDA, whether or not required by
the FDA, and sets forth the reason why each such Product is being marketed
without such clearance or approval.
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(b) Except as set forth on Section 2.19 of the Seller Disclosure Schedule:
(i) no false information or significant omission has been made in any
products application or products-related submission to the FDA or any other
Governmental Entity, or otherwise relating to any of the Products by or on
behalf of the Seller and each Subsidiary.
(ii) any PMA or 510(k) documents and related documents for each of the
Products of the Seller and each Subsidiary are in compliance, in all
material respects, with applicable Laws administered or promulgated by the
FDA and there is no reason to believe that the FDA is considering limiting,
suspending, or revoking such approvals/clearances or changing the marketing
classification or labeling of any such Products.
(iii) all preclinical and clinical studies, if any, have been conducted
by the Seller in accordance with recognized good clinical and good
laboratory practices in all material respects, and are in compliance with
applicable Laws administered or promulgated by the FDA or any other
Governmental Entity regarding preclinical and clinical studies; and
(iv) the Seller has obtained all regulatory approvals from any
Governmental Entities required for the Products that are necessary to the
Seller's and the Subsidiaries' conduct of the Business.
(c) (i) Section 2.19 of the Seller Disclosure Schedule sets forth an
accurate list of written information regarding internal audits concerning
whether the Seller and the Subsidiaries comply with current good manufacturing
practices including FDA Quality Systems Regulations ("QSR") and ISO 9001
standards ("CGMP") and all written reports or written information regarding
CGMP audits conducted for the Seller or any Subsidiary by an outside auditor.
(ii) The Seller and each Subsidiary is in substantial compliance with the
QSR and any other applicable CGMP regulations of each Governmental Entity
including, the inspection of incoming components and in process product
equipment validation and maintenance, complaint file requirements, process
validation, document retention, change controls, and master file and device
history file documentation.
(iii) The Seller has signed up-to-date written policies that reflect its
actual CGMP procedures.
(iv) The Seller has, in a timely manner, filed all required medical
device reports ("MDRs") for deaths, serious injuries, and reportable
malfunctions. A list of such reports and the Seller's written policy
regarding MDR reporting is attached as part of Section 2.19 of the
Schedule.
(v) The Seller has no knowledge of any acts that furnish a reasonable
basis for a Warning Letter, Section 305 Notice, or other similar
communications from the FDA or any other Governmental Entity, and there
have been no recalls, field notifications, safety alerts (whether voluntary
or otherwise) or seizures requested or threatened, related to the Seller's
Products.
(vi) The Seller has established a Corporate Compliance Program which is
described as part of Section 2.19 of the Schedule.
(d) Section 2.19 of the Seller Disclosure Schedule sets forth each
foreign jurisdiction in which the Seller or any Subsidiary is directly or
indirectly marketing or selling Products.
2.20 Insurance.
Section 2.20 of the Seller Disclosure Schedule contains a true and complete
list of all policies of liability, theft, fidelity, life, fire, product
liability, workmen's compensation, health and other forms of insurance held by
the Seller and any Subsidiary (specifying the insurer, amount of coverage,
type of insurance, policy number and any pending claims thereunder).
2.21 Environmental Matters.
(a) Neither the Seller nor any Subsidiary nor, to the Seller's knowledge,
any of their past property or operations, is subject to or the subject of, any
Proceeding, Order, settlement, or other Contract arising under any
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Environmental, Health and Safety Laws, nor, to the Seller's knowledge, has any
investigation been commenced or is any Proceeding threatened against the
Seller or any Subsidiary under any Environmental, Health and Safety Laws with
regard to the Business or the Purchased Assets.
(b) Except as set forth on Section 2.21 of the Seller Disclosure Schedule,
neither the Seller nor any Subsidiary has received any written or oral notice,
report or other information that it is potentially responsible under any
Environmental, Health and Safety Laws for response costs or natural resource
damages, as those terms are defined under the Environmental, Health and Safety
Laws, at any location and, to the Seller's knowledge, neither the Seller nor
any Subsidiary has transported or disposed of, or allowed or arranged for any
third Person to transport to or dispose of, any Hazardous Materials at any
location included on the National Priorities List, as defined under CERCLA, or
any location proposed for inclusion on that List, or any location included on
the CERCLIS database prepared under CERCLA or on any analogous list prepared
by any Governmental Entity.
2.22 Sufficiency of Assets.
The sale of the Purchased Assets by the Seller to the Purchaser pursuant to
this Agreement will effectively convey to, or provide the license to (in the
case of the "BEI" trademark), the Purchaser the entire Business of, and all of
the tangible and intangible property used in the conduct of the Business by
the Seller and the Subsidiaries (whether owned, leased or held under license
by the Seller or by the Subsidiaries) and necessary or desirable to, the
conduct of the Business as conducted by the Seller and the Subsidiaries;
provided, however, that the Seller believes that all of the contracts listed
on Section 2.8 of the Seller Disclosure Schedule are necessary or desirable to
the conduct of the Business, but the Purchaser has elected to include in the
Assumed Contracts only those contracts listed on Annex C to Schedule 1.1 of
this Agreement.
2.23 Disclosure.
This Agreement, including the Seller Disclosure Schedule, attachments or
Exhibits hereto, does not contain any untrue statement of a material fact or
omit a material fact necessary to make the statements contained herein or
therein, taken as a whole, in light of the circumstances in which they were
made, not misleading.
Section 3. Representations And Warranties Of The Purchaser.
The Purchaser represents and warrants, to and for the benefit of the Seller,
as follows:
3.1 Due Organization.
The Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Purchaser is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary.
3.2 Authority; Binding Nature Of Agreements.
The Purchaser has all necessary corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each Related
Document to which it is or will be a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and each Related Document to which it is or will be a party by the Purchaser
and the consummation by the Purchaser of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary corporate
action on the part of the Purchaser, and no other corporate proceedings on the
part of the Purchaser are necessary to authorize this Agreement and each
Related Document to which it is or will be a party or to consummate the
transactions so contemplated hereby and thereby. As of the date hereof, the
Board of Directors of the Purchaser has approved the Sale. This Agreement and
each Related Document to which it is or will be a
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party has been, or upon the Purchaser's execution thereof will be, duly and
validly executed and delivered by the Purchaser. Assuming the due
authorization, execution and delivery by the Seller and each Subsidiary party
thereto, each of this Agreement and each Related Document to which it is or
will be a party constitutes a legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its terms,
except as such enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally, and except as the availability of
equitable remedies may be limited by the application of general principles of
equity (regardless of whether such equitable principles are applied in a
proceeding at law or in equity).
3.3 Non-Contravention; Consents.
(a) The execution and delivery of this Agreement and each Related Document
to which it is or will be a party by the Purchaser does not, and the
performance of this Agreement and each Related Document to which it is or will
be a party by the Purchaser, and the transactions contemplated hereby and
thereby, will not,
(i) conflict with or violate (with or without notice or lapse of time or
both) the Certificate of Incorporation or By-Laws of the Purchaser,
(ii) conflict with or violate (with or without notice or lapse of time or
both) any Law applicable to the Purchaser or by which its properties are
bound or affected, or
(iii) result in any violation or breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or impair the Purchaser's rights or alter the rights or obligations
of any third party under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the properties or assets of the Purchaser
pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which the Purchaser is a party or by which the Purchaser or any of its
properties is bound or affected.
(b) The execution and delivery of this Agreement and each Related Document
to which it is or will be a party by the Purchaser does not, and the
performance of this Agreement and each Related Document to which it is or will
be a party by the Purchaser will not, require the Purchaser to obtain any
consent, approval, authorization or permit of, or to file with or notify, any
Governmental Entity.
3.4 Brokers.
To the extent that the Purchaser has agreed to pay any brokerage commission,
finder's fee or similar commission or fee in connection with any of the
transactions contemplated by this Agreement, it will be solely responsible for
the payment of such commission or fee.
Section 4. Pre-closing Covenants
4.1 Access And Investigation
The Seller shall ensure that, during normal business hours during the period
between the date hereof and the Closing Date or the date of termination of
this Agreement pursuant to Section 8 (the "Pre-Closing Period"), the Seller
and its Representatives provide the Purchaser and its Representatives with
reasonable access to the Seller's Representatives, the Seller's vendors (but
not its customers except as provided below), the Purchased Assets and to the
Seller's locations where the Business is conducted, and to all existing books,
records, tax returns, work papers and other documents and information relating
to the Purchased Assets and the Business; provided, however, that (a) the
Purchaser shall not contact, and the Purchaser shall ensure that none of its
Representatives contacts, any Representative of the Seller or any vendor
without the prior authorization of Richard Turner, President and Chief
Executive Officer of the Seller, or Thomas W. Fry, Vice President, Finance and
Administration of the Seller, and (b) the Purchaser shall take reasonable
precautions to ensure that neither it nor any of its Representatives
interferes with or otherwise disrupts the business or operations of the Seller
while
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exercising rights provided under this Section 4.1. The Purchaser shall hold,
and will cause its Representatives to hold, any and all information received
from the Seller or its Representatives, in confidence, in accordance with the
Confidential Disclosure Agreement dated June 21, 1999. Neither Mr. Fry nor Mr.
Turner shall unreasonably withhold consent to the Purchaser's request for any
such contact. Contacts by the Purchaser with vendors and suppliers shall be
made jointly with the Seller by telephone or other means determined by the
Purchaser. Notwithstanding the foregoing, (x) if the Purchaser requests
Richard Turner or Thomas Fry to authorize the Purchaser to contact any
Representative or vendor of the Seller and the Purchaser does not receive a
response within two business days from the date the request was made, then the
Seller shall be deemed to have consented to the contact requested and (y)
without consent of Mr. Fry or Mr. Turner, the Purchaser may contact during
business hours pursuant to this Section 4.1 the following Persons: SurgiTech,
Inc. and Bates, Fujinon, Inc., PENTAX Precision Instrument Corporation and
ERBE USA, Inc., and Larry Doll, Anthony Manna and Paul Dube, the Seller's MIS
Manager. Contacts to the foregoing customers and suppliers shall be made
jointly with the Seller by telephone or other means determined by the
Purchaser. If the Purchaser, based on such investigations and contacts after
the date of this Agreement with Fujinon, Inc., PENTAX Precision Instrument
Corporation and ERBE USA, Inc., customers of the Seller, reasonably believes
that one or more of such customers do not intend after the Closing to continue
to buy Products from the Purchaser, then, for purposes of calculating the
Sales Shortfall, the sales of Products to such customer or customers shall not
be counted. If within 12 months of the Closing any such customer for which
sales were excluded from the calculation of the Sales Shortfall pursuant to
the preceding sentence buys any Products from the Purchaser, then the
Purchaser shall pay to the Seller by wire transfer of immediately available
funds an amount equal to the amount by which the Purchase Price was reduced as
a result of the exclusion from the Sales Shortfall calculation of sales to
such customer.
4.2 Operation of Business
The Seller shall ensure that during the Pre-Closing Period:
(a) the Seller and each Subsidiary conducts its respective operations as
they relate to the Purchased Assets and the Business in the ordinary course of
business and consistent with the manner such operations have been conducted
prior to the date of this Agreement;
(b) with respect to the Purchased Assets and the Business, the Seller and
its Subsidiaries use commercially reasonable efforts to (i) preserve intact
its current business organization, (ii) keep available the services of its
current officers and employees, (iii) maintain its relations and good will
with its and each Subsidiary's suppliers, customers, landlords, creditors,
licensors, licensees, employees, independent contractors and other Persons
having business relationships with the Seller and its Subsidiaries, and (iv)
repair, restore or replace any Purchased Assets that are destroyed or damaged;
(c) neither the Seller nor any Subsidiary enters into or permits any of the
Purchased Assets to become bound by any contract relating to the Purchased
Assets except in the ordinary course of business consistent with past
practice;
(d) neither the Seller nor any Subsidiary sells or otherwise disposes of, or
permits any Encumbrance, other than a Permitted Encumbrance, to be imposed
upon, any Proprietary Matter or any other Purchased Asset;
(e) neither the Seller nor any Subsidiary enters into any transaction or
takes any other action that might reasonably be expected to cause or
constitute a breach of any representation or warranty made by the Seller in
this Agreement or a Related Document;
(f) neither the Seller nor any Subsidiary pays accounts payable or collects
accounts receivable related to the Business, other than in the ordinary course
of business consistent with past practice and does not delay or postpone the
payment of such accounts payable and other Liabilities related to the Business
or accelerate the collection of such accounts receivable;
(g) neither the Seller nor any Subsidiary shall change its pricing or
commission policies or sales incentive programs involving the Business without
the prior written consent of the Purchaser;
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(h) neither the Seller nor any Subsidiary shall change its practices or
policies with respect to the ordering or shipping of Products; and
(i) neither the Seller nor any Subsidiary agrees, commits or offers (in
writing or otherwise) to take any of the actions described in clauses "(a)"
through "(h)" of this Section 4.2.
4.3 Filings and Consents.
Each of the Seller and the Purchaser shall ensure that: (a) all filings,
notices and Consents required to be made, given and obtained by it in order to
consummate the Sale are made, given and obtained on a timely basis; and (b)
during the Pre-Closing Period, all documents required to be available and all
actions required to be taken in connection with any filing, notice or Consent
that the Purchaser or the Seller is required to make, give or obtain are made
available or taken.
4.4 Notification of Certain Changes; Supplements to Schedules.
(a) The Seller shall give prompt notice to the Purchaser, and the Purchaser
shall give prompt notice to the Seller, of (i) the occurrence or nonoccurrence
of any event the occurrence or nonoccurrence of which would be likely to cause
any representation or warranty contained in this Agreement or any Related
Document to be materially untrue or inaccurate such that the conditions set
forth in Sections 5.1 or 6.1 would not be satisfied as a result, or (ii) any
failure of the Seller or the Purchaser, as the case may be, materially to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder such that the conditions set forth in
Sections 5.2 or 6.2 would not be satisfied as a result; provided, however,
that the delivery of any notice pursuant to this Section 4.4 shall not limit
or otherwise affect the remedies available hereunder to the party receiving
such notice.
(b) From time to time prior to the Closing, the Seller will supplement or
amend with reasonable frequency the information contained in the Schedules
hereto with respect to any matter hereafter arising, which, if existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in any Schedule hereto. Any supplement or amendment
delivered pursuant to this Section 4.4(b) shall in no event be the basis for
any claim that any representation or warranty is inaccurate or has been
breached for purposes of Section 5.1 or Section 7; provided, however, if the
matters described by any such supplement or amendment constitute a Material
Adverse Effect, the Purchaser shall not be obligated, pursuant to Section 5.1,
to purchase the Purchased Assets and may terminate this Agreement pursuant to
Section 8.1(f).
4.5 Public Announcements.
The Purchaser and the Seller will consult with each other before issuing
and, to the extent reasonably practicable, give each other the opportunity to
review and comment upon, any press release or other public statements with
respect to the transactions contemplated by this Agreement or any Related
Document and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
Law, court process or by obligations pursuant to any listing agreement with
any national securities exchange or national securities quotation system. The
initial press release to be issued with respect to the Sale shall be in the
form heretofore agreed to by the parties.
4.6 Reasonable Efforts.
(a) During the Pre-Closing Period, the Seller shall use its commercially
reasonable efforts to cause the conditions set forth in Section 5 to be
satisfied. The Purchaser shall, at the Seller's request, make its personnel
available to talk and provide information to parties to the Assumed Contracts
in connection with seeking from such parties the consents, certificates and
approvals provided for in Section 5.7 of this Agreement.
(b) During the Pre-Closing Period, the Purchaser shall use its commercially
reasonable efforts to cause the conditions set forth in Section 6 to be
satisfied.
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4.7 Exchange Proceeds.
If during the Pre-Closing Period the Seller or any Subsidiary receives any
proceeds in consideration for the exchange of any of its assets that
constitute Purchased Assets, whether from the sale of any such Purchased
Assets (other than sales of inventory in the ordinary course of business
consistent with past practice) and from insurance proceeds payable on account
of any loss or casualty to such Purchased Assets, any proceeds from the taking
of such Purchased Assets pursuant to the power of eminent domain, or any other
proceeds from whatever source relating to the disposition of such Purchased
Assets (the "Exchange Proceeds"), the Seller shall promptly notify the
Purchaser of such receipt of Exchange Proceeds and shall consult with the
Purchaser with respect to the application of any such Exchange Proceeds.
4.8 Allocation of Purchase Price.
The Purchase Price shall be allocated to the Purchased Assets in accordance
with the allocation set forth in Exhibit C (the "Statement of Allocation"). At
the Closing, the Seller shall:
(a) complete and execute a Form 8594 Asset Acquisition Statement Under
Section 1060 of the Code, consistent with the Statement of Allocation; and
(b) deliver a copy of such form to the Purchaser; and
file a copy of such form with its respective tax returns, as the case may, for
the period which includes the Closing Date.
4.9 Exclusivity.
(a) The Seller acknowledges that substantial time of the Purchaser and
substantial out-of-pocket expenses (including attorneys' and accountants' fees
and expenses) have been and will continue to be expended and incurred in
connection with conducting legal, business and financial due diligence
investigations of the Business, drafting and negotiating this Agreement and
the Related Documents and other related expenses (collectively, "Acquisition
Expenses"). Until the Closing Date (unless this Agreement is sooner
terminated), the Seller shall not, and shall use its best efforts to not
permit any of the Representatives of the Seller or any Subsidiary to:
(i) unless following consultation with outside legal counsel, the Seller's
Board of Directors determines in good faith that it is required to do so in
order to discharge properly its fiduciary duties, enter into any written or
oral agreement or understanding with any Person (other than the Purchaser)
regarding Another Transaction (as defined below); (ii) unless following
consultation with outside legal counsel, the Seller's Board of Directors
determines in good faith that it is required to do so in order to discharge
properly its fiduciary duties, enter into or continue any negotiations or
discussions with any Person (other than the Purchaser) regarding the
possibility of Another Transaction; or (iii) unless following consultation
with outside legal counsel, the Seller's Board of Directors determines in good
faith that it is required to do so in order to discharge properly its
fiduciary duties, provide any non-public financial or other confidential or
proprietary information regarding the Business or the Purchased Assets
(including this Agreement and any other materials containing the Purchaser's
proposed terms and any other financial information, projections or proposals
regarding the Business or the Purchased Assets) to any Person (other than to
the Purchaser or its Representatives) who the Seller knows, or has reason to
believe, would have any interest in participating in Another Transaction.
Nothing contained in this Section 4.9 shall prevent the Seller's Board of
Directors from taking and disclosing to its stockholders a position with
regard to a tender offer or exchange offer contemplated by Rules 14d-9 and
14e-2(a) promulgated under the Securities Exchange Act of 1934, as amended,
and making such disclosure to the stockholders as may be required under
applicable Law; provided, that the Board of Directors shall not recommend that
such stockholders tender their shares of Seller common stock in connection
with such tender or exchange offer unless the Board of Directors determines in
good faith, after consultation with outside legal counsel, that making such
recommendation is required in order to discharge properly its fiduciary
duties. As used herein, the term "Another Transaction" means (A) the sale of
the Business or any of the Purchased Assets, other than the sale of
inventories in the ordinary course consistent with past practice, or (B) the
sale (whether by sale of stock, merger, consolidation or
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otherwise) of more than 50% of the voting securities of the Seller. The Seller
represents that it is not a party to, or bound by, any agreement with respect
to Another Transaction other than this Agreement.
(b) The Seller shall disclose to the Purchaser the terms of Another
Transaction that the Seller negotiates or discusses, as permitted under this
Section 4.9, with any Person other than the Purchaser (including the identity
of such Person).
(c) Each party recognizes and acknowledges that a breach of this Section 4.9
will cause irreparable and material loss and damage for the Purchaser, which
cannot be adequately compensated for in damages by an action at law.
Therefore, the Seller agrees that the Purchaser shall be entitled, in addition
to any other remedies and damages available, to the equitable remedies of
injunction and specific performance with respect to the Seller's obligations
hereunder.
4.10 Special Payment to Purchaser Based Upon Another Transaction.
In the event that the Seller's Board of Directors determines in good faith,
after consultation with outside legal counsel, that it is required, in order
to discharge properly its fiduciary duties, to consider the unsolicited offer
of a Person (other than the Purchaser or any of its affiliates or
Representatives) to enter into Another Transaction, the Seller may terminate
this Agreement pursuant to Section 8 under circumstances not involving a
breach by the Seller of the provisions of this Agreement solely for the
purpose of entering into Another Transaction with such person. At the time and
as a condition to such termination by the Seller of this Agreement, the Seller
shall pay $300,000 to the Purchaser and, conditioned upon there not having
been a breach by the Seller of the provisions of this Agreement including
without limitation the provisions of Section 4.9, such payments shall fully
satisfy the Seller's obligations to the Purchaser under this Agreement.
4.11 Stockholders' Meeting.
On or before November 22, 1999, the Seller shall have caused to be convened
a meeting of the Seller's stockholders (in compliance in all respects with
provisions of applicable corporate law and the Certificate of Incorporation
and By-laws of the Seller) at which meeting the stockholders shall consider
whether to approve the Sale and authorize the Seller to execute this Agreement
and the Related Documents and to consummate the transactions contemplated
hereby and thereby. The Seller shall deliver to the Purchaser for review
drafts and final versions of proxy material to be distributed to the Seller's
stockholders in connection with such meeting.
4.12 Subsidiary Approval.
Immediately upon approval of the Sale by the Seller's stockholders, the
Seller shall cause the Boards of Directors of each Subsidiary to approve and
the Seller or any applicable Subsidiary, as sole stockholder, of each
Subsidiary, shall approve the Sale and the consummation of the transactions
contemplated by this Agreement and each Related Document.
