UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 2, 1999 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17885
BEI MEDICAL SYSTEMS COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 71-0455756
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Hollister Road
Teterboro, New Jersey 07608
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(Address of principal executive offices) (Zip code)
(201) 727-4900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
|_|
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 10, 1999 was $8,461,497 (A). As
of December 10, 1999, 7,685,707 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on December 10, 1999,
as reported on the Nasdaq National Market System. Excludes 1,801,495 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 10, 1999.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement with respect to its 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business .................................................. 3
Item 2. Properties ................................................ 29
Item 3. Legal Proceedings ......................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ....... 29
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ............................... 30
Item 6. Selected Financial Data ................................... 31
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 33
Item 7a. Qualitative and Quantitative Disclosures about Market Risks 40
Item 8. Financial Statements and Supplementary Data ............... 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .................... 61
PART III
Item 10. Directors and Executive Officers
of the Registrant ......................................... 62
Item 11. Executive Compensation .................................... 62
Item 12. Security Ownership of Certain Beneficial
Owners and Management ..................................... 62
Item 13. Certain Relationships and Related Transactions ............ 62
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ................................... 63
Signatures ........................................................... 67
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PART I
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words, "intend", "anticipate", "believe",
"estimate" and "expect" and similar expressions as they relate to the Company
are intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in Item 1, "Business",
including "Risk Factors", as well as Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information.
ITEM 1. BUSINESS
Asset Sale
On December 8, 1999, BEI Medical Systems Company, Inc. (the "Company" or
"BEI") completed the sale of a substantial portion of the assets of the Company
to CooperSurgical Acquisition Corp., a Delaware corporation ("CSAC"), pursuant
to an Asset Purchase Agreement, dated as of October 1, 1999, by and between the
Company and CSAC, as amended (the "Asset Purchase Agreement") (the "Asset
Sale"). The assets sold constitute a business of developing, manufacturing,
marketing and servicing a broad array of advanced systems and devices for
minimally invasive diagnostic and therapeutic procedures in the medical fields
of gynecology and gastroenterology (the "Base Business"). During the fiscal year
ended October 2, 1999, approximately 97% of the Company's revenue was derived
from sales of products of the Base Business. In consideration for the sale of
the Base Business, the Company received approximately $10.5 million in cash
which amount is subject to post-closing adjustments. In addition, CSAC assumed
certain liabilities and contracts of the Company, and CooperSurgical, Inc.
waived royalty payments in the amount of up to $100,000 that otherwise may have
been due in the future from the Company.
In connection with the Asset Sale, the Company and CSAC entered into a
Transition Agreement under which, for up to six months following the closing of
the Asset Sale, the Company is providing certain products and services to CSAC
in connection with the Base Business and the assets the Company sold. In
addition, the Company and CSAC entered into a Noncompetition Agreement under
which the Company made certain covenants, including a covenant that it will not
prior to December 8, 2004 engage in any business that competes with any of the
products the Company sold to CSAC. The Company retained the right, in certain
circumstances, to narrow substantially the scope of such noncompetition
covenant. For additional information regarding the Asset Sale, see the Company's
Form 8-K Current Report filed with the Securities and Exchange Commission on
December 22, 1999.
Following the Asset Sale the Company is focusing on developing and
commercializing a new therapeutic system, the Hydro ThermAblator(R) (the
"HTA(R)") for treatment of excessive uterine bleeding. Approval to market this
system in the United States is dependent upon authorization from the U.S. Food
and Drug Administration ("FDA"), and the Company expects to complete follow-up
studies during the coming year that it anticipates will lead to the necessary
FDA authorization. In the meantime, the Company will emphasize marketing of the
HTA system in international markets and will prepare for U.S. marketing that it
anticipates could commence between October 2000 and April 2001. See
"Business--Risk Factors--Future Capital Needs and Applications"
The following business overview includes the activities of BEI's Base
Business prior to the Asset Sale and is presented for historical purposes.
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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 the implementation of new and
innovative diagnostic and therapeutic procedures.