4.13 Insurance.
The Seller shall, at its election, obtain by the Closing Date extended
reporting period coverage for its Product Liability Policy and Umbrella Policy
set forth in Section 2.20 of the Seller Disclosure Schedule or keep in effect
the coverage currently provided under such policies so that the Seller, and
the Purchaser as an additional insured, will be entitled to make and collect
for a period of three years after the Closing claims which arise out of events
involving the Seller or any Subsidiary that occurred, or products that were
sold or services that were performed by the Seller or any Subsidiary, prior to
the Closing and that are covered by such insurance policies.
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Section 5. Conditions Precedent to The Purchaser's Obligation To Close.
The Purchaser's obligation to purchase the Purchased Assets and to take the
other actions required to be taken by the Purchaser at the Closing is subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Purchaser, in whole or in part,
in writing):
5.1 Accuracy Of Representations.
The representations and warranties of the Seller contained in this Agreement
and the Related Documents (without giving effect to any qualification
contained therein as to materiality, including, without limitation, the
phrases "material," "in all material respects" and "Material Adverse Effect"),
shall be true and correct in all respects on and as of the Closing Date,
except (i) for changes contemplated by this Agreement, (ii) for those
representations and warranties which address matters only as of a particular
date (which shall have been true and correct as of such date) and (iii) where
the failure or failures of such representations and warranties to be so true
and correct, individually or in the aggregate, has not resulted in a Material
Adverse Effect.
5.2 Performance Of Obligations.
The Seller shall have performed or complied in all material respects with
all agreements and covenants required by this Agreement and the Related
Documents to be performed or complied with by it on or prior to the Closing
Date, except where the failure to perform or comply with such agreements and
covenants has not resulted in or would not reasonably be expected to result in
a Material Adverse Effect.
5.3 No Proceedings.
There shall not have been commenced and be pending against the Purchaser any
Proceeding (a) involving any material challenge to, or seeking material
damages or other material relief in connection with, the Sale or (b) that is
reasonably likely to have the effect of preventing, delaying, making illegal
or otherwise interfering with the Sale.
5.4 No Prohibition.
No temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Sale shall be in effect; and
there shall not be any action taken, or any Law enacted, entered or enforced
which makes the consummation of the Sale illegal.
5.5 Stockholder and Board of Directors Approval.
This Agreement and the Sale shall have been approved by the requisite vote
of the stockholders of the Seller and by its Board of Directors.
5.6 Opinion of the Seller's Counsel.
The Purchaser shall have received an opinion of Cooley Godward LLP, counsel
for the Seller, dated the Closing Date and covering the matters set forth on
Exhibit D attached hereto.
5.7 Consents and Approvals.
The Purchaser shall have received duly executed copies of (i) all consents,
certificates and approvals required for or in connection with the execution
and delivery by the Seller and each Subsidiary of this Agreement and each
Related Document to which it is a party and the consummation of the
transactions contemplated hereby and thereby, (ii) consents to or notices of,
as appropriate, the assignment to the Purchaser of all the Assumed Contracts
identified on Annex C to Schedule 1.1 hereto from or to each party to such
contracts other than the Seller and (iii) consents and waivers set forth on
Schedule 5.7 hereto.
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5.8 Related Documents.
Each of the documents set forth below (each, a "Related Document," and
collectively, the "Related Documents") shall have been executed and delivered
by the parties thereto:
(i) Transition Agreement. The Seller shall have executed and delivered a
transition agreement with the Purchaser substantially in the form of
Exhibit E attached hereto (the "Transition Agreement").
(ii) Non-Competition Agreements. The Seller and Richard W. Turner shall
each have executed and delivered a non-competition agreement with the
Purchaser, substantially in the form of Exhibit F and Exhibit G,
respectively, attached hereto (the "Non-Competition Agreements").
(iii) Bill of Sale, Assignment and Assumption Agreement. The Seller and
each Subsidiary shall have executed and delivered the Bill of Sale.
5.9 Seller Certificates.
Each of the following certificates shall have been executed and/or
delivered, as the case may be, by the Person who or which is the subject
thereof:
(i) a certificate of the secretary of the Seller, dated as of the Closing
Date, certifying (i) that true and complete copies of the Seller's
Certificate of Incorporation and By-Laws as in effect on the Closing Date
are attached thereto, (ii) as to the incumbency and genuineness of the
signatures of each officer of the Seller executing this Agreement and the
Related Documents on behalf of the Seller; and (iii) the genuineness of the
resolutions (attached thereto) of the board of directors or similar
governing body of the Seller authorizing the execution, delivery and
performance of this Agreement and the Related Documents to which the Seller
is a party and the consummation of the transactions contemplated hereby and
thereby;
(ii) certificates dated as of the Closing Date of the secretaries of
state of the states in which the Seller and each Subsidiary is organized
and qualified to do business, certifying as to the good standing and non-
delinquent tax status of the Seller and each Subsidiary;
(iii) a certificate signed by an officer of the Seller and each
Subsidiary, dated as of the Closing Date, and certifying as to (A) the
accuracy of the representations and warranties of the Seller contained
herein, as contemplated by Section 5.1, and (B) the performance of the
covenants of the Company contained herein, as contemplated in Section 5.2;
and
(iv) a certificate of a principal executive officer of the Seller, dated
as of the Closing Date, certifying that such company is not a foreign
person within the meaning of Section 1445 of the Code.
5.10 Release of Encumbrance.
The Purchaser shall have received from the Seller (i) evidence that the
Seller's lender, Transamerica Business Credit Corporation, has consented to
the Sale and released its Encumbrance on the Purchased Assets and (ii) a
waiver from BEI Technologies, Inc. of any obligation the Seller may have under
the provisions of Section V(A) of the Assumption of Liabilities and Indemnity
Agreement by and between BEI Technologies, Inc. and BEI Electronics, Inc. (the
Seller's predecessor) to cause the Purchaser to assume the Seller's
indemnification obligations under such agreement in the case of a sale of the
properties and assets of the Seller substantially as an entirety.
5.11 Integrated Video Systems.
The Purchaser shall have received from the Seller an irrevocable purchase
order to purchase from the Purchaser 24 Integrated Video Systems at a price
equal to the Seller's standard costs at which such Systems were valued under
Section 1.10. Such Systems shall be delivered by the Purchaser to the Seller
at a rate of 2 systems per month for 12 months, commencing in the month in
which the Closing occurs.
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Section 6. Conditions Precedent To The Seller's Obligation To Close.
The Seller's obligation to sell the Purchased Assets and to take the other
actions required to be taken by the Seller at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by the Seller, in whole or in part, in writing):
6.1 Accuracy Of Representations.
The representations and warranties of the Purchaser contained in this
Agreement and the Related Documents (without giving effect to any
qualification contained therein as to materiality, including, without
limitation, the phrases "material," "in all material respects," and "Material
Adverse Effect"), shall be true and correct in all respects on and as of the
Closing Date, except (i) for changes contemplated by this Agreement, (ii) for
those representations and warranties which address matters only as of a
particular date (which shall have been true and correct as of such date) and
(iii) where the failure or failures of such representatives and warranties to
be so true and correct, individually or in the aggregate, has not resulted in
a material adverse effect on the business or financial condition of the
consolidated group of the Purchaser, taken as a whole.
6.2 Performance Of Obligations.
The Purchaser shall have performed or complied in all material respects with
all agreements and covenants required by this Agreement and the Related
Documents to be performed or complied with by it on or prior to the Closing
Date, except where the failure to perform or comply with such agreements and
covenants has not resulted in or would not reasonably be expected to result in
a material adverse effect on the business or financial condition of the
consolidated group of the Purchaser, taken as a whole.
6.3 No Proceedings.
There shall not have been commenced and be pending against the Seller any
Proceeding (a) involving any material challenge to, or seeking material
damages or other material relief in connection with, the Sale or (b) that is
reasonably likely to have the effect of preventing, delaying, making illegal
or otherwise interfering with the Sale.
6.4 No Prohibition.
No temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Sale shall be in effect; and
there shall not be any action taken, or any Law enacted, entered or enforced
which makes the consummation of the Sale illegal.
6.5 Stockholder Approval.
This Agreement and the Sale shall have been approved by the requisite vote
of the stockholders of the Seller.
6.6 Opinion of the Purchaser's Counsel.
The Seller shall have received an opinion of O'Sullivan Graev & Karabell,
LLP, counsel for the Purchaser, dated the Closing Date and covering the
matters set forth on Exhibit H attached hereto.
6.7 Consents and Approvals.
The Seller shall have received duly executed copies of all consents and
approvals required for or in connection with the execution and delivery by the
Seller and each Subsidiary of this Agreement and each of the Related Documents
to which each of them is a party and the consummation of the transactions
contemplated hereby and thereby, in form and substance reasonably satisfactory
to the Seller and its counsel.
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6.8 Related Documents.
Each of the Related Documents to which the Purchaser is a party shall have
been executed and/or delivered by the Purchaser and the transactions
contemplated thereby to be completed at or prior to the Closing shall have
been substantially consummated or effected, as the case may be, in accordance
with the terms thereof.
6.9 Purchaser's Certificates.
Each of the following certificates shall have been executed and/or
delivered, as the case may be, by the Person who or which is the subject
thereof:
(i) a certificate of the secretary of the Purchaser, dated as of the
Closing Date, certifying (i) that true and complete copies of the
Purchaser's Certificate of Incorporation and By-Laws as in effect on the
Closing Date are attached thereto, (ii) as to the incumbency and
genuineness of the signatures of each officer of the Purchaser executing
this Agreement and the Related Documents on behalf of the Purchaser; and
(iii) the genuineness of the resolutions (attached thereto) of the board of
directors or similar governing body of the Purchaser authorizing the
execution, delivery and performance of this Agreement and the Related
Documents to which the Purchaser is a party and the consummation of the
transactions contemplated hereby and thereby;
(ii) certificates dated as of the Closing Date of the secretaries of
state of the states in which the Purchaser is organized and qualified to do
business, certifying as to the good standing and non-delinquent tax status
of the Purchaser; and
(iii) a certificate signed by an officer of the Purchaser, dated as of
the Closing Date, and certifying as to (A) the accuracy of the
representations and warranties of the Purchaser contained herein, as
contemplated by Section 6.1, and (B) the performance of the covenants of
the Company contained herein, as contemplated in Section 6.2.
6.10 Termination of Royalty Obligation.
The royalty obligations of the Seller to the Purchaser pursuant to the
Settlement Agreement by and between CooperSurgical, Inc., a Delaware
corporation, Richard W. Turner, an individual, the Seller, Meditron Devices,
Inc., a Delaware corporation, XYLOG Corporation, a New Jersey corporation,
Zinnanti Surgical Instruments, Inc., a California corporation, and Donald L.
Tuttle, an individual, dated as of July 9, 1998, shall have been terminated.
Section 7. Indemnification.
7.1 Generally.
(a) The Seller shall indemnify the Purchaser Indemnified Persons for, and
hold each of them harmless from and against, any and all Purchaser Losses to
the extent incurred or suffered by any Purchaser Indemnified Persons as a
result of or based upon the following:
(i) the inaccuracy or breach of any representation or warranty of the
Seller or any Subsidiary contained in this Agreement or any Related
Document or in any certificate delivered by the Seller or any Subsidiary in
connection herewith or therewith at or before the Closing (or any facts or
circumstances constituting any such inaccuracy or breach);
(ii) the breach of any agreement or covenant of the Seller or any
Subsidiary contained in this Agreement or any Related Document;
(iii) the Excluded Assets;
(iv) the Excluded Liabilities;
(v) notwithstanding the disclosure of any such Liability in this
Agreement, on any Schedule, or otherwise, all Liabilities (contingent or
otherwise and including Liability for response costs, personal injury,
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property damage or natural resource damage), other than the Assumed
Liabilities, which arise out of events involving the Seller or any
Subsidiary that occurred, or products sold or services performed by the
Seller or any Subsidiary prior to the Closing (notwithstanding that the
date on which such Liability arose or became manifest is after the
Closing), including the assertion of any claim, demand or Liability against
the Purchaser arising from or in connection with (x) any action or inaction
of the Seller or any of its stockholders in connection with the action of
any such stockholders required to approve the Sale, (y) the assertion
against the Purchaser by any such stockholder of any claim with respect to
any actions or the transactions of or involving the Seller prior to or at
Closing (including the actions and transactions contemplated by this
Agreement), or (z) Environmental, Health and Safety Laws, including those
relating to the handling, treatment, storage, disposal, release or
threatened release of Hazardous Substances at, onto or from any real
property, or any offsite waste treatment or storage disposal facility
associated with the Business, except for any such Liabilities the facts or
circumstances underlying which are caused solely by the operation of the
Business after the Closing Date.
(vi) non-compliance by the Seller with any applicable "bulk sales laws";
and
(vii) any and all Special Tax Losses.
(b) The Purchaser shall indemnify the Seller Indemnified Persons for, and
hold each of them harmless from and against, any and all Seller Losses to the
extent arising from or in connection with any of the following:
(i) the inaccuracy or breach of any representation or warranty of the
Purchaser contained in this Agreement or any Related Document or any
certificate delivered by the Purchaser in connection herewith or therewith
at or before the Closing (or any facts or circumstances constituting any
such inaccuracy or breach);
(ii) the breach of any agreement or covenant of the Purchaser contained
in this Agreement or any Related Document;
(iii) any Seller Losses arising from the Purchaser's ownership and
operation of the Purchased Assets from and after the Closing Date (but
excluding any Seller Losses as a result of any transaction between the
Purchaser and the Seller after the Closing Date not contemplated by this
Agreement); and
(iv) the Assumed Liabilities.
7.2 Assertion of Claims.
No claim shall be brought under Section 7.1 hereof unless the Indemnified
Persons, or any of them, give the Indemnifying Persons (a) written notice
prior to the applicable Survival Date of the existence of any such claim,
specifying the nature and basis of such claim and the amount thereof, to the
extent known or (b) written notice prior to such Survival Date pursuant to
Section 7.3 of any Third Party Claim, the existence of which might give rise
to such a claim. Upon the giving of such written notice as aforesaid, the
Indemnified Persons, or any of them, shall have the right to thereafter
commence legal proceedings for the enforcement of their rights under Section
7.1.
7.3 Notice and Defense of Third Party Claims.
The Liabilities of an Indemnifying Person with respect to Losses resulting
from the assertion of any Liability by third parties (each, a "Third Party
Claim") shall be subject to the terms and conditions set forth below.
(a) The Indemnified Persons shall promptly give written notice (and in any
event prior to any applicable Survival Date) to the Indemnifying Persons of
any Third Party Claim which might give rise to any Loss by the Indemnified
Persons, stating the nature and basis of such Third Party Claim, and the
amount thereof to the extent known; provided, however, that no delay on the
part of the Indemnified Persons in notifying any Indemnifying Persons shall
relieve the Indemnifying Persons from any Liability hereunder unless (and then
solely to the extent that) the Indemnifying Person thereby is prejudiced by
the delay. Such notice shall be accompanied by copies of
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all relevant documentation with respect to such Third Party Claim, including
any summons, complaint or other pleading which may have been served, any
written demand or any other document or instrument.
(b) If the Indemnifying Persons shall acknowledge in a writing delivered to
the Indemnified Persons that such Third Party Claim is properly subject to
their indemnification obligations hereunder, then the Indemnifying Persons
shall have the right to assume the defense of any Third Party Claim at their
own expense and by their own counsel, which counsel shall be reasonably
satisfactory to the Indemnified Persons; provided, however, that the
Indemnifying Persons shall not have the right to assume the defense of any
Third Party Claim, notwithstanding the giving of such written acknowledgment,
if (i) the Indemnified Persons shall have been advised by counsel that there
are one or more legal or equitable defenses available to them which are
different from or in addition to those available to the Indemnifying Persons,
and, in the reasonable opinion of the Indemnified Persons, counsel for the
Indemnifying Persons could not adequately represent the interests of the
Indemnified Persons because such interests could be in conflict with those of
the Indemnifying Persons, (ii) such action or proceeding involves, or could
reasonably be expected to have a material effect on, any material matter
beyond the scope of the indemnification obligation of the Indemnifying Persons
or (iii) the Indemnifying Persons shall not have assumed the defense of the
Third Party Claim in a timely fashion.
(c) If the Indemnifying Persons shall assume the defense of a Third Party
Claim (under circumstances in which the proviso to Section 7.3(b) is not
applicable), the Indemnifying Persons shall not be responsible for any legal
or other defense costs subsequently incurred by the Indemnified Persons in
connection with the defense thereof. If the Indemnifying Persons do not
exercise their right to assume the defense of a Third Party Claim by giving
the written acknowledgment referred to in Section 7.3(b), or are otherwise
restricted from so assuming by the proviso to Section 7.3(b), the Indemnifying
Persons shall nevertheless be entitled to participate in such defense with
their own counsel and at their own expense. If the defense of a Third Party
Claim is assumed by the Indemnified Persons pursuant to clause (i) or (ii) of
the proviso to Section 7.3(b), the Indemnified Persons shall proceed
diligently to defend such Third Party Claim with counsel reasonably
satisfactory to the Indemnifying Persons, but shall not be entitled to settle
such Third Party Claim without the prior written consent of the Indemnifying
Persons, which consent shall not be unreasonably withheld or delayed.
(d) If the Indemnifying Persons exercise their right to assume the defense
of a Third Party Claim pursuant to Section 7.3(b), (i) the Indemnified Persons
shall be entitled to participate in such defense with their own counsel at
their own expense and (ii) the Indemnifying Persons shall not make any
settlement of any claims without the written consent of the Indemnified
Persons, which consent shall not be unreasonably withheld or delayed, unless
the terms of such settlement requires no more than the payment of money and
the Indemnifying Persons pay the money required by such settlement.
(e) If the Indemnifying Persons assume the defense of a Third Party Claim,
the Indemnified Persons shall cooperate fully as reasonably requested by the
Indemnifying Persons in the defense of such Third Party Claim, and shall make
available to the Indemnifying Persons all books, records and other materials
that are under the direct or indirect control of any Indemnified Person and
that the Indemnifying Persons reasonably consider necessary or desirable for
the defense of such Third Party Claims.
(f) Except as hereinafter provided in this paragraph and notwithstanding
anything to the contrary contained in this Agreement (i) the Purchaser
Indemnified Persons shall use commercially reasonable efforts to seek recovery
from their insurance providers with respect to any Losses for which indemnity
or reimbursement may be sought under Section 7 and for which insurance may be
available, and (ii) all Losses shall be net of any insurance proceeds or other
amounts actually recovered by or on behalf of the Purchaser Indemnified
Persons; provided, that, the provisions of this paragraph shall not require
the Purchaser to seek recovery from its insurance providers for Losses
relating to product liability or Environmental, Health and Safety Laws.
(g) To the extent that any Indemnifying Person makes any indemnification
payment to any Indemnified Person, the Indemnifying Person shall be entitled
to exercise, and shall be subrogated to, any rights and remedies (including
rights of indemnity, rights of contribution and other rights of recovery) that
the Indemnified Party may have against any other Person with respect to any
Losses for which such indemnification payment is made. The Indemnified Person
shall take such actions as the Indemnifying Person may reasonably request for
the purpose
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of enabling the Indemnifying Person to perfect or exercise the Indemnifying
Person's right of subrogation hereunder.
7.4 Survival of Representations and Warranties.
Subject to the further provisions of this Section 7.4, the representations
and warranties of the Parties contained in this Agreement or in any
certificate or other writing delivered in connection with this Agreement shall
survive the Closing Date until January 31, 2001; provided, however, that the
representations and warranties of the Seller contained in Sections 2.2, 2.5,
2.9, 2.10, 2.11, 2.19 and 2.22 shall survive the Closing Date for the period
representing their respective statute of limitations. The representations and
warranties of the Purchaser contained in Sections 3.2 and 3.4 shall survive
the Closing indefinitely. The covenants and other agreements of each of the
Seller and the Purchaser contained in this Agreement shall survive the Closing
Date until they are otherwise terminated by their terms. For convenience of
reference, the date upon which any representation or warranty contained herein
shall terminate, if any, is referred to herein as the "Survival Date".
7.5 Limitations on Indemnification.
(a) From and after the Closing, the Purchaser Indemnified Persons shall not
have the right to be indemnified for breaches of representations and
warranties of the Seller and any Subsidiary pursuant to Section 7.1(a)(i) and
the Seller Indemnified Persons shall not have the right to be indemnified for
breaches of representations and warranties of the Purchaser pursuant to
Section 7.1(b)(i) unless and until the Indemnified Persons (or any of them)
shall have incurred on a cumulative basis aggregate Losses in an amount
exceeding $125,000; provided, however, that in no event shall the limitations
set forth in this Section 7.5 apply with respect to any willful or knowing
breach of such representations or warranties. Once aggregate Losses exceed
$125,000, the Purchaser Indemnified Persons and the Seller Indemnified Persons
shall be entitled to indemnification for the amount of all Losses, including
the amount of Losses less than $125,000.
(b) In the event that the Purchaser claims Purchaser Losses as a result of
or based upon the inaccuracy or breach of a representation or warranty of the
Seller or any Subsidiary contained in either subparagraph (b) of Section 2.4
or contained in Section 2.19 (the "Compliance Claim"), the Purchaser shall
provide written notice to the Seller of the Compliance Claim pursuant to
Section 7.2. The Seller may elect to address the Compliance Claim pursuant to
Section 7.3 as if it were a Third Party Claim by providing written notice to
the Purchaser of such election within 10 days of the delivery of the
Purchaser's notice to the Seller of the Compliance Claim. If the Seller does
not provide written notice to the Purchaser of such election within such 10
day period, the Purchaser may address the Compliance Claim. In any event, the
Seller's indemnification obligations under any Compliance Claim shall be
limited to FDA consultants' fees and fines and costs imposed by any
Governmental Entity. In addition, in the event that the Purchaser makes such a
Compliance Claim, and Losses under such Compliance Claim include those
resulting from an Order of a Governmental Entity which has the effect of
preventing the Purchaser from selling a Product for 90 days or more in any
country (a "Blocked Jurisdiction"), the Seller shall promptly pay to the
Purchaser after the Closing by wire transfer of immediately available funds
the Lost Sales Amount. "Lost Sales Amount" means the Blocked Product Sales
Amount divided by 9 multiplied by 12. "Blocked Product Sales Amount" means
that portion of the Product Sales Amount determined under Schedule 1.8(a) for
a Product that is the subject of such Order, which portion is derived from
sales in each Blocked Jurisdiction.
(c) Absent fraud or willful misconduct, no party hereto shall be entitled to
recover special or punitive damages with respect to any breach of any
representation or warranty or non-performance of any obligation under this
Agreement (or otherwise relating to the transactions contemplated hereby), and
under no circumstances shall such damages be considered Losses under this
Section 7. Neither the Purchaser Indemnified Persons nor the Seller
Indemnified Persons may recover Losses under this Agreement which in the
aggregate exceed the amount of the Purchase Price.
(d) Absent fraud or willful misconduct of the Seller, from and after the
Closing, recourse of the Purchaser Indemnified Persons pursuant to this
Section 7 shall be the sole and exclusive remedy of the Purchaser
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Indemnified Persons for any Claims under this Agreement and the Related
Documents or relating to any transactions contemplated hereby or thereby.
7.6 Attorneys' Fees.
Any legal action or other legal proceeding relating to any of this Agreement
or any Related Document or the enforcement of any provision of any of this
Agreement or any Related Document may be brought by an Indemnified Person
against an Indemnifying Person, and may be contested by such Indemnifying
Person. In that event, if the court or arbitrator in such proceeding
determines that the Indemnifying Person is not obligated under this Agreement
or any Related Document to indemnify the Indemnified Person for all or any
part of the amount claimed by the Indemnified Person in such proceeding, then
the Indemnifying Person shall be entitled to recover a portion of the
reasonable attorneys' fees, costs and disbursements incurred by the
Indemnifying Person in contesting the claim of the Indemnified Person against
the Indemnifying Person in such proceeding (in addition to any other relief to
which it may be entitled) based upon the extent to which the Indemnifying
Person was successful in contesting the amount claimed by the Indemnified
Person. This provision shall not limit in any way Losses to which an
Indemnified Person is entitled under the provisions of this Section 7.
Section 8. Termination.
8.1 Termination Events.
This Agreement may be terminated prior to the Closing:
(a) by the Purchaser if the Closing has not taken place on or before
November 30, 1999 (other than as a result of any failure on the part of the
Purchaser to comply with or perform its covenants and obligations under this
Agreement);
(b) by the Seller if the Closing has not taken place on or before November
30, 1999 (other than as a result of any failure on the part of the Seller to
comply with or perform any covenant or obligation set forth in this
Agreement);
(c) by the Seller or the Purchaser, if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other action having the effect of permanently
restraining, enjoining or otherwise prohibiting the Sale;
(d) by the Purchaser or the Seller, if, at a duly held meeting of the
stockholders of the Seller (including any adjournment thereof) (the
"Stockholders Meeting") held for the purpose of voting on the Sale and this
Agreement: (A) the holders of the Seller common stock shall have taken a final
vote on a proposal to approve the Sale and this Agreement and (B) the approval
of the Sale and this Agreement by the holders of a majority of the outstanding
shares of the Seller common stock outstanding on the record date for the
Stockholders Meeting shall not have been obtained;
(e) by the Seller, if the Purchaser has willfully breached this Agreement,
and as a result of such breach, the conditions set forth in Sections 6.1 or
6.2 would not then be satisfied and which breach the Purchaser fails to cure
within ten (10) business days after notice thereof from the Seller; provided,
however, that as long as the Purchaser continues to exercise reasonable best
efforts to cure such breach, the Seller may not terminate this Agreement on
account of such breach;
(f) by the Purchaser, if (i) the matters contained in a supplement or
amendment of any section of the Seller Disclosure Schedule by the Seller
constitute a Material Adverse Effect or (ii) the Seller has willfully breached
this Agreement, and as a result of such breach, the conditions set forth in
Sections 5.1 or 5.2 would not then be satisfied and which breach the Seller
fails to cure within ten (10) business days after notice thereof from the
Purchaser; provided, however, that as long as the Seller continues to exercise
reasonable best efforts to cure such breach, the Purchaser may not terminate
this Agreement on account of such breach; or
(g) by the mutual written consent of the Purchaser and the Seller.
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8.2 Termination Procedures.
If the Purchaser wishes to terminate this Agreement pursuant to Section
8.1(a), Section 8.1(c), Section 8.1(d) or Section 8.1(f), the Purchaser shall
deliver to the Seller a written notice stating that the Purchaser is
terminating this Agreement and setting forth a brief description of the basis
on which the Purchaser is terminating this Agreement. If the Seller wishes to
terminate this Agreement pursuant to Section 8.1(b), Section 8.1(c), Section
8.1(d) or Section 8.1(e), the Seller shall deliver to the Purchaser a written
notice stating that the Seller is terminating this Agreement and setting forth
a brief description of the basis on which the Seller is terminating this
Agreement.
8.3 Effect Of Termination.
If this Agreement is terminated pursuant to Section 8.1, all further
obligations of the parties under this Agreement shall terminate; provided,
however, that: (a) no party shall be relieved of any Liability arising from
any breach by such party of any provision of this Agreement; and (b) the
parties shall, in all events, remain bound by and continue to be subject to
the provisions set forth in Section 10 (other than Sections 10.1) and (c) the
Seller shall remain obligated to make the payment to the Purchaser under
Section 4.10, if applicable.
8.4 Nonexclusivity Of Termination Rights.
The termination rights provided in Section 8 shall not be deemed to be
exclusive. Accordingly, the exercise by any party of its right to terminate
this Agreement pursuant to Section 8 shall not be deemed to be an election of
remedies and shall not be deemed to prejudice, or to constitute or operate as
a waiver of, any other right or remedy that such party may be entitled to
exercise (whether under this Agreement, under any other contract or under any
Law, at common law, in equity or otherwise).
Section 9. Post Closing Covenants.
9.1 Access to Records.
Each of the Purchaser and the Seller shall, for the longer of three years
after the Closing or the period required by applicable Law, give to the other
and the other's authorized Representatives, upon reasonable notice and during
normal business hours, access to the books and records being acquired by the
Purchaser or retained by the Seller, as the case may be, which in any way
relate to the Business. Each of the Purchaser and the Seller shall be
entitled, at its own expense, to make extracts and copies of such books and
records and shall cooperate in connection with accomplishing the same. Each of
the Purchaser and the Seller shall, during such period, preserve and maintain
such books and records held by them and shall not, subsequent to such period,
destroy or cause to be destroyed any such books or records without first
obtaining the written consent of the other or giving to the other the
opportunity to take delivery of the books and records to be destroyed. If the
Purchaser or Seller, as the case may be (a "Requesting Party"), promptly
notifies the other Party that it desires or requires any of such books or
records to be retained for any longer period, such books and records shall be
either retained by the party in possession of it or be shipped promptly to the
Requesting Party at the expense of the non-Requesting Party.
9.2 Use of Seller's Labels, etc.
The Purchaser may, for a period of three hundred sixty-five (365) days from
the Closing Date, (i) sell or otherwise dispose of any products bearing as of
the Closing Date the Seller's name or marks, or (ii) use any cartons, labels,
forms, invoices or other printed matter bearing as of the Closing Date the
Seller's name or marks in connection with the sale or other disposition of the
products or otherwise in connection with the conduct of the Business. After
such 365-day period, the Purchaser may continue using the materials referred
to in the immediately preceding clause (ii) if the Purchaser overlays its name
or marks on such materials so as to indicate clearly that the materials are
those of the Purchaser. The Seller shall have and retain sole ownership of the
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trademark "BEI", including the goodwill pertaining or accruing thereto. The
Purchaser shall not do or suffer to be done any act or thing that would impair
the Seller's rights in the "BEI" trademark or damage the reputation for
quality inherent in the "BEI" trademark. The Purchaser shall indemnify and
hold the Seller harmless from any and all Liabilities suffered or paid as a
result of any and all claims, demands, suits, causes of action, proceedings,
judgments and liabilities, including reasonable counsel fees, incurred or
sustained by or against the Seller with respect to or arising out of the
Purchaser's use of the Seller's names or marks on products, cartons, labels,
forms, invoices or other printed matter bearing the Seller's names or marks as
contemplated by this Section 9.2.
9.3 Physical Transfer of Purchased Assets.
At and from time to time after the Closing (but in no case later than the
end of the Transition Period as defined in the Transition Services Agreement),
the Seller shall assemble and prepare for delivery to the Purchaser, at a
location or locations designated by the Purchaser, the tangible Purchased
Assets specified by the Purchaser. Such designated Purchased Assets shall be
delivered F.O.B. Seller's location to a carrier designated by the Purchaser,
or in the absence of a designation by the Purchaser, to a carrier reasonably
designated by the Seller. Title and risk of loss of the designated Purchased
Assets shall pass to the Purchaser upon proper delivery by the Seller to the
designated carrier.
9.4 Collection of Accounts Receivable.
(a) Upon the termination of the provision of the Seller's services to
collect the Receivables pursuant to the terms of the Transition Services
Agreement, the Purchaser shall use its reasonable efforts, exercised in good
faith, to collect all of the Receivables, the collection practices of the
Purchaser prior to the date hereof being deemed to be an acceptable standard.
(b) Unless otherwise designated by the Debtor, any payment from a Debtor
(other than a payment with respect to a Disputed Receivable) received
subsequent to the Closing shall, for purposes of this Agreement, be applied
against the Receivables of such Debtor other than Disputed Receivables, in the
order of the oldest amounts owing. Payments from Debtors with respect to
Disputed Receivables shall be applied against such Disputed Receivables. The
Seller and the Purchaser shall each timely notify the other of any Disputed
Receivable.
(c) On or promptly after the 180th day following the Closing Date (but in no
event later than 10 business days thereafter), the Purchaser shall notify the
Seller of all Receivables remaining uncollected as of such date, which notice
shall identify each such Receivable by name of Debtor.
(d) The Seller (i) guarantees to the Purchaser that the Receivables will be
collectible in the ordinary course of business and (ii) the Seller shall, at
the option of the Purchaser, pay to the Purchaser an amount equal to the Net
Receivables to the extent such Receivables have not been collected by the date
of the Purchaser's written exercise of such option, which shall not be sooner
than the 180th day following the Closing; provided, however, that the Seller
shall not be required to pay any amount to the Purchaser for any Receivable
for which the Debtor has claimed in writing a right of offset or other defense
to payment based on any act or omission of the Purchaser following the Closing
Date. If the Seller is requested to make a payment to the Purchaser for a
Receivable pursuant to this Section 9.4(d), the Purchaser shall, upon receipt
of such payment from the Seller, (i) assign, transfer, convey and deliver to
the Seller all of the Purchaser's right, title and interest to and under such
Receivable (including without limitation all documentation related to such
Receivable), free and clear of Encumbrances due to the acts or omissions of
the Purchaser and (ii) provide the Seller with the Purchaser's existing
collection history for such Receivable. Payment shall be made by wire transfer
in immediately available funds to an account designated by the Purchaser. The
Purchaser shall deliver monthly to the Seller all amounts subsequently
collected by the Purchaser on Receivables which the Seller have paid to the
Purchaser, up to the amount so paid.
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(e) "Claim" means a claim, refusal to pay or other set-off against a
Receivable arising out of the goods or services to which the Receivable is
related.
"Debtor" means a debtor or an obligor of a Receivable.
"Disputed Receivable" means a Receivable as to which the Debtor has
communicated a Claim to the Seller or the Purchaser.
"Receivables" means the Seller's accounts receivable included in the
Purchased Assets as of the Closing excluding invoiced amounts relating to
Evaluation Inventory (valued as determined in accordance with GAAP).
9.5 Collection of Invoices representing Evaluation Inventory, etc.
If, subsequent to and not later than one year after the Closing Date,
Evaluation Inventory which was valued for the Inventory Statement at zero is
returned to the Purchaser or if an invoice representing Evaluation Inventory
which was valued for the Inventory Statement at zero is paid, then the
Purchaser shall pay to the Seller 50% of the invoiced value of such inventory
which is returned to the Purchaser or 50% of the amount of the invoice paid
for such inventory, as the case may be.
Section 10. Miscellaneous Provisions.
10.1 Further Assurances.
From and after the Closing Date, the parties hereto and their
Representatives shall cooperate with each other, and shall execute and deliver
such documents and take such other actions as the other party may reasonably
request, for the purpose of evidencing the Sale and putting the Purchaser in
possession and control of all of the Assets.
10.2 Fees And Expenses.
Each party shall bear and pay its own respective legal, accounting and
broker fees, costs and expenses that have been incurred or that are in the
future incurred by, on behalf of or for the benefit of such party in
connection with: (i) the negotiation, preparation and review of any summary of
terms or similar document relating to the Sale; (ii) the negotiation,
preparation and review of this Agreement (including any disclosure schedule),
and all bills of sale, assignments, certificates, and other instruments and
documents delivered or to be delivered in connection with the Sale; (iii) the
obtaining of any Consent required to be obtained in connection with the Sale;
(iv) the investigation and review conducted by the Purchaser with respect to
the business of the Seller; (iv) the consummation of the Sale and (v) disputes
under Section 1.9 of this Agreement.
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10.3 Notices.
Any notice or other communication required or permitted to be delivered to
any party under this Agreement shall be in writing and shall be deemed
properly delivered, given and received, if delivered during business hours on
a business day, when delivered (by hand, by registered mail, by courier or
express delivery service or by facsimile) to the address or facsimile
telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other party hereto) or, if not delivered
during business hours on a business day, on the next succeeding business day:
if to the Seller: BEI Medical Systems Company, Inc.
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, NJ 07608
Facsimile: 201-727-4998
Attn.: Richard W. Turner, President and CEO
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Facsimile: (415) 951-3699
Attn.: Christopher A. Westover, Esq.
if to the Purchaser: Cooper Surgical Acquisition Corp.
CooperSurgical Acquisition Corp.
c/o The Cooper Companies, Inc.
6140 Stoneridge Mall Road, Suite 590
Pleasanton, CA 94588
Facsimile: (925) 460-3660
Attn.: Carol R. Kaufman, V.P., Legal Affairs
with a copy to:
CooperSurgical, Inc.
15 Forest Parkway
Shelton, CT 06484
Facsimile: (203) 925-0135
Attn.: Nicolas J. Pichotta, President
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Facsimile: (212) 408-2420
Attn.: David I. Karabell, Esq.
10.4 Headings.
Headings contained in this Agreement are for convenience of reference only,
shall not be deemed to be a part of this Agreement and shall not be referred
to in connection with the construction or interpretation of this Agreement.
A-31
<PAGE>
10.5 Counterparts.
This Agreement may be executed in several counterparts, each of which shall
constitute an original and all of which, when taken together, shall constitute
one agreement.
10.6 Governing Law.
This Agreement shall be construed in accordance with, and governed in all
respects by, the internal laws of the State of Delaware (without giving effect
to principles of conflict of laws).
10.7 Successors And Assigns; Parties In Interest.
(a) This Agreement shall be binding upon and inure to the benefit of the
Seller, the Purchaser, and their respective successors and assigns.
(b) Neither party shall be permitted to assign any of its rights or delegate
any of its obligations under this Agreement without the prior written consent
of the other party, provided, that prior to the Closing, the Purchaser may
assign its rights to any Affiliate and, after the Closing, the Purchaser or
any Affiliate purchasing the Purchased Assets may assign its rights and
delegate its duties to any other Person that assumes in writing the
Purchaser's Liabilities under this Agreement and the Related Documents;
provided, however, that the Purchaser shall remain secondarily liable for the
performance of all such Liabilities.
(c) No provision of this Agreement is intended to provide any rights or
remedies to any Person other than the parties to this Agreement and their
respective successors and assigns (if any). Without limiting the generality of
the foregoing, no creditor of the Seller shall have any rights under this
Agreement.
10.8 Remedies Cumulative; Specific Performance.
The rights and remedies of the parties hereto shall be cumulative (and not
alternative). The Seller agrees that in the event of any breach or threatened
breach by the Seller of any covenant, obligation or other provision set forth
in this Agreement, the Purchaser shall be entitled (in addition to any other
remedy that may be available to it) to (a) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision, and (b) an injunction restraining
such breach or threatened breach.
10.9 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
10.10 Amendments.
This Agreement may not be amended, modified, altered or supplemented other
than by means of a written instrument duly executed and delivered on behalf of
the Purchaser and the Seller.
A-32
<PAGE>
10.11 Severability.
In the event that any provision of this Agreement, or the application of any
such provision to any Person or set of circumstances, shall be determined to
be invalid, unlawful, void or unenforceable to any extent, the remainder of
this Agreement, and the application of such provision to Persons or
circumstances other than those as to which it is determined to be invalid,
unlawful, void or unenforceable, shall not be impaired or otherwise affected
and shall continue to be valid and enforceable to the fullest extent permitted
by Law.
10.12 Entire Agreement; Confidential Disclosure Agreement.
This Agreement, the Related Documents and the Confidential Disclosure
Agreement dated June 21, 1999, set forth the entire understanding of the
parties relating to the subject matter hereof and thereof and supersede all
prior agreements and understandings among or between any of the parties
relating to such subject matter. Notwithstanding the foregoing provisions, the
sixth paragraph of the Confidential Disclosure Agreement dated June 21, 1999
shall expire at the Closing to the extent applicable to those individuals
employed by the Seller or the Subsidiaries solely in connection with the
Business.
10.13 Knowledge.
For purposes of this Agreement, the Seller shall be deemed to have
"knowledge" of a particular fact or other matter if Richard Turner, President
and Chief Executive Officer of the Seller, Thomas W. Fry, Vice President,
Finance and Administration of the Seller and Samuel Dickstein, Vice
President--New Business Development and Technology of the Seller, has actual
knowledge of such fact or other matter after exercising due diligence with
respect thereto, including making reasonable inquiries of the employees or
Representatives of the Seller and its subsidiaries who the Seller has
determined in good faith may have any knowledge concerning such fact or other
matter.
10.14 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the construction
or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" and "Annexes" and "Schedules" are intended to refer
to Sections, Exhibits, Annexes and Schedules to this Agreement.
A-33
<PAGE>
The parties to this Agreement have caused this Agreement to be executed and
delivered as of the date first set forth above.
BEI MEDICAL SYSTEMS COMPANY, INC.,
a Delaware corporation
/s/ Thomas W. Fry
By: _________________________________
Name: Thomas W. Fry
Title: Vice President, Finance
and Administration
COOPERSURGICAL ACQUISITION CORP.,
a Delaware corporation
/s/ Nicholas J. Pichotta
By: _________________________________
Name: Nicholas J. Pichotta
Title: President
A-34
<PAGE>
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT
This Amendment No. 1 To the Asset Purchase Agreement (the "Amendment No.
1"), dated as of November 2, 1999, amends the Asset Purchase Agreement (the
"Asset Purchase Agreement"), dated as of October 1, 1999, by and between BEI
Medical Systems Company, Inc., a Delaware corporation (the "Seller"), and
CooperSurgical Acquisition Corp., a Delaware corporation (the "Purchaser").
The undersigned parties agree as follows:
1. All capitalized terms that are undefined herein shall have the meanings
given to them in the Asset Purchase Agreement.
2. Section 4.11 of the Asset Purchase Agreement is hereby amended and
restated as follows:
"On or before December 31, 1999, the Seller shall have caused to be
convened a meeting of the Seller's stockholders (in compliance in all
respects with provisions of applicable corporate law and the Certificate of
Incorporation and By-laws of the Seller) at which meeting the stockholders
shall consider whether to approve the Sale and authorize the Seller to
execute this Agreement and the Related Documents and to consummate the
transactions contemplated hereby and thereby. The Seller shall deliver to
the Purchaser for review drafts and final versions of proxy material to be
distributed to the Seller's stockholders in connection with such meeting."
3. Sections 8.1(a) and 8.1(b) of the Asset Purchase Agreement are hereby
amended as follows:
"(a) by the Purchaser if the Closing has not taken place on or before
December 31, 1999 (other than as a result of any failure on the part of the
Purchaser to comply with or perform its covenants and obligations under
this Agreement);"
"(b) by the Seller if the Closing has not taken place on or before
December 31, 1999 (other than as a result of any failure on the part of the
Seller to comply with or perform any covenant or obligation set forth in
this Agreement);"
4. The second to last sentence of the definition of "Material Adverse
Effect" as set forth on Exhibit B of the Asset Purchase Agreement is hereby
amended as follows:
Notwithstanding the foregoing, for purposes of Section 4.4(b) and Section
8.1(f)(i), Material Adverse Effect shall not include the matters specified
in subparagraph (i) of this definition so long as the Closing occurs on or
before December 31, 1999.
5. The Asset Purchase Agreement, as amended by this Amendment No. 1, shall
remain in full force and effect in accordance with its terms.
6. This Amendment No. 1 may be executed in several counterparts, each of
which shall constitute an original and all of which, when taken together,
shall constitute one agreement.
The parties to this Amendment have caused this Amendment No. 1 to be
executed and delivered as of the date first set forth above.