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 recently added
endometrial ablation to their outpatient approach to therapy.
Base Business
Prior to the Asset Sale, the Company's goal was to provide a broad array
of minimally invasive advanced systems and devices to be used in an outpatient
setting serving the specific needs of gynecologists and their patients. The
Company's Base Business involved 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 Base Business included a line of specialty instruments, procedure
kits, disposables and equipment for gynecologists, as outlined in the following
table, as well as a line of gastroenterology products. As a result of the Asset
Sale, the Company will no longer manufacture, market, sell or service any of the
following products, except the HTA and related accessories:
Clinical Target Key Products
--------------- ------------
Cervix........................ o Bi-Safe I(TM) bipolar electrosurgical
generator and bipolar LLETZ electrode
system, for removal of abnormal tissue
from the cervix
o Colposcopy instruments, including
biopsy forceps and specula
o Gyne-Tech(TM) colposcopes systems, for
tissue destruction
o Gyne-Tech cryosurgical systems, for
tissue destruction
o OS Finder(TM) dilator, for cervical
canal access
o Plus II(TM) monopolar generator and
monopolar LLETZ Plus(TM) electrodes,
for removal of abnormal tissue from
the cervix
Uterus........................ o Corson Office Hysteroscopy System, for
examination and therapy of the inner
surface of the uterus **
o HTA, for treatment of excessive
menstrual bleeding*
o Hysteroscopic Insufflator, for precise
control of uterine distension
o Z-Sampler(TM) endometrial suction
curette, for tissue sampling to detect
carcinoma or precancerous conditions
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Clinical Target Key Products
--------------- ------------
Infertility Diagnosis......... o Corson Office Hysteroscopy System, for
examination and therapy of the inner
surface of the uterus**
o Hysteroscopic Insufflator, for precise
control of uterine distension
o Laparoscopic Insufflator, with high
flow capability to maintain proper
peritoneal cavity distension
o OS Finder dilator, for cervical canal
access
o SHG catheter, for distension during
sonohysterography
o Z-Sampler endometrial suction curette,
for endometrial sampling and to
monitor hormonal therapy effects
o ZUI(TM) uterine injector, for
hysterosalpingography
o ZUMI(TM) uterine manipulator/injector,
for manipulation of the uterus
Oncological Surgery and Pelvic
Reconstruction................ o Endo-Sock(TM)/MegaPouch(TM), for
laparoscopic tissue removal
o Laparoscopic Insufflator, with high
flow capability to maintain proper
peritoneal cavity distension
o MIYA Hook(TM), for pelvic suspension
surgery
o Nichols-Veronikis Ligature
Carrier(TM), for pelvic suspension
surgery
o Soderstrom LAVH Manipulator(TM), for
laparoscopically assisted hysterectomy
- ------------
* Not available in the United States
** The Company will continue to sell these products, but only in conjunction
with its sales of the HTA product.
The Hydro ThermAblator or 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
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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.
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.
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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 heated fluid-filled 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 would
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 Agency, notified
medical administrators, surgeons and nurses of reports of a number of incidences
of uterine perforation and injury to adjacent organs involving devices for
endometrial ablation by thermal means. The notice advised practitioners to
verify the correct placement of such devices within the uterus prior to their
use. The Company believes the HTA will reduce the risk of perforation due to its
integral hysteroscope, which provides visual confirmation of uterine anatomy and
verification of instrument position. The characteristics of various endometrial
ablation technologies currently under development or commercialization are
outlined below.