BEI MEDICAL SYSTEMS COMPANY, INC.,
a Delaware corporation
/s/ Thomas W. Fry
By: _________________________________
Name: Thomas W. Fry
Title: Vice President, Finance
and Administration
COOPERSURGICAL ACQUISITION CORP.,
a Delaware corporation
/s/ Gregory A. Fryling
By: _________________________________
Name: Gregory A. Fryling
Title: Vice President, Corporate
Development
<PAGE>
EXHIBIT A TO
ASSET PURCHASE AGREEMENT
BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of , 1999
(this "Agreement"), among BEI MEDICAL SYSTEMS COMPANY, INC., a Delaware
corporation (the "Seller"), MEDITRON DEVICES, INC., a Delaware corporation,
XYLOG CORPORATION, a New Jersey corporation, BEI MEDICAL SYSTEMS
INTERNATIONAL, INC., a Delaware corporation, OVAMED CORPORATION, a California
corporation, CALCULUS INSTRUMENTS COMPANY, INC., a New Jersey corporation,
ZINNANTI SURGICAL INSTRUMENTS, INC., a California corporation (each, a
"Subsidiary"), and COOPERSURGICAL ACQUISITION CORP., a Delaware corporation
(the "Purchaser").
Reference is made to the Asset Purchase Agreement dated as of October 1,
1999 and amended on November 2, 1999 (the "Purchase Agreement") between the
Purchaser and the Seller.
Pursuant to the terms of the Purchase Agreement, the Seller has agreed to
sell, and the Purchaser has agreed to purchase, substantially all of the
assets of the Seller, subject to the Purchaser's assumption of certain
liabilities of the Seller, related to the Business.
ACCORDINGLY, in consideration of the mutual covenants and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
Section 1. Defined Terms.
Capitalized terms used and not otherwise defined herein shall have the
respective meanings ascribed thereto in the Purchase Agreement.
Section 2. Sale of Assets.
On and subject to the terms and conditions of the Purchase Agreement, the
Seller and each Subsidiary hereby sells, transfers, assigns, conveys and
delivers to the Purchaser all right, title and interest in and to the
Purchased Assets, free and clear of all Encumbrances. The Purchaser hereby
accepts title to the Purchased Assets.
Section 3. Assumed Liabilities.
On and subject to the terms and conditions of the Purchase Agreement, the
Purchaser hereby assumes and agrees to discharge and/or perform, when due in
accordance with the terms thereof, the Assumed Liabilities.
Section 4. Governing Law.
This agreement will be governed by and construed in accordance with the
domestic laws of the State of Delaware, without giving effect to any choice of
law or conflicting provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the laws of any jurisdiction other than
the State of Delaware to be applied.
Section 5. Purchase Agreement.
The Purchase Agreement is hereby incorporated herein by reference and shall
control in the event of any conflict with this Agreement. Nothing contained in
this Agreement is intended to provide any rights to the Purchaser or the
Seller and each Subsidiary beyond those rights expressly provided to the
Purchaser or the Seller and each Subsidiary in the Purchase Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Bill of Sale,
Assignment and Assumption Agreement to be executed on its behalf as of the
date first written above.
BEI MEDICAL SYSTEMS COMPANY, INC.
By: _________________________________
Name:
Title:
XYLOG CORPORATION
By: _________________________________
Name:
Title:
BEI MEDICAL SYSTEMS INTERNATIONAL,
INC.
By: _________________________________
Name:
Title:
OVAMED CORPORATION
By: _________________________________
Name:
Title:
CALCULUS INSTRUMENTS COMPANY, INC.
By: _________________________________
Name:
Title:
2
<PAGE>
ZINNANTI SURGICAL INSTRUMENTS, INC.
By: _________________________________
Name:
Title:
COOPERSURGICAL ACQUISITION CORP.
By: _________________________________
Name:
Title:
3
<PAGE>
EXHIBIT B TO
ASSET PURCHASE AGREEMENT
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit B):
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, Controls, or is
Controlled by, or is under common Control with, such Person.
"Agreement" means the Asset Purchase Agreement to which this Exhibit B is
attached (including the Seller Disclosure Schedule), as it may be amended from
time to time.
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended.
"CERCLIS" means the Comprehensive Environmental Response, Compensation, and
Liability Information System.
"Consent" means any approval, consent, ratification, permission, waiver or
authorization (including any Approval as defined in Section 2.1).
"Control" means, with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Encumbrance" means and includes security interests, mortgages, liens,
pledges, charges, easements, reservations, restrictions, rights of way,
servitudes, options, rights of first refusal, community property interests,
equitable interests, restrictions of any kind and all other encumbrances,
whether or not relating to the extension of credit or the borrowing of money.
"Environmental, Health and Safety Laws" means all Laws, Permits and
Contracts with Governmental Entities relating to or addressing pollution or
protection of the environment, public health and safety, or employee health
and safety, including, but not limited to, the Solid Waste Disposal Act, as
amended, 42 U.S.C. (S)(S)6901, et seq., the Clean Air Act, as amended, 42
U.S.C. (S)(S)7401 et seq., the Federal Water Pollution Control Act, as
amended, 33 U.S.C. (S)(S)1251 et seq., the Emergency Planning and Community
Right-to-Know Act, as amended, 42 U.S.C. (S)(S)11001 et seq., CERCLA, 42
U.S.C. (S)(S)9601 et seq., the Hazardous Materials Transportation Uniform
Safety Act, as amended, 49 U.S.C. (S)1804 et seq., the Occupational Safety and
Health Act of 1970, as amended, the regulations promulgated thereunder, and
any similar Laws and other requirements having the force or effect of Law, and
all Orders issued or promulgated thereunder, and all related common law
theories.
"Evaluation Inventory" means Products which have been invoiced and shipped
to customers for evaluation purposes, which the customer can decide to either
purchase or return to the Seller for a full credit.
"GAAP" means generally accepted accounting principles in the United States.
"Governmental Entity" means any government and any governmental authority or
instrumentality, whether federal, state, local or foreign and whether
legislative, executive, judicial or otherwise.
"Hazardous Materials" means any hazardous or toxic chemicals, materials or
substances, pollutants, contaminants, or crude oil or any fraction thereof (as
such terms are defined under any Environmental, Health and Safety Law).
"Indemnified Persons" means the Seller Indemnified Persons and/or the
Purchaser Indemnified Persons, as the case may be.
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<PAGE>
"Indemnifying Persons" means the Seller Indemnifying Persons and/or the
Purchaser Indemnifying Persons, as the case may be.
"Law" means any applicable foreign, federal, state or local law, statute,
treaty, rule, directive, regulation, order, judgment, writ, injunction,
decree, ordinances and similar provisions having the force or effect of law or
an Order of any Governmental Entity (including all Environmental, Health and
Safety Laws).
"Liabilities" means any liability or obligation of any nature, whether known
or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due,
regardless of when asserted.
"Losses" means any and all losses, claims, shortages, damages, expenses
(including reasonable attorneys' and accountants' and other professionals'
fees and expenses and litigation expenses), assessments, taxes (including
interest or penalties thereon) and insurance premium increases arising from or
in connection with any such matter that is the subject of indemnification
under Section 7, in each instance after deduction of the amount of any
insurance proceeds recovered and net of any tax benefit actually realized as a
result of the Loss by the Indemnified Person in the year in which the claim
for indemnification for such Loss was made pursuant to this Agreement or, in
the case of a corporation, net of any tax benefit actually realized in such
year by a member of an affiliated group of such corporation within the meaning
of Section 1504 of the Code.
"Material Adverse Effect" means a material adverse effect on (i) the
financial condition, business or results of operations of the Business taken
as a whole, (ii) on the Purchased Assets taken as a whole or (iii) on the
ability of the Seller or any Subsidiary to perform its obligations under or to
consummate the Sale, provided, however, that in no event shall any of the
following constitute a Material Adverse Effect: (x) any effects, changes,
events, circumstances or conditions generally affecting the industry in which
the Seller or any Subsidiary operates or arising from changes in general
business or economic conditions (including litigation, delays in customer
orders, a reduction in sales, a disruption in business relationships or a loss
of employees); and (y) any effects, changes, events, circumstances or
conditions resulting from compliance by the Seller or any Subsidiary with the
terms of, or the taking of any action contemplated or permitted by, this
Agreement or any Related Document. Notwithstanding the foregoing, for purposes
of Section 4.4(b) and Section 8.1(f)(i), Material Adverse Effect shall not
include the matters specified in subparagraph (i) of this definition so long
as the Closing occurs on or before November 15, 1999. If the Closing occurs
thereafter, the definition of Material Adverse Effect shall remain unchanged.
"Orders" means judgments, writs, decrees, compliance agreements, injunctions
or judicial or administrative orders and determinations of any Governmental
Entity or arbitrator.
"Permits" means any and all permits, licenses, concessions, authorizations,
registrations, franchises, approvals, consents, certificates, variances and
similar rights obtained, or required to be obtained, from a Governmental
Entity.
"Permitted Encumbrances" means (i) Encumbrances for Taxes not yet due and
payable or being contested in good faith by appropriate proceedings and for
which there are adequate reserves on the books, (ii) workers or unemployment
compensation liens arising in the ordinary course of business and (iii)
mechanic's, materialman's, supplier's, vendor's or similar liens arising in
the ordinary course of business securing amounts that are not delinquent.
"Person" means any individual or entity including any Governmental Entity.
"Products" has the meaning ascribed to it on Schedule 1.1 hereto.
"Purchaser Indemnified Persons" means the Purchaser and its Affiliates,
their respective successors and assigns, and the respective officers,
directors and controlling parties of each of the foregoing; provided, however,
that any such Person who was, prior to the Closing Date, an officer, director,
employee, Affiliate, successor or
2
<PAGE>
assign of the Seller shall not in such capacity be a Purchaser Indemnified
Person with respect to a breach of this Agreement or any Related Document
based on facts or circumstances occurring, or actions taken by such Person, at
or prior to the Closing.
"Purchaser Indemnifying Persons" means the Purchaser and its successors.
"Purchaser Losses" means any and all Losses sustained, suffered or incurred
by any Purchaser Indemnified Person arising from or in connection with any
such matter which is the subject of indemnification under Section 7.
"Representatives" means officers, directors, employees, agents, attorneys,
accountants and financial advisors of the Purchaser or the Seller or any
Subsidiary, as the case may be.
"Sale" means (i) the sale of the Assets by the Seller to the Purchaser in
accordance with this Agreement; (ii) the assumption of the Assumed Liabilities
by the Purchaser pursuant to the Bill of Sale; and (iii) the performance by
the Seller and the Purchaser of their respective obligations under this
Agreement and each Related Document, and the exercise by the Seller and the
Purchaser of their respective rights under this Agreement.
"Sales Shortfall" has the meaning ascribed to it on Schedule 1.8(a) hereto.
"Seller Indemnified Persons" means the Seller and its Affiliates, their
respective successors and assigns, and the respective officers, directors and
controlling parties of each of the foregoing.
"Seller Indemnifying Persons" means the Seller and its successors.
"Seller Losses" means any and all Losses sustained, suffered or incurred by
any Seller Indemnified Person arising from or in connection with any matter
which is the subject of indemnification under Section 7.
"Special Tax Losses" means any and all Losses sustained, suffered or
incurred by any Purchaser Indemnified Person arising from or in connection
with Taxes payable by the Seller or any Affiliate thereof with respect to any
period ending on or prior to the Closing Date (or the portion ending on the
Closing Date of any period that includes but does not end on the Closing Date)
or the inaccuracy or breach of the representations and warranties of the
Seller contained in Section 2.18.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Taxes" means, with respect to any Person, (i) all Income Taxes and all
gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property or windfall profits taxes, alternative or add-on minimum
taxes, customs duties and other taxes, fees, assessments or charges of any
kind whatsoever, together with all interest and penalties, additions to tax
and other additional amounts imposed by any taxing authority (domestic or
foreign) on such Person (if any) and (ii) any Liability for the payment of any
amount of the type described in clause (i) above as a result of (A) being a
"transferee" (within the meaning of Section 6901 of the Code or any other
applicable Law) of another Person, (B) being a member of an affiliated,
combined or consolidated group or (C) a contractual arrangement or otherwise.
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<PAGE>
EXHIBIT C TO
ASSET PURCHASE
AGREEMENT
STATEMENT OF ALLOCATION
Purchase Price consists of $11,206,600 minus (a) the Sales Shortfall
described on Schedule 1.8(a), if any, and (ii) the Estimated Inventory and
Receivables Holdback Amount plus (c) the amount of the Assumed Liabilities.
<TABLE>
<S> <C>
Class III.
Receivables and Inventory valued as provided in this Agreement
estimated at................................................... $3,600,000
Net fixed assets estimated at................................... $ 100,000
----------
$3,700,000
==========
Class IV.
Trademarks...................................................... $ 350,000
Patents......................................................... $1,000,000
Customer Lists.................................................. $1,500,000
Covenant not to compete......................................... $1,500,000
----------
$4,350,000
==========
Class V. Goodwill-Balance of Purchase Price
</TABLE>
1
<PAGE>
EXHIBIT D TO
ASSET PURCHASE AGREEMENT
, 1999
CooperSurgical Acquisition Corp.
Re: Asset Purchase Agreement
Ladies and Gentlemen:
We have acted as counsel for BEI Medical Systems Company, Inc., a Delaware
corporation (the "Seller"), in connection with that certain Asset Purchase
Agreement (the "Purchase Agreement") dated as of October 1, 1999 and amended
on November 2, 1999, by and between CooperSurgical Acquisition Corp., a
Delaware corporation ("the Purchaser") and the Seller. We are rendering this
opinion pursuant to Section 5 of the Purchase Agreement. Capitalized terms
used but not defined herein have the respective meanings given to them in the
Purchase Agreement. "Related Documents" shall mean:
1. Noncompetition Agreement between the Purchaser and the Seller of even
date herewith.
2. Noncompetition Agreement between the Purchaser and Richard W. Turner of
even date herewith.
3. Transition Agreement between the Purchaser and the Seller of even date
herewith.
4. Bill of Sale and Assumption and Assignment Agreement by the Seller, the
Subsidiaries and the Purchaser.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Purchase Agreement by the various parties and originals, or
copies certified to our satisfaction, of such records, documents,
certificates, opinions, memoranda and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinion expressed below.
Where we render an opinion concerning an item "of which we are aware" or our
opinion otherwise refers to our knowledge, it is based solely upon (i) an
inquiry of attorneys within this firm who perform legal services for the
Seller, (ii) receipt of a certificate executed by an officer of the Seller
covering such matters, and (iii) such other investigation, if any, that we
specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and authenticity
of all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and
delivery by the Seller and each Subsidiary of the Purchase Agreement and the
Related Documents to which it is a party), where authorization, execution and
delivery are prerequisites to the effectiveness of such documents. We have
also assumed: that Richard W. Turner executing and delivering documents in his
individual capacity had the legal capacity to so execute and deliver; that you
have received all documents you were to receive under the Purchase Agreement
and the Related Documents; that the Purchase Agreement and the Related
Documents to which you are a party are obligations binding upon you; that the
Purchaser has filed any required California franchise or income tax returns
and has paid any required California franchise or income taxes; and that there
are no extrinsic agreements or understandings among the parties to the
Purchase Agreement or the Related Documents that would modify or interpret the
terms of the Purchase Agreement or the Related Documents or the respective
rights or obligations of the parties thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America, the General Corporation Law of the State of Delaware and
the laws of the State of California. We are not rendering any opinion as to
compliance with any antifraud law, rule or regulation relating to securities,
or to the sale or issuance thereof, or as to compliance with any antitrust
law. We note that the parties to the Purchase Agreement and certain of the
Related Documents have designated the laws of the State of Delaware or the
State of New York as
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<PAGE>
the laws governing the Purchase Agreement and the Related Documents. Our
opinion in paragraph 3 below as to the legality, validity, binding effect and
enforceability of the Purchase Agreement and the Related Documents is premised
upon the result that would obtain if a California court were to apply the
internal laws of the State of California (notwithstanding the designation of
the laws of the State of Delaware or the State of New York) to the
interpretation and enforcement of the Purchase Agreement and the Related
Documents. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the laws of any
jurisdiction other than those identified above are applicable to the subject
matter hereof. Further, we express no opinion with respect to the
enforceability or validity of any noncompetition agreements or covenants
entered into by the parties in connection with the Purchase Agreement or the
transactions contemplated thereby.
With regard to our opinion in paragraph 4 below with respect to material
breaches and defaults under any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
known to us, we have relied solely upon (i) inquiries of officers of the
Seller, (ii) a list supplied to us by the Seller, a copy of which is attached
as Exhibit A hereto, of any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Seller or any Subsidiary is a party or by which the
Seller or any Subsidiary is bound (collectively, the "Material Agreements")
and (iii) an examination of the items on the aforementioned list; we have made
no further investigation.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Seller is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. The Seller and each
Subsidiary has all the requisite corporate power and authority necessary to
own, lease and operate the Purchased Assets and to carry on its business as it
is now being conducted. The Seller and each Subsidiary are duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
the respective jurisdictions listed on Exhibit B.
2. The Seller has the corporate right, power and authority to enter into and
to perform its obligations under the Purchase Agreement and each Related
Document to which it is a party and to consummate the transactions
contemplated thereby. The execution and delivery by the Seller of the Purchase
Agreement and each Related Document to which it is a party and the
consummation of the transactions contemplated thereby have been duly
authorized by all necessary corporate action on the part of the Seller, and no
other corporate proceedings on the part of the Seller are necessary to
authorize the Purchase Agreement and each Related Document to which it is a
party or to consummate the transactions so contemplated thereby. Each
Subsidiary has the corporate right, power and authority to enter into and
perform its respective obligations under each Related Document to which it is
respectively a party and to consummate the transactions contemplated thereby.
The execution and delivery by each Subsidiary of the Related Documents to
which it is respectively a party and the consummation of the transactions
contemplated thereby have been duly authorized by all necessary corporate
action on the part of each such Subsidiary, and no other corporate proceedings
on the part of any such Subsidiary are necessary to authorize the Related
Documents to which such Subsidiary is a party or to consummate the
transactions so contemplated thereby.
3. The Purchase Agreement and each Related Document to which the Seller is a
party constitute the legal, valid and binding obligations of the Seller,
enforceable against the Seller in accordance with their terms, subject to (a)
laws of general application relating to bankruptcy, insolvency, moratorium,
arrangement, reorganization and other similar laws affecting creditors'
rights, (b) general principles of equity, and (c) limitations on the
availability of equitable relief, including specific performance. Each Related
Document to which each Subsidiary is a party constitutes the legal, valid and
binding obligation of each of the respective Subsidiaries, enforceable against
such Subsidiary in accordance with its terms, subject to (a) laws of general
application relating to bankruptcy, insolvency, moratorium, arrangement,
reorganization and other similar laws affecting creditors' rights, (b) general
principles of equity, and (c) limitations on the availability of equitable
relief, including specific performance.
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4. Except as set forth in Exhibit C, the execution and delivery of the
Purchase Agreement and each Related Document to which it is a party by the
Seller and each applicable Subsidiary does not, and the performance of the
Purchase Agreement and each Related Document to which it is a party by the
Seller and each applicable Subsidiary, and of the transactions contemplated
thereby, will not: (i) conflict with or violate (with or without notice or
lapse of time or both) the Certificate of Incorporation or By-Laws of the
Seller or such Subsidiary, (ii) conflict with, violate or cause a default
under (with or without notice or lapse of time or both) any federal laws of
the United States of America or the General Corporation Law of the State of
Delaware applicable to the Seller or any such Subsidiary or by which its or
any of their respective properties are bound or affected, or (iii) result in
any material violation or breach of or constitute a default (or an event that
with notice or lapse of time or both would become a default) under or impair
the Seller's or such Subsidiary's rights or alter the rights or obligations of
any third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of an Encumbrance
on any of property or assets of the Seller or any Subsidiary pursuant to, any
Material Agreement known to us.
5. The execution and delivery by the Seller of the Purchase Agreement and
each Related Document to which it is a party does not, and the performance by
the Seller of the Purchase Agreement and each Related Document to which it is
a party will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any regulatory authority or governmental
body in the United States, except for such consents, approvals,
authorizations, permits, filings or notifications as have been made or
obtained. The execution and delivery by each Subsidiary of each Related
Document to which it is a party does not, and the performance by each
Subsidiary of each Related Document to which it is a party will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any regulatory authority or governmental body in the United
States, except for such consents, approvals, authorizations, permits, filings
or notifications as have been made or obtained.
6. To our knowledge, there are no actions, suits or proceedings
("proceedings") relating to the Business or the Purchased Assets pending or
threatened in writing against the Seller or any Subsidiary, whether at law or
in equity, whether civil or criminal in nature or before or by any regulatory
authority or governmental body in the United States, nor to our knowledge has
any order, judgment, writ, injunction or decree of a regulatory authority or
governmental body in the United States relating to the Business or the
Purchased Assets been entered against the Seller or any Subsidiary.
7. The Bill of Sale and Assumption and Assignment Agreement are sufficient
in form to transfer all right, title and interest held by the Seller and the
Subsidiaries.
This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other Person without our prior written
consent.
Sincerely,
Cooley Godward LLP
Christopher A. Westover
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EXHIBIT E TO
ASSET PURCHASE
AGREEMENT
TRANSITION AGREEMENT
This Transition Agreement (the "Agreement") is entered into as of this
day of , 1999 by and among BEI Medical Systems Company, Inc., a Delaware
corporation ("Seller"), and CooperSurgical Acquisition Corp., a Delaware
corporation ("Buyer").
RECITALS
WHEREAS, Seller and Buyer have entered into an asset purchase agreement (the
"Asset Purchase Agreement") dated October 1, 1999 and amended on November 2,
1999 pursuant to which Seller will sell, and Buyer will purchase,
substantially all of the assets and assume certain of the liabilities of
Seller relating to the Business as defined in the Asset Purchase Agreement;
and
WHEREAS, in connection with Buyer's acquisition of the Business from Seller
(the "Acquisition"), Seller and Buyer desire to provide for certain transition
services, on an interim basis, as set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants set forth below, and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
AGREEMENT
1. Transition Services.
(a) During the term of this Agreement as set forth in Section 3 below (the
"Transition Period"), Seller shall continue to provide on behalf of Buyer the
products and services related to the Business in substantially the same manner
as such services were heretofore provided by Seller on its own behalf in
carrying on the Business, including the activity set forth on Annex A attached
hereto.
(b) Annex A constitutes part of this Agreement and may be amended from time
to time with the written consent of Seller and Buyer.
(c) Buyer shall pay the following amounts for the products and services
provided by Seller under this Agreement: (i) the cost of materials purchased
by Seller subsequent to the date of this Agreement to produce products
pursuant to a production plan mutually agreed upon by Seller and Buyer, which
plan shall in no event exceed Seller's manufacturing capacity as of the date
of this Agreement (the "Mutual Production Plan"), (ii) for each employee not
engaged in production or manufacturing and listed on Annex B, that percentage
set forth on such annex opposite the name of such employee under the column
headed "Support Base Business %" of the amount of weekly salary set forth on
such annex opposite the name of such employee under the column headed "Weekly
Salary" plus an amount equal to 28% of the result of the foregoing
calculation, (iii) the amount of out-of-pocket expenditures for supplies and
services provided for the benefit of Buyer under this Agreement that are
approved by Buyer, which approval shall not be unreasonably withheld, (iv) the
cost of moving expenses for, and repairs and installation of, equipment owned
by Buyer, (v) as a labor component for each product delivered for Buyer
hereunder, an amount equal to the number of direct labor hours multiplied by
direct labor costs for each product as set forth on Schedule 1(c), which
product is delivered by Seller to or at the direction of Buyer pursuant to the
Mutual Production Plan, (vi) costs and expenses such as employment agency fees
which are incurred as a direct result of Seller's efforts to replace on a
temporary basis any employee performing transition services under this
Agreement who voluntarily terminates employment with Seller during the
Transition Period, (vii) all incremental costs approved by Buyer that are
associated with customer solicitation activity including,
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but not limited to: sales commissions, postage, sales literature, freight,
samples and other free goods, telephone and communications, computer and
office supplies, maintenance and repairs, outside computer services and travel
and entertainment expenses, (viii) all related pre-approved collection charges
and (ix) the commissions provided for in Annex A. Seller shall send bills
and/or invoices in connection with the foregoing items at the end of each one-
week period of the Transition Period. Buyer shall within five days after
receipt of such bills and/or invoices, pay to Seller the amounts specified in
such bills and/or invoices in full. Notwithstanding the foregoing, although
Seller shall bill all amounts to be paid pursuant to this subsection, Buyer
shall have no obligation to pay to Seller the first $245,000 for products and
services due under this Agreement and such amount will not be considered due
to Seller under this Agreement as Seller has agreed to provide the first
$245,000 of products and services delivered hereunder without cost to Buyer.
2. General Intent. Seller shall use its commercially reasonable best efforts
to provide all transition assistance which the Buyer may reasonably request
during the Transition Period. Seller shall use its commercially reasonable
best efforts to retain the employees required to produce the services set
forth in Annex A. Seller is not obligated to hire any new employees to replace
those employees who may leave the employment of the Seller during the
Transition Period; provided, however, that Seller shall use commercially
reasonable efforts to replace such employees with temporary personnel to the
extent required for Seller to perform its obligations under this Agreement.
Because Seller is performing the transition services for the benefit of Buyer,
Seller shall perform such services under the direction and control of Buyer,
provided that Buyer shall provide such direction and control through Seller's
existing management and supervisory channels. Buyer's personnel may be present
on the premises of Seller on which transition services are being performed to
monitor and control such services. Each party shall execute such further
documents and take such further actions as may be necessary to carry out the
purposes of this Agreement.
3. Term.
(a) Except as provided in Section 3(b), 3(c), and 3(d) below, the term of
this Agreement shall commence on the date of the closing of the Acquisition
(the "Closing Date") and shall continue for ninety (90) days; provided,
however, that either party may terminate this Agreement in the event of a
material default by the other party hereunder that is not cured within five
(5) business days following written notice of default by the non-defaulting
party.
(b) Notwithstanding Section 3(a), Buyer may elect to extend the term of this
Agreement on a month-to-month basis for up to three (3) months by providing
written notice at least thirty (30) days prior to the expiration of the then
applicable Transition Period of this Agreement specifying the products and
services attached hereto that Buyer requires that Seller continue to provide
and the duration for which such products and services shall be provided.
During the period of any such extension (i) products shall be provided at the
costs mutually agreed to pursuant to this Agreement, and (ii) services shall
be provided pursuant to the terms of this Agreement at the rate of one hundred
dollars ($100) per hour of Seller employee time and incidental costs incurred
for such services that are pre-approved by Buyer. If the mutually agreed upon
production schedule for a certain product has not been met by Seller during
the initial ninety (90) days of the Transition Period and such production
schedule contemplated that the products would be completed within such ninety
(90) day period, then the costs for completing such products shall be pursuant
to the costs applicable during such ninety (90) day period, as specified on
Schedule 1(c), rather than pursuant to this Section 3(b).
(c) Notwithstanding Section 3(a), Seller, at the request of Buyer, from time
to time during and for up to fifteen (15) months following the date of this
Agreement will provide on reasonable notice reasonable consulting services
with respect to issues such as regulatory affairs, product details,
engineering and sales and marketing. Such services shall be provided during
the term of Transition Period for payment provided for in this Agreement and
after the Transition Period at the rate of one hundred twenty dollars ($120)
per hour of Seller employee time and incidental costs incurred for such
services that are pre-approved by Buyer.
(d) Buyer may, at any time and from time to time, terminate any product or
service to be provided by Seller under this Agreement by delivering to Seller
a "Buyer Termination Notice". Each Buyer Termination Notice
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shall specify the product or service to be terminated and the date on which
termination shall occur (which shall be not less than fourteen (14) days from
the delivery to Seller of such notice). From and after each such date of
termination, Buyer shall have no further obligation under this Agreement to
pay Seller the charges specified in this Agreement for each such terminated
service or product, except for any product for which an order has already been
placed by Buyer and for any service or product provided prior to such date of
termination.
4. Insurance.
(a) Buyer possesses those insurance policies, including product liability
insurance, which are necessary to fully insure the services to be conducted by
Seller against all risks normally insured against by a person or entity
conducting the same business as Buyer and the business to be conducted by
Seller pursuant to this Agreement, and such policies name Buyer as the
insured. Such insurance policies comply with any federal, state, local or
foreign laws and regulations applicable to the business and operations
conducted by Buyer, including the transactions contemplated by this Agreement.
(b) Buyer will continue to carry its existing insurance or reasonably
comparable coverage throughout the term of this Agreement. Upon the written
request of Seller, Buyer will provide copies of certificates of insurance as
evidence thereof.
(c) Seller will continue to carry its existing insurance as disclosed in
Schedule 2.20 to, or as may be otherwise required by the Asset Purchase
Agreement, or reasonably comparable coverage throughout the term of this
Agreement.
(d) Seller's insurance shall cover loss or damage to property of Seller
located on Seller's facilities used to provide transition services and on such
facilities to the extent required by any lease therefor. Buyer's insurance
shall cover loss or damage to Buyer's property located on such facilities.
Each party shall request its insurers to waive subrogation against the other
party for Losses to property covered by such party's insurance as described in
this subsection 4(d).
5. Certain Seller Payments. Seller represents to Buyer that to induce each
employee of Seller listed on the Personnel Consolidation Plan attached hereto
as Annex B (the "Retained Employee") to remain as an employee of Seller during
the Transition Period, Seller has offered each such employee the stay bonus
and severance payment set forth opposite the name of such employee on such
Plan. Seller shall make the payments required to be made by it to each such
employee pursuant to such offer. Other than as set forth on Annex B, Seller
shall have no further obligation to provide any stay bonus, severance payment
or other compensation to the Retained Employees. If Buyer instructs Seller to
attempt to retain a specific Retained Employee beyond the Transition Period,
Buyer shall be solely responsible for any stay bonus, severance payment or
other compensation to be provided at the instruction of Buyer to any such
Retained Employee in order to retain such Retained Employee beyond the
Transition Period, and Seller shall not be obligated hereunder to provide any
compensation to any such Retained Employee beyond the Transition Period
(including any extensions of such Transition Period made pursuant to this
Agreement) unless instructed to do so by Buyer.
6. Indemnification.
(a) Indemnification by Buyer. As of the date of this Agreement and subject
to the other provisions of this Section 6, Buyer shall indemnify, defend (with
counsel reasonably acceptable to Seller), and hold Seller, and its respective
directors, officers, agents and employees (collectively, the "Seller
Indemnified Parties") harmless from and against, and will pay to the Seller
Indemnified Parties the amount of any and all losses, damages, liabilities,
costs and expenses, direct and indirect (including reasonable attorneys' and
consultants' fees) (collectively, the "Losses"), arising, directly or
indirectly, from or in connection with:
(i) any breach of any representation or warranty made by Buyer in this
Agreement;
(ii) any breach by Buyer of any covenant or obligation of Buyer in this
Agreement;
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(iii) any suit or proceeding brought against any Seller Indemnified Party
arising out of Seller's performance or non-performance contemplated by this
Agreement except to the extent caused by the gross negligence or willful
misconduct of a Seller Indemnified Party or Seller's wrongful failure to
render the services or produce the products contemplated by this Agreement;
or
(iv) gross negligence or willful misconduct of Buyer.
(b) Indemnification by Seller. As of the Effective Date and subject to the
other provisions of this Section 6, Seller shall indemnify, defend and hold
Buyer, its shareholders, directors, officers, agents and employees
(collectively, the "Buyer Indemnified Parties") harmless from and against and
will pay to the Buyer Indemnified Parties the amount of any Losses, arising
directly or indirectly, from or in connection with:
(i) any breach of any representation or warranty made by Seller in this
Agreement;
(ii) any breach by Seller of any covenant or obligation of Seller in this
Agreement; or
(iii) gross negligence or willful misconduct of Seller or Seller's
wrongful failure to render the services or produce the products
contemplated by this Agreement.
Notwithstanding the above, Seller shall have no liability and shall not
indemnify Buyer for any Losses to the extent based on (A) the gross negligence
or willful misconduct of a Buyer Indemnified Party or (B) any delay or refusal
on the part of Buyer in providing any necessary pre-approvals or approvals
under this Agreement on a timely basis. In each instance where pre-approval or
approval is required under this Agreement, Seller shall request for pre-
approval or approval in advance of the time when Losses would be incurred if
pre-approval or approval were not obtained. Seller shall not be obligated to
take any action or pay any expense with respect to a matter requiring pre-
approval or approval until such pre-approval or approval has been provided by
Buyer.
(c) Limitations on Indemnification by Seller. No Seller Indemnified Party
shall be liable, responsible or in anyway accountable to Buyer for, and Buyer
waives and releases any claims (including any claim by way of subrogation,
contractual or implied indemnity or otherwise) against, such Seller
Indemnified Party for Losses which at any time after the date hereof may be
suffered or sustained by any individual, including any individual employed by
Buyer, who, after the date of this Agreement, and with the permission of
Seller, has entered Seller's facilities used to provide transition services,
or may at any time be using or occupying or visiting such facilities or be in,
on or about the same, or in or about the common areas of such facilities or
the sidewalks adjacent thereto, except to the extent caused by the gross
negligence or willful misconduct of such Seller Indemnified Party.
(d) Indemnification Claims. If either party hereto (the "Claimant") wishes
to assert an indemnification claim against the other party hereto, the
Claimant shall deliver to the other party a written notice (a "Claim Notice")
setting forth:
(i) a detailed description of the facts and circumstances giving rise to
the claim; and
(ii) a reasonable estimate of the total amount of Losses incurred.
(e) Defense of Third Party Actions.
(i) If either party hereto (the "Indemnitee") receives notice or
otherwise obtains knowledge of any action, hearing, arbitration,
litigation, suit or claim ("Proceeding") or any threatened Proceeding that
may give rise to an indemnification claim against the other party hereto
(the "Indemnifying Party"), then the Indemnitee shall promptly deliver to
the Indemnifying Party a written notice describing such Proceeding in
reasonable detail. The failure to give such written notice shall not
relieve the Indemnifying Party of any liability under this Section 6 with
respect to such matter except to the extent the Indemnifying Party shall
have been materially prejudiced by such failure.
(ii) If any Proceeding referred to in Section 6(e)(i) is brought against
an Indemnitee and it gives notice to the Indemnifying Party of the
commencement of such Proceeding, the Indemnifying Party will be entitled
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to participate in such Proceeding and, to the extent that it wishes (unless
the Indemnifying Party is also a party to such Proceeding and the
Indemnitee reasonably determines in good faith that joint representation
would be inappropriate), to assume the defense of such Proceeding with
counsel reasonably satisfactory to the Indemnitee and, after notice from
the Indemnifying Party to the Indemnitee of its election to assume the
defense of such Proceeding, the Indemnifying Party will not, as long as it
diligently conducts such defense, be liable to the Indemnitee under this
Section 6(e) for any fees of other counsel or any other expenses with
respect to the defense of such Proceeding, in each case subsequently
incurred by the Indemnitee in connection with the defense of such
Proceeding. If the Indemnifying Party assumes the defense of a Proceeding,
(i) it will be conclusively established for purposes of this Agreement that
the claims made in that Proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be
effected by the Indemnifying Party without the Indemnitee's consent and the
Indemnitee will have no liability with respect to any compromise or
settlement of such claims effected without its consent. If notice is given
to an Indemnifying Party of the commencement of any Proceeding and the
Indemnifying Party does not, within ten (10) days after the Indemnitee's
notice is given, give notice to the Indemnitee of its election to assume
the defense of such proceeding, the Indemnitee shall have the right to
control the defense of, and to compromise or settle such Proceeding.
(f) Survival. All representations and warranties in this Agreement will
survive for a period of one year after termination of this Agreement. The
right to indemnification, payment of damages or other remedy based on the
provisions of this Section 6 shall survive the time at which it would
otherwise terminate pursuant to Section 3, if prior to such termination, the
party seeking indemnification shall have duly delivered a Claim Notice to the
party against whom such indemnity may be sought in conformity with all of the
applicable procedures set forth in this Section 6.
(g) If the Indemnifying Party exercises its right to assume the defense of a
Proceeding pursuant to Section 6(e), (i) the Indemnitee shall be entitled to
participate in such defense with its own counsel at its own expense and (ii)
the Indemnifying Party shall not make any settlement of any claims without the
written consent of the Indemnitee, which consent shall not be unreasonably
withheld or delayed, unless the terms of such settlement requires no more than
the payment of money and the Indemnifying Party pays such amount.
(h) If the Indemnifying Party assumes the defense of a Proceeding, the
Indemnitee shall cooperate fully as reasonably requested by the Indemnifying
Party in the defense of such Proceeding, and shall make available to the
Indemnifying Party all books, records and other materials that are under the
direct or indirect control of the Indemnitee and that the Indemnifying Party
reasonably considers necessary or desirable for the defense of such
Proceeding.
(i) Absent fraud or willful misconduct, no party hereto shall be entitled to
recover special or punitive damages with respect to any breach of any
representation or warranty or nonperformance of any obligation under this
Agreement.
(j) Notwithstanding anything to the contrary contained in this Agreement (i)
to the extent Losses hereunder also constitute Losses under the Asset Purchase
Agreement, then those provisions of the Asset Purchase Agreement applicable to
such Losses shall determine the rights and obligations of the parties with
respect thereto and the provisions of this Agreement shall not apply, (ii)
except as provided in the previous clause (i) of this subsection 6(j), Buyer's
product liability insurance shall be applicable to sales of products by Buyer
which occur subsequent to the date of this Agreement and Seller's product
liability insurance shall not be applicable to such sales, (iii) the
Indemnitee shall use commercially reasonable efforts to seek recovery from its
insurance providers with respect to any Losses for which indemnity (other than
indemnity for product liability) may be sought against the Indemnifying Party
under this Section 6 and for which the Indemnitee's insurance may be available
and such Losses shall be net of any insurance proceeds or other amounts
actually recovered by or on behalf of Indemnitee.
(k) To the extent that any Indemnifying Party makes any indemnification
payment to any Indemnitee, the Indemnifying Party shall be entitled to
exercise, and shall be subrogated to, any rights and remedies (including
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rights of indemnity, rights of contribution and other rights of recovery) that
the Indemnitee may have against any other Person with respect to any Losses to
which such indemnification payment is related. The Indemnitee shall take such
actions as the Indemnifying Party may reasonably request for the purpose of
enabling the Indemnifying Party to perfect or exercise its right of
subrogation hereunder.
(l) Any legal action or other legal proceeding relating to this Agreement or
the enforcement of any provision of this Agreement may be brought by an
Indemnitee against an Indemnifying Person, and may be contested by such
Indemnifying Person. In that event, if the court or arbitrator in such
proceeding determines that the Indemnifying Person is not obligated under this
Agreement to indemnify the Indemnitee for all or any part of the amount
claimed by the Indemnitee in such proceeding, then the Indemnifying Person
shall be entitled to recover a portion of the reasonable attorneys' fees,
costs and disbursements incurred by the Indemnifying Person contesting the
claim of the Indemnitee against the Indemnifying Person in such proceeding (in
addition to any other relief to which it may be entitled) based upon the
extent to which the Indemnitee was successful in contesting the amount claimed
by the Indemnifying Person. This provision shall not limit in any way Losses
to which an Indemnitee is entitled under the provisions of this Agreement.
7. General.
(a) This Agreement is made in accordance with and will be governed and
construed under the laws of the State of New York, excluding conflict of law
principles that would cause the law of another jurisdiction to apply.
(b) This Agreement is not assignable or transferable by either party in
whole or in part except with the written consent of Buyer, which consent shall
not be unreasonably withheld, provided, however, this Agreement may be
assigned by Buyer to an Affiliate of Buyer to which Buyer assigns its rights
and duties under the Asset Purchase Agreement. In the case of any permitted
assignment or transfer of or under this Agreement, this Agreement or the
relevant provisions thereof will be binding upon, and inure to the benefit of,
the successors and assigns of the parties hereto.
(c) All notices and other communications required or permitted to be given
under this Agreement will be in writing and will be effective if delivered
during business hours on a business day when delivered personally by facsimile
or sent by a nationally recognized commercial overnight carrier, or by
registered or certified mail, postage prepaid, and addressed to the party at
its address set forth on the signature page hereof, unless by such notice a
different person, address or number has been designated for giving notice
hereunder or, if not delivered during business hours on a business day, the
next succeeding business day.
(d) The parties hereto agree that under this Agreement, each party is an
independent contractor and not an agent or employee of the other party. In no
way will any party be liable to the other party, its employees or agents for
any losses, injury, damages or the like occasioned by such party's activities
in connection with this Agreement, except as expressly provided herein.
(e) This Agreement may be amended only with the written approval of each
party hereto. Any of the provisions of this Agreement may be waived, generally
or in a specific instance, with the written approval of the party giving such
waiver. The failure of either party to enforce any provision of this Agreement
will not be deemed a waiver of such provision or of the right of such party
thereafter to enforce such provision or any other provision.
(f) In the event that any provision of this Agreement will be unenforceable
or invalid under any applicable law or be so held by applicable court
decision, such unenforceability or invalidity will not render this Agreement
unenforceable or invalid as a whole and, in such event, such provision will be
changed and interpreted so as to best accomplish the objectives of such
unenforceable or invalid provision within the limits of applicable law or
applicable court decision.
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(g) Except as expressly provided in this Agreement, the rights and remedies
provided in this Agreement will be cumulative and not exclusive of any other
rights and remedies provided by law or otherwise.
(h) No liability shall result from delay in performance or non-performance
caused by circumstances beyond the reasonable control of the party affected,
including, without limitation, the voluntary termination of employment with
Seller by any of Seller's employees, reassignment or termination of any
employees of Seller at the direction of Buyer, acts of God, acts of a public
enemy, acts of the governments of any state or political subdivision or any
department or regulatory agency thereof or entity created thereby, quotas,
embargoes, acts of any person engaged in subversive activity or sabotage,
fires, floods, explosions, or other catastrophes, epidemics, or quarantine
restrictions, strikes or other labor stoppages, slowdowns or disputes,
voluntary or involuntary compliance with any law, or regulation of any
governmental agency or authority, lack of transportation facilities, or any
other cause beyond the control of the affected party, for that period
commencing at the time notice of such circumstances is given by the affected
party and terminating at such time as the impairment caused by such
circumstances ends or would have ended had the affected party taken reasonable
steps to remedy such circumstances.
(i) Seller's total liability with respect to services provided under this
Agreement will under no circumstances exceed the total of all service fees
actually paid or due to Seller or credited to Buyer under this Agreement,
including up to $245,000 billed but not paid by Buyer pursuant to Section 1(c)
of this Agreement. Furthermore, and subject to the limitations set forth in
this Agreement, if Seller fails to deliver a product in accordance with the
Mutual Production Plan (other than as a result of or failure to act on the
part of Buyer) and is unable to adequately cure such failure to deliver, the
maximum liability of Seller to Buyer with respect thereto shall be an amount
equal to the difference between the average sales price for such product and
the cost to Buyer hereunder relating to producing such product; in no event,
however, shall Seller be liable to Buyer for loss of customers in connection
with the failure to deliver a product in accordance with the Mutual Production
Plan.
(j) The section headings appearing in this Agreement are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or extent of such paragraph or in any way affect such paragraph.
(k) This Agreement may be executed in counterparts with the same force and
effect as if each of the signatories had executed the same instrument.
8. Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the construction
or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above set forth.
BEI Medical Systems Company, Inc.
CooperSurgical Acquisition Corp.
By: _________________________________ By: _________________________________
Name: _______________________________ Name: _______________________________
Title: ______________________________ Title: ______________________________
Address: Address:
BEI Medical Systems Company, Inc. CooperSurgical Acquisition Corp.
Hollister Road c/o CooperSurgical, Inc.