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Comparison of Endometrial Ablation Technologies
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Compatibility
With Varying
Method of Uterine Size & Pressurization of
Device Technology Introduction Location of Energy Source Shape the Uterine Cavity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balloon containing heated Blind insertion Heater inside balloon, inside Low High,
fluid uterus 150+ mmHg
- ------------------------------------------------------------------------------------------------------------------------
Balloon with conductive Blind insertion External electrosurgical Low High,
electrodes generator, electrodes inside 150+ mmHg
uterus
- ------------------------------------------------------------------------------------------------------------------------
Microwave probe Blind insertion External microwave generator Low Not applicable
applicator inside uterus
- ------------------------------------------------------------------------------------------------------------------------
Cryogenic probe Blind insertion External unit, probe inside Low Not applicable
uterus
- ------------------------------------------------------------------------------------------------------------------------
Conductive mesh electrode Blind insertion External electrosurgical Low Vacuum
generator, electrode inside
uterus
- ------------------------------------------------------------------------------------------------------------------------
Free fluid circulation Blind insertion Heater inside probe, inside High Low,
probe uterus < 50 mmHg
- ------------------------------------------------------------------------------------------------------------------------
Free fluid circulation Insertion with External Heater, circulation to High Low,
hysteroscope visual control, uterus < 50 mmHg
connected to
Hydro ThermAblator video monitor
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Hydro ThermAblator Solution
The Company has developed the patented HTA technology as an alternative to
existing treatments for menorrhagia, or excessive uterine bleeding, as well as
other proposed ablation treatments currently under development.
Management believes that the patented HTA offers distinct advantages
compared to existing and emerging ablation technologies for the treatment of
excessive uterine bleeding:
o Integral hysteroscope provides visual confirmation of uterine
anatomy and instrument position, as well as continuous observation
of treatment effect.
o Variation in uterine size and shape are easily accommodated by
freely circulating heated saline.
o Freely circulating heated saline allows even and complete treatment
of the entire endometrium.
o Low pressurization of the uterine cavity reduces risk and patient
discomfort.
o Does not require extensive training prior to use.
o Clinical outcome is not dependent on user experience or variation in
technique.
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o Minimally invasive short duration procedure with limited risk.
The Company's initial target market for the HTA is the 150,000
hysterectomies performed in the United States annually for menorrhagia or
excessive menstrual bleeding from benign causes. Additionally, the Company has
identified a market opportunity among the nearly two million women suffering
from abnormal uterine bleeding in the United States for whom the prospect of
long-term hormonal therapy or repeated D&C procedures is undesirable, or for
whom such treatments are ineffective. The Company also believes that an
additional substantial market opportunity exists among the over seven million
post-menopausal women who are currently receiving hormonal replacement therapy
that can result in an undesirable resumption of menstrual bleeding. BEI also
believes marketing opportunities will develop among women seeking a cessation of
menstruation, either electively as a lifestyle choice or in conjunction with
tubal sterilization.
The HTA System
The HTA has been designed to offer the gynecologist a minimally invasive,
non-surgical method to treat excessive uterine bleeding in an outpatient or
office setting. The HTA consists of a portable treatment unit, incorporating
microprocessor control of fluid temperature and fluid circulation. The mobile
unit provides a drawer for procedure supplies, and a shelf to house the
Company's Integrated Video System ("IVS") for display of the hysteroscopic image
on a video monitor. Precisely heated saline is circulated within the patient's
uterus, under the direct visual control of the gynecologist, for approximately
ten minutes to cause ablation of the entire endometrial lining. By utilizing
freely circulating heated saline at low pressure to distend the uterine cavity,
thermal energy is evenly transferred to all areas of the uterine cavity
including the areas of the cornua (the area where the fallopian tubes enter the
uterus) which can be difficult to treat with other devices. The use of
physiologic saline eliminates concerns about fluid absorption overload, and low
pressure prevents escape of fluid from the fallopian tubes. The incorporation of
a hysteroscopic telescope provides visual control during introduction, positive
visual confirmation of proper placement within the uterine cavity as well as
continuous visualization of the effects of the treatment. The digital displays
of the HTA control unit guide the user through the HTA procedure, providing
step-by-step visual prompts that facilitate ease of use and consistent results.
During the procedure an automated microprocessor system controls the ablating
temperature and monitors fluid volume to measure and reduce possibilities of
fluid absorption or loss and assure consistent treatment effect without
depending on user skill level. At any time, the gynecologist can interrupt the
treatment and, if desired, the circulation of room temperature saline will
rapidly cool the patient's uterus. As a result of ablation of the endometrial
lining of the uterus, the regeneration of the endometrium and resulting periodic
menstrual bleeding is either significantly reduced or eliminated.
The need to provide a definitive diagnosis of uterine abnormalities led to
the development of hysteroscopy. A gynecologist may look inside the uterus with
a hysteroscope, a thin telescope-equipped device that is inserted through the
cervix. The hysteroscope is attached to a light source and camera allowing the
gynecologist to view the endometrial lining on a video monitor. Direct
visualization of the lining of the uterus provides a more precise diagnosis of
uterine abnormalities than D&C, hysterosalpingography, x-ray imaging of the
uterine cavity and fallopian tubes or ultrasound imaging. The HTA is the only
non-surgical technique for the treatment of excessive uterine bleeding currently
under development and in various stages of FDA clinical trials that incorporates
hysteroscopic visualization.
In the past most therapeutic procedures for the treatment of excessive
uterine bleeding 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 therapeutic
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. However, the transition of
therapeutic procedures from the hospital environment to the gynecologist's
office practice is expected to be 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 providing
incentives to relocate procedures to more cost-effective environments.
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Results of Clinical Trials
The Company completed FDA required Phase I clinical trials in April 1996,
and was given permission to proceed to a Phase II trial of the HTA. Phase II
treatments of 20 patients were completed in December 1997. Follow-up outcome
data from the Phase II patients was compiled and submitted to the FDA in June
1998. This outcome data compared favorably with the results of alternative
therapies, showing an amenorrhea rate of 57.9%, at six months follow-up
examinations. When these patients whose menstrual bleeding was eliminated are
grouped with the remainder of the patients whose menstrual bleeding was
significantly reduced, the overall success rate was 94.7%. A protocol violation
related to pharmaceutical administration required that one patient be removed
from consideration in the study, with only one of the remaining 19 patients
(5.3%) failing to show an improvement from HTA treatment. There is no assurance
the Phase III results will be consistent with the results obtained by the
Company in its Phase II trials or that they will support the safety and efficacy
of the HTA.
The Company received approval to begin Phase III Clinical Trials in August
1998, and the first treatments were conducted in September 1998. BEI initiated
its Phase III clinical trials at 9 sites and enrolled 276 patients suffering
from menorrhagia, or excessive uterine bleeding. The study compared the safety
and efficacy of the HTA endometrial ablation treatment to electrosurgical
rollerball ablation, one of the current treatments for excessive uterine
bleeding. The Company completed the treatment phase of the clinical trials in
early August 1999. Data from examinations one year following treatment are
required for approval of its premarket approval ("PMA") application, but the
Company will submit six-month data to the FDA after review and analysis by its
contract research organization (Quintiles). There can be no assurance that any
data obtained from the Phase III trial will support the safety and effectiveness
of the HTA. Failure of the data to support the safety and effectiveness of the
HTA would have a material adverse effect on the Company's business, financial
condition and results of operations.
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
The Company is unable to market or sell the HTA in the U. S. prior to
receiving FDA approval. The Company anticipates that FDA approval to begin
commercial sales in the U. S. 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.
Internationally, 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 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.
Revenues from shipments of HTA products to international distributors
during fiscal years 1999 and 1998 were principally to establish demonstration
stock, and also included limited commercial sales outside
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the United States to private healthcare service end-users. During fiscal year
1999, the Company continued working with its international distributors to
establish clinical treatment sites with leading gynecologists at key
institutions in their respective markets. HTA treatments have been ongoing at
these sites to produce the local clinical studies with outcomes follow-up
necessary for documentation of the economic models to influence public health
ministries and insurance providers regarding reimbursement of the cost of the
HTA procedure in these respective markets. Commercial expansion of the market
for the HTA in international public healthcare depends on successful adaptation
of favorable reimbursement policies on a country by country basis. The Company
plans to provide sponsorship for clinically-based seminars conducted by the
Company's clinical investigators, as well as clinical practitioners who
currently use the HTA, to familiarize practitioners on the use of 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.
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.