Teterboro, NJ 07608 15 Forest Parkway
Attn: Richard W. Turner, Shelton, CT 06484
President and CEO Attn: Nicholas J. Pichotta, President
Facsimile Number: 201-727-4988 Facsimile Number: 203-925-0135
with a copy to: with a copy to:
Cooley Godward LLP O'Sullivan Graev & Karabell, LLP
One Maritime Plaza, 20th Floor 30 Rockefeller Plaza
San Francisco, CA 94111 New York, NY 10112
Attn: Christopher A. Westover, Esq. Attn: David I. Karabell, Esq.
Facsimile Number: (415) 951-3699 Facsimile Number: (212) 728-5950
8
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ANNEX A and ANNEX B
[OMITTED]
9
<PAGE>
EXHIBIT F TO
ASSET PURCHASE AGREEMENT
NONCOMPETITION AGREEMENT dated , 1999, between COOPERSURGICAL
ACQUISITION CORP., a Delaware corporation (the "Company"), and BEI MEDICAL
SYSTEMS COMPANY, INC., a Delaware corporation (the "Covenantor").
Reference is made to the Asset Purchase Agreement dated as of October 1,
1999 and amended on November 2, 1999, between the Company and the Covenantor
(the "Asset Purchase Agreement"). Pursuant to the Asset Purchase Agreement,
the Company is acquiring substantially all of the assets, including the
Products, of the Covenantor which comprise the Business. This Agreement is
being entered into pursuant to the Asset Purchase Agreement.
In consideration of the Company purchasing the Purchased Assets under the
Asset Purchase Agreement and in order to prevent the Company from being
economically harmed by a loss of the goodwill associated with the Business,
the Covenantor has agreed not to compete with the Company under the conditions
set forth in this Agreement.
ACCORDINGLY, in consideration of the good and valuable consideration which
the parties hereto acknowledge, the parties hereto hereby agree as follows:
Section 1. Certain Defined Terms.
Capitalized terms used but not otherwise defined herein have the meanings
set forth in the Asset Purchase Agreement.
Section 2. Non-competition and Non-solicitation.
(a) Subject to the second paragraph of Section 2(a), the Covenantor agrees
that, during the Non-Compete Period (as defined below), the Covenantor shall
not, directly or indirectly, own, manage, control, participate in, consult
with, render services for, whether as an agent, employee, consultant, advisor,
representative, stockholder, partner or joint venturer, or in any manner
engage in any business within any Restricted Territory (as defined below)
competing with the Products, including any improvements and replacements for
the Products, or competing with any other products or procedures which are
used to perform the same function as, or the same treatments and procedures
performed by, the Products or a business developing any product which is used
to perform the same function as, or the same treatments and procedures
performed by, the Products. As used in this Agreement, the term "Restricted
Territory" means any of the following geographic areas (whether domestic or
foreign) in which any Product, process, good or service has been manufactured,
provided, sold or offered or promoted for sale by the Company or its Business
Group or with respect to which the Company or its Business Group have devoted
substantial expense in anticipation of launching into such geographic area a
portion of the Business: (i) any state in the continental United States; (ii)
Alaska and Hawaii; (iii) any other territory or possession of the United
States; (iv) each country in the European Union ("EU"); and (v) any country
other than (x) the United States or any state, territory, possession or
political subdivision thereof and (y) a country in the EU. As used in this
Agreement, the term "Non-Compete Period" means the period beginning on the
date of this Agreement and ending on the fifth anniversary of the date of this
Agreement. As used in this Agreement, the term "control" means the possession,
directly or indirectly, of the power to direct the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
Nothing in this Section 2 shall prohibit the Covenantor from (i) engaging,
directly or indirectly, as a partner, joint venturer or otherwise in the
development, manufacture, sales, marketing or service of the product known as
Hydro ThermAblator or HTA, or any improvement to such product (collectively,
"HTA") and, subject to the last two sentences of this paragraph, the
development, manufacture, marketing, sale or service of the products listed on
Exhibit A, or any improvement to or replacement for such products listed on
Exhibit A (the "HTA Related Products") or (ii) being a passive owner of not
more than (A) 4% of the outstanding capital stock of any class of
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a corporation (or 4% of the equity interest in any other Person), the
securities of which are publicly traded or (B) 1% of the outstanding capital
stock of any class of a corporation (or 1% of the equity interest in any other
Person), the securities of which are privately held, so long as the Covenantor
has no active participation in the business of such Person. The HTA Related
Products may only be marketed, sold or serviced, directly or through
distribution channels, (A) solely in connection with the sale or use of HTA by
medical professionals, (B) in a number reasonably necessary to facilitate the
use by such medical professionals of HTA and (C) to the medical professionals
purchasing or using HTA. Any marketing, sale or service of an HTA Related
Product which does not strictly comply with the immediately preceding sentence
is a violation of the Covenantor's obligations under this Agreement.
(b) During the Non-Compete Period, the Covenantor agrees that the Covenantor
shall not, directly or indirectly through another Person (i) solicit any
employee of the Company or its Business Group to leave the employ of the
Company or any of its Business Group, or in any way interfere with the
relationship between the Company or any of its Business Group, on the one
hand, and any employee thereof, on the other hand; provided, however, that the
general solicitation of third parties through the use of means generally
available to the public, including the placement of advertisements in the
newspaper, shall not be deemed to violate this clause (i), (ii) hire any
individual who was an employee of the Company or its Business Group until six
months after such individual's employment relationship with the Company or any
of its Business Group has been terminated or (iii) induce or attempt to induce
any customer, supplier, consultant, licensee or other business relation of the
Company or any of its Business Group to cease doing business with the Company
or any of its Business Group, or in any way interfere with the relationship
between any such customer, supplier, consultant, licensee or business
relation, on the one hand, and the Company or any of its Business Group, on
the other hand; provided, however, that the Covenantor shall not be deemed to
interfere with the relationships of the Company or its Business Group with a
customer, supplier, consultant, licensee or other business relation solely
because, in compliance with this Agreement, the Covenantor does business on a
non-exclusive basis with such a Person.
Section 3. Option To Modify Non-Competition Covenant in Section 2(a).
(a) The Company hereby grants to the Covenantor the right and option (the
"Option"), exercisable by the Covenantor under the terms specified in this
Section 3, to modify the non-competition covenant in Section 2(a) of this
Agreement. The Option may be exercised by the Covenantor strictly in the
manner provided in this Section 3 solely on the occurrence of the first Change
of Control or Joint Venture Arrangement which is consummated after the date of
this Agreement.
(b) The Covenantor may exercise the Option by delivering an election notice
(the "Election Notice") to the Company concurrently with paying to the Company
the sum of $250,000 by wire transfer of immediately available funds. The
Election Notice shall certify to the Company that there has occurred the first
Change of Control or Joint Venture Arrangement which has been consummated
after the date of this Agreement, shall specify that the Covenantor is
exercising the Option upon consummation of such Change of Control or Joint
Venture Arrangement and shall be accompanied by confirmation that there has
been paid to the Company by wire transfer of immediately available funds the
sum of $250,000.
(c) Upon exercise by the Covenantor of the Option in the manner provided in
this Section 3, then, notwithstanding the provisions of Section 2(a), from and
after such Change of Control or Joint Venture Arrangement is consummated, only
the following activities by the Person that acquires control of the Covenantor
as a result of such Change of Control or engages with the Covenantor in such
Joint Venture Arrangement shall be deemed to violate the provisions of Section
2(a) of this Agreement: developing, manufacturing, selling, marketing or
servicing products which both Mimic and compete with the Principal Products.
(d) "Change of Control" means either (x) the sale of substantially all of
the Covenantor's assets to an unaffiliated third Person (other than sale of
such assets to the Company) or (y) a merger or consolidation or sale of
capital stock of the Covenantor (each, a "Transaction"), under circumstances
in which the holders of a majority of the voting power of the outstanding
capital stock of the Covenantor, immediately prior to the
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<PAGE>
Transaction, own less than a majority of the voting power of the outstanding
capital stock of the Covenantor or the surviving corporation or resulting
corporation, as the case may be (the "Surviving Person"), immediately
following such Transaction. A Person is deemed to have acquired control of the
Covenantor as a result of the Change of Control (x) if such Person owns,
directly or indirectly, substantially all of such assets sold by the
Covenantor or (y) if such Person controls, directly or indirectly, a majority
of the voting power of the outstanding capital stock of the Surviving Person
or (z) if such Person is the Surviving Person. "Joint Venture Arrangement"
means an agreement between the Covenantor and a third Person to carry on a
joint business activity in the form of a joint venture, partnership or other
contractual arrangement, including without limitation any license, supply or
distribution arrangement.
"Principal Products" means the Products known as "Zumi", "Zui", "Z-Clamp",
"Nichols Pelvic Set" and "Miya Hook", and all variations of such Products. A
product is deemed to "Mimic" a Principal Product if a bona fide credible
argument can be made that such product infringes a patent or patents which may
at any time have been issued for such Principal Product, even if such
Principal Product is not at the time protected by a patent.
Section 4. Confidentiality.
(a) The Covenantor will not disclose or use at any time, during the Non-
Compete Period, any Confidential Information of which the Covenantor is or
becomes aware, whether or not such information was developed by the
Covenantor.
(b) As used in this Agreement, the term "Confidential Information" means
information that is not in the public domain and that was used, developed or
obtained by the Covenantor in connection with the Business, including but not
limited (i) products or services, (ii) fees, costs and pricing structures,
(iii) designs, (iv) analyses, (v) drawings, photographs and reports, (vi)
computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases,
(ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) other copyrightable works, (xiii) all production methods,
processes, technology and trade secrets, and (xiv) all similar and related
information in whatever form.
(c) Notwithstanding the provisions of this Agreement to the contrary, the
Covenantor shall have no liability to the Company for disclosure or use of
Confidential Information if the Confidential Information:
(i) is known to the receiving party at the time of disclosure by the
Covenantor to the receiving party of such Confidential Information other
than as the result of a breach of this Section 4 by the Covenantor;
(ii) becomes publicly known or is disclosed by the Company other than as
the result of a breach of this Section 4 by the Covenantor;
(iii) is received by the Covenantor after the date of this Agreement from
a third party that is not under an obligation of confidentiality to the
Company;
(iv) is required to be disclosed by law, court order, or similar
compulsion or in connection with any legal proceeding, provided that such
disclosure shall be limited to the extent so required and, except to the
extent prohibited by law, the Covenantor shall give the Company notice of
its intent to so disclose such Confidential Information and shall
reasonably cooperate with the Company in seeking suitable confidentiality
protections; or
(v) relates to HTA.
Section 5. Representations and Warranties.
(a) The Covenantor hereby represents and warrants to the Company that (i)
the execution, delivery and performance of this Agreement by the Covenantor
does not and will not conflict with, breach, violate or cause a
3
<PAGE>
default under any agreement, contract or instrument to which the Covenantor is
a party or any judgment, order or decree to which the Covenantor is subject,
(ii) the Covenantor is not a party to or bound by any employment agreement,
consulting agreement, non-compete agreement, confidentiality agreement or
similar agreement with any other Person that is inconsistent with the
provisions of this Agreement and (iii) upon the execution and delivery of this
Agreement by the Company and the Covenantor, this Agreement will be a valid
and binding obligation of the Covenantor.
(b) The Company hereby represents and warrants to the Covenantor that (i)
this Agreement has been duly authorized by all necessary corporate action on
the part of the Company, (ii) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate
or cause a default under any agreement, contract or instrument to which the
Company is a party or any judgment, order or decree to which the Company is
subject, and (iii) upon the execution and delivery of this Agreement by the
Company and the Covenantor, this Agreement will be a valid and binding
obligation of the Company.
Section 6. Enforcement.
(a) Because the relationship between the Company and the Covenantor is
unique and because the Covenantor has had access to Confidential Information,
the parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement. Therefore, in the event of a breach or
threatened breach by the Covenantor of this Agreement, the Company may apply
to any court of competent jurisdiction for specific performance and/or
injunctive or other relief in order to enforce, or prevent any violations of,
the provisions hereof (without posting a bond or other security) in addition
to other rights and remedies existing in its favor, including requiring the
Covenantor to account for and pay over to the Company all compensation,
profits, moneys, accruals, increments or other benefits derived or received as
a direct result of any transactions constituting a breach of the covenants
contained therein.
(b) The prevailing party in any legal action arising out of or relating to
this Agreement shall be entitled to its reasonable attorneys' fees and court
costs.
Section 7. General Provisions.
(a) Severability. It is the desire and intent of the parties hereto that the
provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
this Agreement or affecting the validity or enforceability of such provision
in any other jurisdiction. Notwithstanding the foregoing, if such provision
could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction.
(b) Complete Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral,
which may have related to the subject matter hereof in any way.
(c) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Covenantor and the Company and their respective
successors, permitted assigns, personal representatives, heirs and estates, as
the case may be.
(d) Governing Law. This Agreement will be governed by and construed in
accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflicting provision or rule
4
<PAGE>
(whether of the State of New York or any other jurisdiction), that would cause
the laws of any jurisdiction other than the State of New York to be applied.
In furtherance of the foregoing, the internal law of the State of New York
will control the interpretation and construction of this Agreement, even if
under such jurisdiction's choice of law or conflict of law analysis, the
substantive law of some other jurisdiction would ordinarily apply.
(e) Jurisdiction and Venue.
(i) THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY
SUBMIT, FOR THEMSELVES AND THEIR PROPERTY, TO THE EXCLUSIVE JURISDICTION OF
ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA
SITTING IN NEW YORK COUNTY, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR FOR RECOGNITION OR ENFORCEMENT OF ANY
JUDGMENT, AND THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH NEW YORK STATE COURT OR
SUCH FEDERAL COURT, PROVIDED THAT, IN THE EVENT THAT ANY SUCH FEDERAL COURT
HAS JURISDICTION, THE PARTIES SHALL INSTITUTE ANY SUCH ACTION OR PROCEEDING
IN SUCH FEDERAL COURT AND NOT IN SUCH STATE COURT. THE COMPANY AND THE
COVENANTOR AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING
SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON
THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
(ii) THE COMPANY AND THE COVENANTOR IRREVOCABLY AND UNCONDITIONALLY
WAIVE, TO THE FULLEST EXTENT THEY MAY LEGALLY AND EFFECTIVELY DO SO, ANY
OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN
ANY NEW YORK STATE OR FEDERAL COURT SITTING IN NEW YORK COUNTY. THE COMPANY
AND THE COVENANTOR IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY
LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION
OR PROCEEDING IN ANY SUCH COURT.
(f) Waiver of Jury Trial.
THIS IS A COMPLEX BUSINESS TRANSACTION. THE PARTIES BELIEVE THAT IT WOULD BE
BETTER TO HAVE ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT RESOLVED BY A JUDGE WITHOUT A JURY. EACH OF THE
PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT.
(g) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Covenantor, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(h) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(j) Business Group. For purposes of this Agreement, the term "Business
Group" means, with respect to the Company, the Company's current and future
Affiliates including those Affiliates listed on Exhibit B, and, with respect
to the Covenantor, the Covenantor's current and future Affiliates; provided,
however, that a future Affiliate of the Company shall not be considered part
of its "Business Group" unless and until the Company provides notice to the
Convenantor in writing that such Person is an Affiliate of the Company.
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(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of New York, the time period for taking action shall be automatically extended
to the business day immediately following such Saturday, Sunday or holiday.
(l) Survival of Representations and Warranties. All representations and
warranties contained herein shall survive the consummation of the transactions
contemplated hereby and by the Asset Purchase Agreement.
(m) Construction.
(i) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
(ii) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the
construction or interpretation of this Agreement.
(iii) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(n) Any notice or other communication required or permitted to be delivered
to any party under this Agreement shall be in writing and shall be deemed
properly delivered, given and received, if delivered during business hours on
a business day, when delivered (by hand, by registered mail, by courier or
express delivery service or by facsimile) to the address or facsimile
telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other party hereto) or, if not delivered
during business hours on a business day, on the next succeeding business day:
(A) if to the Company, to:
CooperSurgical Acquisition Corp.
c/o CooperSurgical, Inc.
15 Forest Parkway
Shelton, Connecticut 06484
Attention: Nicholas J. Pichotta, President
Telecopier: (203) 925-0135
with a copy to:
The Cooper Companies, Inc.
6140 Stoneridge Mall Road
Suite 590
Attention: Carol R. Kaufman, V.P., Legal Affairs
Telecopier: (510) 460-3660
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: David I. Karabell, Esq.
Telecopier: (212) 408-2400; and
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(B) if to the Covenantor, to:
BEI Medical Systems Company, Inc.
100 Hollister Drive
Teterboro, NJ 07608
Attention: Richard W. Turner, President & CEO
Telecopier: (201) 727-4998
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Attention: Christopher A. Westover, Esq.
Telecopier: (415) 951-3699
* * * *
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Noncompetition Agreement as of the date first written above.
COOPERSURGICAL ACQUISITION CORP.
By: _________________________________
Name:
Title:
BEI MEDICAL SYSTEMS COMPANY, INC.
By: _________________________________
Name:
Title:
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EXHIBIT A
HTA Related Products
1.Endoscopic Light Source (any method).
2.Hysteroscopic Video Camera System.
3.Flexible Hysteroscope System.
4.Rigid Hysteroscope System.
5.Cervical Sealing Tenaculum.
6.Disposable Cervical Dilator.
7. Those Products which are identified by asterisk on Annex A to Schedule 1.1
of the Asset Purchase Agreement as components and/or finished goods required
in the support of HTA.
8
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EXHIBIT B
The Company Affiliates
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- ---------------
<S> <C>
1.The Cooper Companies, Inc.................................... Delaware
2.The Cooper Healthcare Group, Inc............................. Delaware
a.Unimar, Inc................................................. California
3.CVP, Inc..................................................... Delaware
4.The Cooper Real Estate Group, Inc............................ Delaware
5.CooperVision, Inc............................................ New York
a.CooperVision Inc............................................ Canada
6.Marlow Surgical Acquisition (dormant)........................ Delaware
a.CooperVision GB Finance, Inc. (dormant)..................... Delaware
b.CooperVision GB Services, Inc. (dormant).................... Delaware
7.Hospital Group of America, Inc............................... Delaware
a.HGA Management Services, Inc................................ Delaware
b.Hospital Group of Delaware, Inc............................. Delaware
c.Hospital Group of Illinois, Inc............................. Illinois
d.Hospital Group of Louisiana, Inc............................ Louisiana
e.Residential Centers of Indiana, Inc......................... Delaware
f.Hospital Group of New Jersey, Inc........................... New Jersey
g.Hampton Learning Center, Inc................................ New Jersey
h.HGNJ, Inc................................................... New Jersey
8.Arlington Center for Recovery, L.L.C......................... Illinois
9.MeadowWood Health Services, L.L.C............................ Delaware
10.CooperSurgical, Inc.......................................... Delaware
a.CooperSurgical, Inc......................................... Canada
b.HBH Medizintechnik GmbH..................................... Germany
11.Aspect Vision Holdings, Limited.............................. England-Wales
a.Aspect Vision Care Limited.................................. England-Wales
b.Contact Lens Technologies Limited........................... England-Wales
c.Aspect Specialty Limited.................................... England-Wales
d.New Focus HealthCare Limited................................ England-Wales
e.Aspect Vision Italia s.r.l.................................. Italy
f.Focus Solutions Limited..................................... England-Wales
g.Averlan Company Limited..................................... England-Wales
h.Aspect Contact Lenses Limited............................... England-Wales
12.CooperVision Limited......................................... England-Wales
</TABLE>
NOTE: Except for CooperSurgical and its 52% owned subsidiary, HBH
Medizintechnik GmbH, each subsidiary is wholly-owned either by The Cooper
Companies, Inc. or by the wholly-owned subsidiary under which it is indented
in the list above. In the case of CooperSurgical, Inc., 99.8% of the company
is owned by The Cooper Companies, Inc. and the remaining .2% is owned by
members of CooperSurgical's Medical Advisory Board.
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EXHIBIT G TO
ASSET PURCHASE
AGREEMENT
NONCOMPETITION AGREEMENT dated as of , 1999, among COOPERSURGICAL
ACQUISITION CORP., a Delaware corporation (the "Company"), and RICHARD W.
TURNER, an individual ("Turner" or the "Covenantor").
Reference is made to the Asset Purchase Agreement (the "Asset Purchase
Agreement") dated as of October 1, 1999 and amended on November 2, 1999 and
the Noncompetition Agreement (the "BEI Noncompetition Agreement") dated as of
the date hereof, each between the Company and BEI Medical Systems Company,
Inc., a Delaware corporation ("BEI"). Pursuant to the Asset Purchase
Agreement, the Company is acquiring substantially all of the assets, including
the products listed on Exhibit A hereto (the "Turner Products"), of BEI which
comprise the Business. This Agreement is being entered into pursuant to the
Asset Purchase Agreement.
Turner has been an executive active in the business and affairs of BEI and
has personally developed numerous relationships and successful practices and
procedures which constitute the goodwill of the Business. In consideration of
the Company purchasing the Purchased Assets under the Asset Purchase Agreement
and in order to prevent the Company from being economically harmed by a loss
of the goodwill associated with the Business, Turner has agreed not to compete
with the Company under the conditions set forth in this Agreement.
ACCORDINGLY, in consideration of the good and valuable consideration which
the parties hereto acknowledge, the parties hereto hereby agree as follows:
Section 1. Certain Defined Terms; Consideration.
(a) Capitalized terms used but not otherwise defined herein have the
meanings set forth in the Asset Purchase Agreement.
(b) The Covenantor has been employed by BEI under a letter agreement dated
January 24, 1999, a copy of which is attached as Exhibit B hereto (the "Turner
Letter"), which gives Turner certain rights including, among others, an option
to be paid certain monies by BEI upon the occurrence of a sale of BEI prior to
January 31, 2000, and Turner has agreed to defer the exercise of those rights
pending the conclusion of a new employment agreement with BEI. In addition,
BEI may be paying additional amounts to Turner for the transaction
contemplated by the Asset Purchase Agreement.
Section 2. Noncompetition and Nonsolicitation.
(a) Subject to the second paragraph of Section 2(a), Covenantor agrees that,
during the Noncompete Period (as defined below), the Covenantor shall not,
directly or indirectly, own, manage, control, participate in, consult with,
render services for, whether as an agent, employee, consultant, advisor,
representative, stockholder, partner or joint venturer, or in any manner
engage in any business within any Restricted Territory (as defined below)
competing with the Turner Products, including any improvements and
replacements for the Turner Products, or competing with any other products or
procedures which are used to perform the same function as, or the same
treatments and procedures performed by the Turner Products ("Functionally
Equivalent Products"), or a business developing Functionally Equivalent
Products. As used in this Agreement, the term "Restricted Territory" means any
of the following geographic areas (whether domestic or foreign) in which any
product, process, good or service has been manufactured, provided, sold or
offered or promoted for sale by the Company or its Business Group or with
respect to which the Company or its Business Group have devoted substantial
expense in anticipation of launching into such geographic area a portion of
the Business: (i) any state in the continental United States; (ii) Alaska and
Hawaii; (iii) any other territory or possession of the United States;
(iv) each country in the European Union ("EU"); and (v) any country other than
(x) the United States or any state, territory, possession or political
subdivision thereof, and (y) a country in the EU. As used in this Agreement,
the term "Noncompete Period" means the period beginning on the date of this
Agreement and
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ending on the third anniversary of the date of this Agreement. As used in this
agreement, the term "control" means the possession, directly or indirectly, of
the power to direct the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
Nothing in this Section 2 shall prohibit the Covenantor from (i) engaging,
directly or indirectly, as an owner, manager, controlling person, participant,
agent, employee, consultant, advisor, representative, stockholder, partner,
joint venturer or otherwise in the development, manufacture, sales, marketing
or service of the product known as Hydro ThermAblator or HTA, or any
improvement to or replacement for such product (collectively, "HTA") and,
subject to the immediately succeeding paragraph, the sale and service of the
products listed on Exhibit C, or any improvement to or replacement for such
products listed on Exhibit C (the "HTA Related Products"), or (ii) being a
passive owner of not more than (A) 4% of the outstanding equity interests of
any class of a Person, the securities of which are publicly traded, or (B) 1%
of the outstanding equity interests of any class of a Person, the securities
of which are privately held, so long as the Covenantor has no active
participation in the business of such Person, or (iii) serving as an employee
or consultant for any Person, if (A) the sales of such Person to the
gynecological, infertility and family practice medical markets (collectively,
the "Proscribed Markets"), or any of such markets, do not exceed 25% of the
total sales of such Person, and (B) none of the activities of the Covenantor
relate directly or indirectly to the activities of such Person which, as to
the Covenantor, are prohibited under Section 2(a), or (iv) serving as an
employee or consultant for any Person selling products or services to the
Proscribed Markets, or any of them, which products or services do not include
the Turner Products or Functionally Equivalent Products.
The HTA Related Products may only be marketed, sold or serviced, directly or
through distribution channels, (A) solely in connection with the sale or use
of HTA by medical professionals, and (B) in a number reasonably necessary to
facilitate the use by such medical professionals of HTA, and (C) to the
medical professionals purchasing or using HTA. Any marketing, sale or service
of an HTA Related Product which does not strictly comply with the immediately
preceding sentence is a violation of the Covenantor's obligations under this
Agreement. Notwithstanding the first two sentences in this paragraph, sales of
HTA Related Products shall not be subject to the restrictions in such
sentences so long as such sales are made only by a Person described in clause
(iii) of the immediately preceding paragraph as part of the sales of such a
Person to the Proscribed Markets, or any of them, which do not exceed 25% of
the total sales of such Person.
(b) During the Noncompete Period, the Covenantor agrees that the Covenantor
shall not directly or indirectly through another Person (i) solicit any
employee of the Company or its Business Group to leave the employ of the
Company or any of its Business Group, or in any way interfere with the
relationship between the Company or any of its Business Group, on the one
hand, and any employee thereof, on the other hand; provided, however, that the
general solicitation of third parties through the use of means generally
available to the public, including the placement of advertisements in the
newspaper, shall not be deemed to violate this clause (i), (ii) hire any
individual who was an employee of the Company or its Business Group until six
months after such individual's employment relationship with the Company or any
of its Business Group has been terminated or (iii) induce or attempt to induce
any customer, supplier, consultant, licensee or other business relation of the
Company or any of its Business Group to cease doing business with the Company
or any of its Business Group, or in any way interfere with the relationships
between any such customer, supplier, consultant, licensee or business
relation, on the one hand, and the Company or any of its Business Group, on
the other hand; provided, however, that the Covenantor shall not be deemed to
interfere with the relationship of the Company or its Business Group with a
customer, supplier, consultant, licensee or other business relation solely
because, in compliance with this Agreement, the Covenantor does business on a
non-exclusive basis with such Person.
(c) Turner acknowledges that, in the course of his employment with BEI
and/or its Business Group (as defined below) and their predecessors, he has
become familiar with BEI's and its Business Group's and their predecessors'
trade secrets and with other Confidential Information (as defined below)
concerning BEI, its Business Group and their respective predecessors and that
his services have been of special, unique and extraordinary value to BEI and
its Business Group.
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(d) Turner understands that the foregoing restrictions may limit his ability
to earn a livelihood in a business similar to the Business. However, Turner
has been a manager and an executive for many years in different types of
businesses, some of which are similar and some of which are not similar to the
Business. Turner does not believe that the restrictions in this Agreement,
given Turner's education, skills, experience and ability, would prevent him
from earning a living.
Section 3. Option To Modify Noncompetition Covenant in Section 2(a).
(a) Pursuant to the BEI Noncompetition Agreement, the Company granted to BEI
the right and option (the "Option"), exercisable by BEI under the terms
specified in Section 3 of the BEI Noncompetition Agreement, to modify the
noncompetition covenant in Section 2(a) of the BEI Noncompetition Agreement.
The Option may be exercised by BEI strictly in the manner provided in Section
3 of the BEI Noncompetition Agreement solely on the occurrence of the first
Change of Control or Joint Venture Arrangement (each as defined in the BEI
Noncompetition Agreement) which is consummated after the date of this
Agreement.
(b) In the event that BEI exercises the Option, then, so long as Turner at
the time of the exercise of the Option has been continually employed or
retained as a consultant by BEI, and continues without interruption to be so
employed or so retained as a consultant by BEI or the Person which acquires
control of BEI as a result of the Change of Control or which engages with BEI
in the Joint Venture Arrangement upon which the exercise of the Option is
based, Turner may, solely as an employee or a consultant to such Person,
engage in the same activities that such Person may engage in pursuant to
section 3(c) of the BEI Noncompetition Agreement. If Turner is not so employed
or so retained as a consultant and commencing at any time as he does not
continue without interruption to be so employed or so retained as a
consultant, then the provisions of this Agreement shall remain in effect
unmodified by this Section 3. A leave of absence for family or medical reasons
will not be deemed an interruption in continual employment or consulting by
Turner for such Person.
Section 4. Confidentiality.
(a) The Covenantor will not disclose or use at any time during the
Noncompete Period any Confidential Information of which the Covenantor is or
becomes aware, whether or not such information was developed by the
Covenantor.
(b) As used in this Agreement, the term "Confidential Information" means
information that is not in the public domain and that was used, developed or
obtained by the Covenantor in connection with the Business, including but not
limited to (i) information, observations and data obtained by Turner while
employed by BEI or any predecessors thereof concerning the Business, (ii)
products or services, (iii) fees, costs and pricing structures, (iv) designs,
(v) analyses, (vi) drawings, photographs and reports, (vii) computer software,
including operating systems, applications and program listings, (viii) flow
charts, manuals and documentation, (ix) data bases, (x) accounting and
business methods, (xi) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xii) customers and clients and customer or client lists, (xiii)
other copyrightable works, (xiv) all production methods, processes, technology
and trade secrets, and (xv) all similar and related information in whatever
form.
(c) Notwithstanding the provisions of this Agreement to the contrary, the
Covenantor shall have no liability to the Company for disclosure or use of
Confidential Information if the Confidential Information:
(i) is known to the receiving party at the time of disclosure by the
Covenantor to the receiving party of such Confidential Information other
than as the result of a breach of this Section 4 by the Covenantor;
(ii) becomes publicly known or is disclosed by the Company other than as
the result of a breach of this Section 4 by the Covenantor;
(iii) is received by the Covenantor after the date of this Agreement from
a third party that is not under an obligation of confidentiality to the
Company;
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(iv) is required to be disclosed by law, court order, or similar
compulsion or in connection with any legal proceeding, provided that such
disclosure shall be limited to the extent so required and, except to the
extent prohibited by law, the Covenantor shall give the Company notice of
its intent to so disclose such Confidential Information and shall
reasonably cooperate with the Company in seeking suitable confidentiality
protections;
(v) relates to HTA; or
(vi) is independently developed by the Covenantor in connection with
matters unrelated to the Turner Products or Functionally Equivalent
Products without reference to or reliance upon Confidential Information;
provided, that such independent development can be reasonably proven by the
Covenantor by written records.
Section 5. Representations and Warranties.
(a) The Covenantor hereby represents and warrants to the Company that (i)
the execution, delivery and performance of this Agreement by the Covenantor
does not and will not conflict with, breach, violate or cause a default under
any agreement, contract or instrument to which the Covenantor is a party or
any judgment, order or decree to which the Covenantor is subject, (ii) the
Covenantor is not a party to or bound by any employment agreement, consulting
agreement, noncompete agreement, confidentiality agreement or similar
agreement with any other Person that is inconsistent with the provisions of
this Agreement and (iii) upon the execution and delivery of this Agreement by
the Company and the Covenantor, this Agreement will be a valid and binding
obligation of the Covenantor.
(b) The Company hereby represents and warrants to the Covenantor that (i)
this Agreement has been duly authorized by all necessary corporate action on
the part of the Company, (ii) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate
or cause a default under any agreement, contract or instrument to which the
Company is a party or any judgment, order or decree to which the Company is
subject, and (iii) upon the execution and delivery of this Agreement by the
Company and the Covenantor, this Agreement will be a valid and binding
obligation of the Company.
Section 6. Enforcement.
(a) Because the relationship between the Company and the Covenantor is
unique and because the Covenantor has had access to Confidential Information,
the parties hereto agree that money damages would be an inadequate remedy for
any breach of this Agreement. Therefore, in the event of a breach or
threatened breach by the Covenantor of this Agreement, the Company may apply
to any court of competent jurisdiction for specific performance and/or
injunctive or other relief in order to enforce, or prevent any violations of,
the provisions hereof (without posting a bond or other security) in addition
to other rights and remedies existing in its favor, including requiring the
Covenantor to account for and pay over to the Company all compensation,
profits, moneys, accruals, increments or other benefits derived or received as
a result of any transactions constituting a breach of the covenants contained
therein.
(b) The prevailing party in any legal action arising out of or relating to
this Agreement shall be entitled to its reasonable attorneys' fees and court
costs.
Section 7. General Provisions.
(a) Severability. It is the desire and intent of the parties hereto that the
provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
this Agreement or affecting the validity or enforceability of such provision
in any
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other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in
such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn,
without invalidating the remaining provisions of this Agreement or affecting
the validity or enforceability of such provision in any other jurisdiction.
(b) Complete Agreement. This Agreement and the Asset Purchase Agreement
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral,
which may have related to the subject matter hereof in any way.
(c) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the Covenantor and the Company and their respective
successors, permitted assigns, personal representatives, heirs and estates, as
the case may be.
(d) Governing Law. This Agreement will be governed by and construed in
accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflicting provision or rule (whether of the
State of New York or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of New York to be applied. In furtherance of
the foregoing, the internal law of the State of New York will control the
interpretation and construction of this Agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law
of some other jurisdiction would ordinarily apply.
(e) Jurisdiction and Venue.
(i) THE COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY
SUBMIT, FOR THEMSELVES AND THEIR PROPERTY, TO THE EXCLUSIVE JURISDICTION OF
ANY STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN
NEW YORK COUNTY, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND THE
COMPANY AND THE COVENANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE
THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD
AND DETERMINED IN ANY SUCH NEW YORK STATE COURT OR SUCH FEDERAL COURT,
PROVIDED THAT, IN THE EVENT THAT ANY SUCH FEDERAL COURT HAS JURISDICTION,
THE PARTIES SHALL INSTITUTE ANY SUCH ACTION OR PROCEEDING IN SUCH FEDERAL
COURT AND NOT IN SUCH STATE COURT. THE COMPANY AND THE COVENANTOR AGREE
THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN
ANY OTHER MANNER PROVIDED BY LAW; PROVIDED THAT, NOTWITHSTANDING THE
FOREGOING, IF THE COVENANTOR IS A DEFENDANT IN ANY SUCH ACTION OR
PROCEEDING IN WHICH B IS NOT ALSO A DEFENDANT, SUCH ACTION OR PROCEEDING
SHALL INSTEAD BE BROUGHT AND MAINTAINED IN ANY COURT IN THE STATE OR COUNTY
IN WHICH THE COVENANTOR'S PRINCIPAL RESIDENCE IS LOCATED OR IN WHICH THE
COVENANTOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED.
(ii) SUBJECT TO (e)(i), THE COMPANY AND THE COVENANTOR IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT THEY MAY LEGALLY AND
EFFECTIVELY DO SO, ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT IN ANY NEW YORK STATE OR FEDERAL COURT SITTING
IN NEW YORK COUNTY. THE COMPANY AND THE COVENANTOR IRREVOCABLY WAIVE, TO
THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM
TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
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(iii) THE COVENANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY MAIL IN THE
COUNTY IN WHICH THE COVENANTOR'S PRINCIPAL RESIDENCE IS LOCATED OR IN WHICH
THE COVENANTOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AND SUCH SERVICE
SHALL BE DEEMED TO BE GOOD AND SUFFICIENT SERVICE FOR ALL PURPOSES. THE
COVENANTOR SHALL NOTIFY THE COMPANY PURSUANT TO THIS AGREEMENT OF EACH OF
HIS PRINCIPAL PLACE OF RESIDENCE AND PRINCIPAL PLACE OF BUSINESS.
(f) Waiver of Jury Trial.
THIS IS A COMPLEX BUSINESS TRANSACTION. THE PARTIES BELIEVE THAT IT WOULD BE
BETTER TO HAVE ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT RESOLVED BY A JUDGE WITHOUT A JURY. EACH OF THE
PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT.
(g) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Covenantor, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement or any provision hereof.
(h) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(j) Business Group. For purposes of this Agreement, the term "Business
Group" means, with respect to the Company, the Company's current and future
Affiliates, including those Affiliates listed on Exhibit D; provided, however,
that a future Affiliate of the Company shall not be considered part of its
"Business Group" unless and until the Company provides notice to the
Covenantor in writing that such Person is an affiliate of the Company.
(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of New York, the time period for taking action shall be automatically extended
to the business day immediately following such Saturday, Sunday or holiday.
(l) Survival of Representations and Warranties. All representations and
warranties contained herein shall survive the consummation of the transactions
contemplated hereby and by the Asset Purchase Agreement.
(m) Construction.
(i) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
(ii) Any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not be applied in the
construction or interpretation of this Agreement.
(iii) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
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(n) Any notice or other communication required or permitted to be delivered
to any party under this Agreement shall be in writing and shall be deemed
properly delivered, given and received, if delivered during business hours on
a business day, when delivered (by hand, by registered mail, by courier or
express delivery service or by facsimile) to the address or facsimile
telephone number set forth beneath the name of such party below (or to such
other address or facsimile telephone number as such party shall have specified
in a written notice given to the other party hereto) or, if not delivered
during business hours on a business day, on the next succeeding business day.
(i) if to the Company, to:
CooperSurgical Acquisition Corp.
c/o CooperSurgical, Inc.
15 Forest Parkway
Shelton, Connecticut 06484
Attention: Nicholas J. Pichotta, President
Telecopier: (203) 925-0135
with a copy to:
The Cooper Companies, Inc.
6140 Stoneridge Mall Road
Suite 590
Pleasanton, CA 94588
Attention: Carol R. Kaufman, V.P., Legal Affairs
Telecopier: (510) 460-3660
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: David I. Karabell, Esq.
Telecopier: (212) 408-2400; and
(ii) Richard W. Turner, the principal place
of residence and telecopier number set
forth under Turner's signature hereto.
with a copy to:
McCarter & English LLP
Four Gateway Center
100 Mulberry Street
Newark, NJ 07702
Attention: William J. Heller, Esq.
Telecopier: (973) 624-7070
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IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Noncompetition Agreement as of the date first written above.
COOPERSURGICAL ACQUISITION CORP.
By: _________________________________
Name
Title
_____________________________________
RICHARD W. TURNER
Principal Place of Residence:
_____________________________________
_____________________________________
_____________________________________
Principal Place of Business:
_____________________________________
_____________________________________
_____________________________________
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EXHIBIT A
Turner Products
All of the products listed in the BEI Gynecology Products 1999 Catalog,
except for the following products:
1. Microscope and endoscope equipment.
2. Generic vaginal specula.
3. Spring-loaded syringe.
4. Sterilization and storage trays.
5. Cryo systems so long as they are sold outside of the GYN and family
practitioner markets.
6. Generic needle holders, clamps and scissors.
7. Office video equipment so long as it is sold outside of the GYN and
family practitioner markets.
8. Endo-sock or other similar retrieval instruments so long as they are
sold outside of GYN and family practitioner markets.
9. Laproscopic insufflater so long as it is sold outside of the GYN market.
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EXHIBIT B
Letter Agreement
Attached letter agreement dated January 24, 1999 between the Covenantor and
BEI.
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EXHIBIT C
HTA Related Products
1. Endoscopic Light Source (any method).
2. Hysteroscopic Video Camera System.
3. Flexible Hysteroscopic System.
4. Rigid Hysteroscopic System.
5. Cervical Sealing Tenaculum.
6. Disposable Cervical Dilator.
7. Those Products which are identified by asterisk on Annex A to Schedule
1.1 of the Asset Purchase Agreement as components and/or finished goods
required in the support of HTA.
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EXHIBIT D
The Company Affiliates
<TABLE>
<CAPTION>
Jurisdiction
of
Incorporation
Name -------------
<S> <C>
1.The Cooper Companies, Inc...................................... Delaware
2.The Cooper Healthcare Group, Inc............................... Delaware
a.Unimar, Inc................................................... California
3.CVP, Inc....................................................... Delaware
4.The Cooper Real Estate Group, Inc.............................. Delaware
5.CooperVision, Inc.............................................. New York
a.CooperVision Inc.............................................. Canada
6.Marlow Surgical Acquisition (dormant).......................... Delaware
a.CooperVision GB Finance, Inc. (dormant)....................... Delaware
b.CooperVision GB Services, Inc. (dormant)...................... Delaware
7.Hospital Group of America, Inc................................. Delaware
a.HGA Management Services, Inc.................................. Delaware
b.Hospital Group of Delaware, Inc............................... Delaware
c.Hospital Group of Illinois, Inc............................... Illinois
d.Hospital Group of Louisiana, Inc.............................. Louisiana
e.Residential Centers of Indiana, Inc........................... Delaware
f.Hospital Group of New Jersey, Inc............................. New Jersey
g.Hampton Learning Center, Inc.................................. New Jersey
h.HGNJ, Inc..................................................... New Jersey
8.Arlington Center for Recovery, L.L.C........................... Illinois
9.MeadowWood Health Services, L.L.C.............................. Delaware
10.CooperSurgical, Inc............................................ Delaware
a.CooperSurgical, Inc........................................... Canada
b.HBH Medizintechnik GmbH....................................... Germany
11.Aspect Vision Holdings, Limited................................ England-Wales
a.Aspect Vision Care Limited.................................... England-Wales
b.Contact Lens Technologies Limited............................. England-Wales
c.Aspect Specialty Limited...................................... England-Wales
d.New Focus HealthCare Limited.................................. England-Wales
e.Aspect Vision Italia s.r.l.................................... Italy
f.Focus Solutions Limited....................................... England-Wales
g.Averlan Company Limited....................................... England-Wales
h.Aspect Contact Lenses Limited................................. England-Wales
12.CooperVision Limited........................................... England-Wales
</TABLE>
NOTE: Except for CooperSurgical and its 52% owned subsidiary, HBH
Medizintechnik GmbH, each subsidiary is wholly-owned either by The Cooper
Companies, Inc. or by the wholly-owned subsidiary under which it is indented
in the list above. In the case of CooperSurgical, Inc., 99.8% of the company
is owned by The Cooper Companies, Inc. and the remaining .2% is owned by
members of CooperSurgical's Medical Advisory Board.
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EXHIBIT H TO
ASSET PURCHASE
AGREEMENT
,1999
BEI Medical Systems Company, Inc.
Ladies and Gentlemen:
We have acted as counsel to CooperSurgical Acquisition Corp., a Delaware
corporation ("Cooper"), in connection with (a) the Asset Purchase Agreement
(the "Asset Purchase Agreement") dated October 1, 1999 and amended November 2,
1999 between Cooper and BEI Medical Systems Company, Inc., a Delaware
corporation (the "Company"), (b) the Bill of Sale, Assignment and Assumption
Agreements each dated the date hereof between Cooper and the Company and each
Subsidiary, respectively (the "Bills of Sale"), (c) the Transition Agreement
dated the date hereof between Cooper and the Company (the "Transition
Agreement"), and (d) the two Non-Competition Agreements dated the date hereof
between Cooper and each of the Company and Richard W. Turner, respectively
(the "Noncompetition Agreements", and together with the Asset Purchase
Agreement, the Bills of Sale and the Transition Agreement, the "Transaction
Documents"). Capitalized terms used but not otherwise defined herein have the
meanings given them in the Asset Purchase Agreement. This opinion is being
delivered pursuant to Section 6.6 of the Asset Purchase Agreement.