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 that 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 alternative 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 to dysfunctional uterine bleeding. Gynecologists
worldwide are beginning to adopt such 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
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 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 would 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 in the future.
Competing companies may succeed in developing technologies and products that are
efficacious or more cost effective than the HTA.
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The Company believes that its ability to compete effectively depends on
its ability to develop and commercialize the HTA, to continue to attract and
retain highly qualified personnel and to obtain the required regulatory
approvals. See "Risk Factors Competition; Uncertainty of Technology Change".
Manufacturing
The Company utilizes contract manufacturers to make the disposable HTA
procedure kit. Additionally, the Company intends to transfer production of the
HTA system to a third party contract manufacturer following completion of the
Transition Agreement related to the Asset Sale. Company engineers are continuing
to work with the third party contract manufacturers to reduce the cost of the
HTA disposable kit and the HTA system as volume increases by streamlining
production methods and eliminating or replacing higher cost methods and
materials. See "Risk Factors -- Dependence on Third Party Vendors"
In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA through third parties in accordance with FDA requirements in
commercial quantities, at high quality levels and at commercially reasonable
costs. The Company has no experience in managing the manufacture and assembly of
the HTA in commercial quantities. The HTA has not yet been produced in
commercial quantities at commercially reasonable costs, but the Company expects
that its experience with other third party manufacturers of medical electronic
systems and consumable medical products will be transferable to the HTA. Failure
of the Company or third party vendors to achieve production of the HTA in
commercial quantities at high quality levels and at commercially reasonable
prices would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Scale-up Risk"
During fiscal 1996, BEI's 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 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, including the HTA. The
Company's internally funded research and development expenditures were
$3,184,000, $2,866,000 and $1,864,000 for the fiscal years 1999, 1998 and 1997,
respectively. The Company's 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, as well as finalizing manufacturing arrangements for
the HTA systems and the related disposable components and reducing the cost of
manufacturing.
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 will depend in part on its ability to obtain and
maintain patent protection for the HTA, 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.
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As of October 2, 1999, the Company had a portfolio of four patents related
to the development of the HTA. Corresponding applications have been filed in
certain foreign countries relative to the HTA. The Company's policy is generally
to file patent applications in foreign countries where rights are available and
the Company believes it is commercially advantageous to do so. No assurance can
be given that any patents from pending patent applications or from any future
patent applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. The Company also owns certain registered
trademarks, and has applied for other trademarks in certain foreign countries.
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 the HTA, 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 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 medical devices 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 FDA, 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.
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 premarket approval process ("PMA"), which requires the
manufacturer to prove the safety and effectiveness of the device to the FDA's
satisfaction. A PMA application must provide extensive preclinical and clinical
trial data and information about the device and its components regarding, among
other things, manufacturing, labeling and promotion. As part of the PMA review,
the FDA will inspect the manufacturer's facilities for compliance with the QSR,
which includes elaborate testing, control, documentation and other quality
assurance procedures.
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Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review and, if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application,
which the Company believes typically takes one to three years, but may take
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already provided.
The FDA also may respond with a "not approvable" determination based on
deficiencies in the application and require additional clinical trials that are
often expensive and time consuming and can delay approval for months or even
years. In recent years, the FDA has heightened its scrutiny of clinical data
submitted in support of PMA applications. During the review period, an FDA
advisory committee, typically a panel of clinicians, likely will be convened to
review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. Although the FDA is not bound by the
advisory panel decision, the panel's recommendation is important to the FDA's
overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include post-approval
conditions that the FDA believes are necessary to ensure the safety and
effectiveness of the device, including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in enforcement action, including withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance can
be given that any PMA application will ever be approved for marketing. Even
after approval of a PMA, a new PMA or a 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 the Company's PMA application for the HTA will be found
approvable, or, if found approvable, will not take longer than expected to
obtain or will not include unfavorable restrictions.
The HTA and related products, if any, 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 Quality System Regulations ("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. The Company's
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The 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 PMA process, 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 HTA and related products.