We have not adopted the Legal Opinion Accord (the "Accord") of the ABA
Section of Business Law (1991) for purposes of this opinion letter. In
rendering the opinions expressed in this opinion letter, however, we have
relied without investigation on the assumptions set forth in Section 4 of the
Accord.
In addition, as to matters of fact (including matters of fact set forth in
this opinion letter), we have relied (except to the extent that we have actual
knowledge of facts to the contrary) without investigation on (i) the
representations and warranties of the various parties set forth in the
Transaction Documents, (ii) certificates of officers of Cooper delivered at
the Closing and (iii) certificates of public officials.
Our opinions in this opinion letter are limited to the law of the State of
New York, the General Corporation Law of the State of Delaware and the federal
law of the United States of America. We do not express any opinion as to any
other law. Although we note that the Asset Purchase Agreement and the
Transition Agreement are, by their terms, governed by the laws of the State of
Delaware we have assumed, with your consent, for purposes of the opinions
expressed below that each such agreement is governed by and construed in
accordance with the laws of the State of New York without giving effect to
principles of conflicts of law. We do not express any opinion with respect to
any provisions of the Asset Purchase Agreement and the Transition Agreement
providing for the choice of the laws of the State of Delaware. Unless
explicitly addressed herein, we do not express any opinion as to any of the
legal issues set forth in Section 19 of the Accord.
Based upon the foregoing, we are of the opinion that:
1. Cooper is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware.
2. Cooper has all necessary corporate power and authority to execute,
deliver, and perform its obligations under each Transaction Document to
which it is a party and to consummate the transactions contemplated
thereby. The execution and delivery by Cooper of each Transaction Document
to which it is a party and the consummation by Cooper of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action on the part of Cooper.
3. Cooper has duly and validly executed and delivered each Transaction
Document to which it is a party. Each Transaction Document to which Cooper
is a party constitutes a legal, valid and binding obligation of Cooper,
enforceable against Cooper in accordance with its terms.
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4. The execution and delivery by Cooper of each Transaction Document to
which it is a party and its performance of its obligations thereunder will
not (i) conflict with or violate (with or without notice or lapse of time
or both) its Certificate of Incorporation or By-Laws, or (ii) conflict with
or violate (with or without notice or lapse of time or both) any Law
applicable to it.
5. The execution and delivery by Cooper of each Transaction Document to
which it is a party does not, and the performance of its obligations
thereunder will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity.
Our opinion is subject to the General Qualifications (as defined in the
Accord) and the opinions expressed in clause (ii) of paragraph 4 above and in
paragraph 5 above are based on our review of those Laws that, in our
experience, are normally applicable to transactions of the type contemplated
by the Transaction Documents.
This opinion letter has been rendered solely for your benefit in connection
with the execution and delivery of the Transaction Documents and the
transactions contemplated thereby. Accordingly, it is not to be relied upon by
any other Person, and is not to be used for any other purpose, without our
prior written consent.
Very truly yours,
O'Sullivan Graev & Karabell, LLP
2
<PAGE>
SCHEDULE 1.1
[OMITTED]
<PAGE>
SCHEDULE 1.6
Assumed Liabilities
A) The Assumed Liabilities shall consist of and be assumed in the following
order:
1. First, to the extent of any trade accounts payable ("Trade Payables")
up to $350,000;
2. Second, up to $25,000 of warranty obligations ("Warranty Obligations")
up to the difference between $350,000 and the lesser amount of Trade
Payables so assumed;
3. Third, to the extent of the amount at Closing of any accrued sales
return obligations ("Sales Return Obligations") up to the difference
between $350,000 and the sum less than $350,000 of the amount of Trade
Payables and Warranty Obligations so assumed; and
4. Fourth, the amount at Closing of any accrued royalty obligations
("Royalty Obligations"), up to any remaining difference between $350,000
and the sum less than $350,000 of the amount of Trade Payables, Warranty
Obligations and Sales Return Obligations so assumed.
Any part of the Liabilities referred to above which are not Assumed
Liabilities are Excluded Liabilities. The Seller shall pay such Excluded
Liabilities as part of its indemnification obligations to the Purchaser
Indemnified Persons under this Agreement. Since $25,000 of Warranty
Obligations is a negotiated number, the Seller shall pay to the Purchaser upon
delivery of the Statements pursuant to this Agreement an amount equal to all
or any part of the Warranty Obligations which are Excluded Liabilities, if
any; provided, however, that if the Seller pays such amounts to the Purchaser
promptly when due, such amounts shall not be counted towards the calculation
of the Losses under Section 7.5(a). The Seller shall pay to the Purchaser an
amount equal to all or any part of the Trade Payables, Sale Return Obligations
and Royalty Obligations which are Excluded Liabilities when the Purchaser
incurs such liabilities and makes a claim under Section 7 of this Agreement
therefor.
B) The Assumed Liabilities shall also consist of approximately $11,000 owed
by the Seller to Venusa, Ltd. for tooling pursuant to the Letter Agreement
dated October 2, 1998 between the Seller and Venusa, Ltd. This Liability shall
be assumed by the Purchaser in addition to the Liabilities assumed by the
Purchaser under subsection (A).
<PAGE>
SCHEDULE 1.7
Excluded Liabilities
The Purchaser is not assuming any of the following Excluded Liabilities:
(a) any Liability of the Seller or any Subsidiary under this Agreement;
(b) any Liability of the Seller or any Subsidiary for expenses, Taxes or
fees incident to or arising out of the negotiation, preparation, approval
or authorization of this Agreement, the Related Documents or the
consummation (or preparation for the consummation) of the transactions
contemplated hereby or thereby (including all attorneys' and accountants'
fees, and brokerage fees incurred by or imposed upon the Seller or any
Subsidiary);
(c) any Liability of the Seller or any Subsidiary for any indebtedness;
(d) any Liability of the Seller or any Subsidiary under any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise
or other instrument or obligation to which the Seller or any Subsidiary is
a party or by which the Seller or any Subsidiary or its or any of their
respective properties is bound or affected other than Assumed Liabilities
specified in Schedule 1.6 and Liabilities assumed by the Purchaser in
accordance with Section 1.6 which accrue from and after the Closing
pursuant to the Assumed Contracts;
(e) any Liability relating to any Employee Benefit Plan;
(f) any Liability of the Seller or any Subsidiary for worker's
compensation; and
(g) any Liability of the Seller or any Subsidiary which relate to the
Excluded Assets;
The Seller and each Subsidiary shall pay, discharge and perform all its
respective Excluded Liabilities promptly when due.
<PAGE>
SCHEDULE 1.8(a)
Sales Shortfall Calculation
The Sales Shortfall shall be calculated as follows:
1. The amount of Included Sales for the period beginning on January 3,
1999 and ending on October 2, 1999 (each, a "Channel Sales Amount") shall
be calculated for the following categories of buyers: (a) U.S. End User;
(b) U.S. Distributor; (c) Non-U.S. (except for OEM); and (d) OEM.
2. Each Channel Sales Amount shall then be multiplied by the sales
multiple specified on Annex A hereto under the column headed by the buyer
category for which such Channel Sales Amount was calculated, which appears
opposite the name of each Product. The product of each such modification is
called, a "Total Channel Sales Amount".
3. All Total Channel Sales Amounts for each Product shall be added
together to determine the "Product Sales Amount".
4. All the Product Sales Amounts shall be added together to determine the
"9 Month Total Sales Amount" for all Products.
5. The 9 Month Total Sales Amount shall be annualized by dividing such
amount by 9, then multiplying the result of such calculation by 12, to
determine the "Total Annualized Sales Amount".
6. The amount, if any, by which the Total Annualized Sales Amount is less
than $11,231,600 is the "Sales Shortfall". Such Sales Shortfall, if any,
shall be subtracted from the Purchase Price paid by the Purchaser to the
Seller on the Closing Date.
"Included Sales" means all sales for each Product which is sold in the
ordinary course of the Business, except (i) sales of OEM Industrial Products
and (ii) any sales of Products to Fujinon, Inc., PENTAX Precision Instrument
Corporation and ERBE USA, Inc. excluded pursuant to the last sentence of
Section 4.1.
<PAGE>
ANNEX A
TO
SCHEDULE 1.8(a)
Product Sales Multiple Analysis
<TABLE>
<CAPTION>
Non-
United States
United States United States (Except
Buyer Categories End User Distributor for OEM) OEM
---------------- ------------- ------------- ------------- ----
<S> <C> <C> <C> <C>
LEEP Products:
Electrodes................ 2.21 1.66 1.11 0.28
Procedure Kits............ 2.21 1.66 1.11 0.28
Other Disposable.......... 2.21 1.66 1.11 0.28
---- ---- ---- ----
Sub total--LEEP
Disposables............ N/A N/A N/A N/A
Hardware.................. 1.11 0.55 0.28 0.28
Coated Instruments........ 1.11 0.55 0.28 0.28
---- ---- ---- ----
TOTAL LEEP PRODUCTS..... N/A N/A N/A N/A
Other GYN Products:
Zumi...................... 2.21 1.66 1.11 0.28
Zui....................... 2.21 1.66 1.11 0.28
HSG/SHG................... 2.21 1.66 1.11 0.28
Z-Samplers................ 2.21 1.66 1.11 0.28
Endo-Sock/Mega-Pouch...... 2.21 1.66 1.11 0.28
Other GYN Disposables..... 2.21 1.66 1.11 0.28
---- ---- ---- ----
Sub total--GYN
Disposables............ N/A N/A N/A N/A
Biopsy Punch.............. 2.21 1.66 1.11 0.28
Specula................... 2.21 1.66 1.11 0.28
Z-Clamps.................. 2.21 1.66 1.11 0.28
Z-Scissors................ 2.21 1.66 1.11 0.28
OS Finder................. 2.21 1.66 1.11 0.28
Nichols Pelvic Surgery
Set...................... 2.21 1.66 1.11 0.28
Other Reusable
Instruments.............. 1.11 0.55 0.28 0.28
---- ---- ---- ----
Sub total--GYN
Instruments............ N/A N/A N/A N/A
Colposcopes............... 1.11 0.55 0.28 0.28
Hysteroscopy System....... 1.11 0.55 0.28 0.28
Cryo System............... 1.11 0.55 0.28 0.28
---- ---- ---- ----
N/A N/A N/A N/A
TOTAL OTHER GYN......... N/A N/A N/A N/A
TOTAL GYN SALES......... N/A N/A N/A N/A
Other Products:
GYNESYS Products.......... N/A 0.28 0.28 0.28
Misc. Hardware............ 0.28 0.28 0.28 0.28
GI Products............... 0.28 0.28 0.28 0.28
OEM Products.............. 0.28 0.28 0.28 0.28
HTA Products.............. N/A N/A N/A N/A
TOTAL OTHER PRODUCTS.... N/A N/A N/A N/A
TOTAL BEI SALES......... N/A N/A N/A N/A
</TABLE>
<PAGE>
SCHEDULE 1.10(a)
Inventory Valuation Rules
A. Finished Goods Inventory
Finished goods inventory of the Business on hand at the Facilities of the
Seller at Closing and not held by vendors shall be valued for purposes of the
Inventory Statement as provided in this Schedule
1. The number of units of each separate Product will be counted. The result
of this count for each Product is called the "Closing Unit Number." For this
count, the following will be treated as one Product: (a) like Products which
are sold by the Seller in different package configurations (i.e., ZUMI 4.5 Box
of 12 and ZUMI single will be treated as one Product); (b) groups of common
Products in varying sizes or configurations which the Seller has frequently
sold and promoted in sets (i.e., Z-Clamps and Z-Scissors will be treated as
one Product); and (c) a Product which is sold by the Seller in the United
States and the same Product which has been modified solely to meet
requirements for a sale by the Seller outside of the United States (i.e., a
Lletz Plus II Generator in a 110-volt configuration for the United States
market and in a 220-volt configuration for the market outside the United
States shall be treated as one Product).
2. The "Two Year Sales Number" for each Product shall be determined. Two
Years Sales Number for each Product means the number of units of such Product
sold by the Seller during the ten month period commencing October 1, 1998 and
ending July 31, 1999 divided by 10 and multiplied by 24.
3. The excess, if any, of the Closing Unit Number for each Product over the
Two Year Sales Number for the same Product shall have zero value for purposes
of calculating the value of finished goods inventory on hand at Closing.
4. That number of units of finished goods inventory of each Product on hand
at Closing not in excess of the Two Year Sales Number for the same Product
shall be valued as follows;
(a) The lesser of (i) The full absorbed standard costs historically used
by the Seller to value finished goods inventory ("Standard Costs"); or
(ii) The lesser of (x) the value of such inventory at the lower of cost
or market, (y) for the bipolar Product line (including generators, Loops
and Balls), 25% of Standard Costs and (z) for demonstration inventory
(except demonstration inventory consisting of the bipolar Product line), if
placed in service by the Seller within the four year period preceding the
Closing Date, 50% of Standard Costs, and if placed in service by the Seller
prior to such four year period, zero; and
(b) Evaluation Inventory represented by an invoice bearing a date which
is less than 90 days prior to the Closing Date, 50% of the amount of the
invoice representing such inventory, and Evaluation Inventory represented
by an invoice bearing a date which is 90 days or more prior to the Closing
Date, zero.
5. Notwithstanding the foregoing, (a) OEM Industrial Inventory shall be
valued at zero and (b) that number of units at Closing of finished goods
inventory of the integrated video system Product which equals up to the
greater of (x) the Two Year Sales Number for that Product and (y) 24, shall be
valued at Standard Costs. The excess of units of such inventory over such
number of units at Closing shall be valued at zero.
B. Raw Materials Inventory and Inventory Held By Vendors
Attached to this Schedule is an analysis of raw material inventory of the
Business at July 31, 1999, separated into categories of Products. The
inventory in such analysis constitutes approximately 72% of the value of all
raw material inventory of the Business at that date. The valuation percentage
of Standard Costs for each category of Products in the analysis is specified
opposite the description of such category. Raw material and unfinished
inventory and inventory of the Business held by vendors and not located at
Closing at the Seller's Facilities (except inventory held by Venusa, Ltd.)
which is a component of or included in each category of Products will
<PAGE>
be valued at the same percentage of Standard Costs as raw material, unfinished
inventory and inventory included in such analysis. Raw material, unfinished
inventory and inventory held by Venusa, Ltd. shall be valued at zero.
C. Work-in-Process
Work-in-Process shall be valued at Standard Cost therefor.
D. General
HTA inventory and components and inventory of Products which have been
discontinued by the Seller shall be valued at zero. HTA inventory and
components are not part of the Purchased Assets. Inventories of Products that
have been discontinued are part of the Purchased Assets. Units of Products
which are Products used in the Business and which are also HTA Related
Products (as defined in the Non-Competition Agreement) shall be divided as
follows:
(a) that percentage of units of such products on hand at Closing equal to
the percentage of the Seller's sales of all Products for the nine (9) month
period ended September 30, 1999 represented by sales of Products used in
the Business shall constitute Purchased Assets.
(b) The balance of units of such products on hand at Closing shall
constitute Excluded Assets.
As specified in the Agreement to which this Schedule is attached, inventory
shall be valued in accordance with GAAP, applied consistently with the
Seller's allocations thereof, as GAAP may be modified by this Schedule.
<PAGE>
SCHEDULE 5.7
[OMITTED]
<PAGE>
SELLER DISCLOSURE SCHEDULE
[OMITTED]
<PAGE>
ANNEX B
September 23, 1999
Board of Directors
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, NJ 07608
Gentlemen:
You have asked that Ewing Monroe Bemiss & Co. ("EMB&Co.") render an opinion
(the "Opinion") as to the fairness, from a financial point of view, to the
stockholders of BEI Medical Systems Company, Inc. (the "Company"), of the
consideration (the "Consideration") to be paid by The Cooper Companies
("Cooper") in connection with the purchase of certain assets of the Company
(the "Purchase") pursuant to the Asset Purchase Agreement between the Company
and Cooper dated as of September 22, 1999 (the "Asset Purchase Agreement").
As part of our investment banking business, EMB&Co. regularly engages in the
valuation of private and publicly-traded companies and of the assets,
liabilities, and debt and equity securities thereof, in connection with
mergers and acquisitions, private placements and valuations for estate,
corporate and other purposes. We have been retained as a financial advisor to
the Company and will receive fees upon delivery of this Opinion and upon
consummation of the Purchase.
In arriving at our Opinion, we have taken into account such financial and
other factors as we considered relevant and performed such investigations and
analyses as we have deemed necessary and appropriate under the circumstances.
Among other things we have:
(i) reviewed the Asset Purchase Agreement and related ancillary
documents;
(ii) reviewed the audited financial statements of the Company for the
fiscal years ended September 28, 1996, September 27, 1997 and October 3,
1998 and of Cooper for the fiscal years ended October 31, 1996, 1997 and
1998; the interim financial statements of the Company for the eleven-month
period ended August 31, 1999 and of Cooper for the nine-month period ended
July 31, 1999;
(iii) reviewed such internally prepared financial and operating
information (including financial projections) developed by the management
of the Company as we deemed relevant;
(iv) discussed the business and operations, assets, financial condition
and future prospects of the Company with the senior management of the
Company;
(v) compared the Company from a financial point of view with certain
other publicly traded companies which we consider to be generally
comparable to the Company, and reviewed the historical performance of, and
current market conditions for, the common stock of the Company in relation
to those of other publicly held medical instrumentation and device
companies which we considered to be comparable;
(vi) considered the terms of the Purchase in light of the terms of
certain recent business combinations and asset purchase transactions
involving companies which we deemed comparable to the Purchase;
(vii) considered the future prospects of the Company with and without the
assets that Cooper proposes to purchase, and prepared discounted cash flow
analyses to compare the Consideration to the discounted present value of
the cash flows that the assets to be purchased could reasonably be expected
to generate in the hands of the Company;
(viii) participated in discussions and negotiations among representatives
of the Company and Cooper and their financial and legal advisors; and
(ix) performed such other investigations and analyses, and considered
such other factors, as we deemed appropriate and relevant.
B-1
<PAGE>
In arriving at our Opinion, we have assumed and relied upon the accuracy and
completeness of the information that has been provided to us by the managers
and auditors of the Company or made available from public sources. We have not
attempted independently to verify any such information, nor have we conducted
an appraisal of the assets or liabilities of the Company, nor have we been
given any such appraisals. With respect to certain financial projections and
forecasts, we have assumed that they have been reasonably prepared on a basis
that reflects the best currently available estimates and judgments of the
senior managers of the Company.
This Opinion is based on economic, market and other conditions as they
exist, and can be evaluated, as of the date of this letter. Because subsequent
developments may affect this Opinion, we understand that you may ask that we
update, revise or reaffirm this Opinion at a later date. We do not hereby
express, nor will we subsequently express any opinion as to the price at which
the common stock of the Company may trade at any time in the future.
This Opinion is for the benefit of the Board of Directors of the Company in
connection with their evaluation of the Purchase. This Opinion may be included
in its entirety in any filing made by the Company or Cooper with the
Securities and Exchange Commission in respect of the Purchase. We hereby
express no recommendation as to how the stockholders of the Company should
vote at the stockholders' meeting in connection with the Purchase.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the consideration to be paid to the Company in connection with
the Purchase is fair from a financial point of view.
Sincerely,
Ewing Monroe Bemiss & Co.
/s/ Samuel M. Bemiss, III
By: _________________________________
Samuel M. Bemiss, III
Managing Director
B-2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Proxy Statement dated October 8, 1999 of BEI Medical Systems Company, Inc. and
to the use of our reports dated November 13, 1998, with respect to the
consolidated financial statements and schedule of BEI Medical Systems Company,
Inc. included in its Annual Report on Form 10-K for the year ended October 3,
1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
_____________________________________
Hackensack, New Jersey
November 8, 1999
<PAGE>
Proxy
BEI MEDICAL SYSTEMS COMPANY, INC.
Proxy Solicited By The Board Of Directors
For the Special Meeting of Stockholders
To be held December 7, 1999
The undersigned hereby appoints Charles Crocker and Thomas W. Fry, and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of BEI Medical Systems Company,
Inc., which the undersigned may be entitled to vote at the Special Meeting of
Stockholders of BEI Medical Systems, Inc. to be held at the Company's facility
located at 100 Hollister Road, Teterboro, New Jersey, on Tuesday, December 7,
1999 at 9:00 a.m. (local time), and at any and all postponements, continuations
and adjournments thereof with all powers that the undersigned would possess if
personally present, upon and in respect of the following materials and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
THE UNDERSIGNED HEREBY DIRECTS AND AUTHORIZES SAID PROXIES, AND EACH OF
THEM, OR THEIR SUBSTITUTES, TO VOTE AS SPECIFIED BELOW WITH RESPECT TO THE
PROPOSAL LISTED IN THE PARAGRAPH ON THE REVERSE SIDE, OR IF NOT SPECIFICATION IS
MADE, TO VOTE IN FAVOR THEREFOR.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
The undersigned hereby acknowledges receipt of: (1) Notice of Special
Meeting of Stockholders of the Company, and (2) accompanying Proxy Statement.
(continued on reverse side)
<PAGE>
Please mark your votes as indicated in [X] this example
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
FOR AGAINST ABSTAIN
1. To approve the Asset Sale [_] [_] [_]
pursuant to the Asset
Purchase Agreement and
to approve and adopt the
Asset Purchase Agreement
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If signer is
a corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please sign in
partnership name by authorized person.
Dated: ______________________________________, 1999
___________________________________________________
___________________________________________________
Signature(s)
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE WHICH
IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