Distribution of the Company's HTA and related 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
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assurance that the Company will receive on a timely basis, if at all, any
necessary foreign government or United States export approvals.
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 investigational device exemption ("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 1997, 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 related products in a timely manner, if at
all, and any failure to receive or delay in receiving such approval could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors Government Regulation."
Employees
As of October 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.
As a result of the Asset Sale, and following the completion of 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.
Risk Factors
Limited Operating History; History of Losses and Possible Future Losses;
Fluctuations in Operating Results.
The Company has a limited medical device operating history upon which an
evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by entrants
into the medical device industry, which is characterized by an increasing number
of participants, intense competition and a high failure rate. Historically, BEI
Medical has incurred significant losses in its medical device business and
expects losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in support
of regulatory and reimbursement approvals, expansion of marketing and sales
activities and research and development. BEI's future revenues will depend upon,
among other factors, its ability to cost-effectively commercialize the Hydro
ThermAblator (HTA). There can be no assurance that the HTA will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales of the HTA. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
In the event the Company is unable to achieve profitability or secure additional
sources of capital, its ability to continue as a going concern may be severely
impaired. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- New Products and Technologies."
The Company expects that its operating results will fluctuate
significantly from quarter to quarter in the future and will depend on a number
of factors, many of which are outside the Company's control. These factors
include actions relating to regulatory and reimbursement matters, the extent to
which the HTA gains market acceptance and the timing of regulatory approvals.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Dependence on Single Product
The Company is dependent on a single product, the HTA system, to achieve
commercial success and generate sufficient future revenues and profits to
fulfill capital needs. Although the Company's management believes that the HTA
system will ultimately achieve commercial viability, there can be no assurance
that the HTA will achieve commercial acceptance. The Company does not have an
alternative source of revenue or profits to meet capital needs in the event the
HTA does not achieve commercial acceptance.
Uncertainty of Market Acceptance
The Company's success is dependent upon acceptance by the medical
community of the HTA and, to a lesser extent, other new products, if any,
introduced by the Company, as reliable, safe and cost-effective treatments for
the medical conditions they are intended to treat. There can be no assurance
that the HTA or such other products will gain any significant degree of market
acceptance among physicians, patients and healthcare payors, even if the
necessary international and United States regulatory approvals are obtained. BEI
believes that recommendations and endorsements by physicians will be essential
for market acceptance of the HTA and such other products, and there can be no
assurance that any such recommendations or endorsements will be obtained. The
Company believes that physicians will not use the HTA unless they determine,
based on clinical data and other factors, that the HTA is an attractive
treatment alternative for excessive menstrual bleeding and offers clinical
utility in a cost-effective manner. Although the Company believes that
physicians will not require extensive training prior to using the HTA,
acceptance among physicians will depend upon the Company's ability to train
potential users of the HTA in interventional techniques, and the willingness of
such users to learn these new techniques. Failure of the Company to achieve
significant market acceptance of the HTA and other new products introduced by
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations. Any future products developed by
the Company that gain regulatory approval would have to compete for market
acceptance and market share. The timing of market introduction of competitive
products could adversely affect the competitiveness of the HTA and any other
products the Company may develop. Accordingly, the relative speed with which the
Company can develop new products, complete clinical testing and the regulatory
approval process and supply commercial quantities of the product to the market
are expected to be important competitive factors. The Company believes that
competition in the gynecological device market is based on many factors,
including clinical outcomes, ease of use, relative efficacy, safety, product
reliability, physician familiarity with the device, third-party reimbursement
policies, patent protection, sales and marketing capability, reputation and
price. There can be no assurance that FDA approval will be obtained for the HTA
or any other new products the Company, that competitors will not introduce new
products with similar or more advanced features or that the market will accept
the HTA or any other new products the Company may develop. See "Business --
Competition."
Government Regulation.
The manufacture and distribution of the HTA are subject to extensive
regulation by the FDA and, in some instances, by foreign and state governments.
Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"), and the regulations promulgated thereunder, the FDA regulates the
preclinical testing, manufacture, labeling, sale, distribution, and promotion of
medical devices. Before a new device can be introduced into the market, the
manufacturer must obtain market clearance through either the 510(k) premarket
notification process or the lengthier PMA application process. Noncompliance
with applicable requirements, including the FDA's QSR, can result in, among
other things, warning letters, fines, injunctions, civil penalties, public
notifications, recall or seizure of products, total or partial suspension of
product revenues, failure of the government to grant premarket clearance or
premarket approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA has the authority to require repair, replacement or refund
of the cost of any device manufactured or distributed by the Company.
The process of complying with FDA regulations with respect to new and
existing products can be costly and time-consuming. FDA requirements for the
Company's HTA require obtaining FDA premarket approval. The first stage of the
PMA process is submission of an application for an IDE. The IDE permits clinical
evaluations of products on human subjects under controlled experimental
conditions by designated qualified
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medical institutions. For information concerning clinical trials of the HTA, see
"Business-The HTA System-Results of Clinical Trials."
The Company completed the treatment phase of the clinical trials of the
HTA in early August 1999. Data from examinations one year following treatment
are required for approval of its PMA application, but the Company will submit
six-month data to the FDA after review and analysis by its contract research
organization. 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, financial condition and results of
operations.
The second stage of the PMA process is the PMA application, which is a
comprehensive report of all data and information obtained by the applicant
throughout the product's development and testing. The PMA includes reports of
prior inventions, QSR information, the results of bench testing of the device
and other data and information including the results of the IDE clinical
studies. The FDA will issue a PMA if it finds that the safety and effectiveness
of the product have been sufficiently demonstrated and that the product complies
with all applicable regulations and standards. After reviewing the PMA
application, the FDA may require further clinical evaluation of the product,
terminate the clinical studies, issue a PMA, or require additional patient
follow-up for an indefinite period of time. Approval of the Company's PMA
application for its HTA will depend on a wide variety of factors, many of which
are outside the Company's control. There can be no assurance that the Company
will reach a stage of development at which filing a PMA application will be
appropriate, nor that it will be successful in obtaining a PMA for the HTA in a
timely manner, or at all, which is necessary to market the Company's HTA
commercially in the United States. Delays in obtaining marketing approvals and
clearances in the United States, could have material adverse effects on the
Company and its operations. Although the Company has been successfully inspected
with respect to its current facilities for compliance of its operations with the
QSR, final approval of the HTA will require an inspection by the FDA to
determine whether the Company's operations at its current facilities conform
with the FDA's current QSR. Even after approval of a PMA, a new PMA or PMA
supplement is required in the event of a modification to the device, to its
labeling or to its manufacturing process that affects the safety or
effectiveness of the device. The timing of the PMA review process is
unpredictable, and the Company's failure to obtain the necessary approval on a
timely basis would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is subject to certain FDA regulations governing defective
products and complaints about its products. The Company's products are subject
to recall at any time by the FDA or the Company if it appears that use of the
products could result in, among other things, unwarranted health risks. The FDA
has authority to inspect the Company's facilities to ensure compliance with the
FDC Act and regulations thereunder. Failure to comply with these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The FDA regulates the export of medical devices that have not been
approved or cleared for marketing in the United States. The Company expects to
export the HTA directly to the European Union under the provisions of the FDA
Export Reform and Enhancement Act of 1996. In certain instances, however, the
Company may need to apply for export approval from the FDA. There can be no
assurance that required approvals will be granted.
Developments such as the enactment of the Safe Medical Devices Act of 1990
and increased enforcement actions reflect a trend toward more stringent product
regulation by the FDA. One result is an increase in the typical time elapsed
between the filing of an application and the receipt of FDA clearance or
approval of commercial release of a medical device. In addition, the FDA often
requires clinical data with such applications, which can increase the cost of
obtaining such clearance to market. Furthermore, rigorous regulatory action may
be taken in response to deficiencies noted in inspections or to any product
performance problems.
The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions and other provisions in the FDC Act affecting
the regulation of devices. Among other things, the
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changes will affect the PMA process, and also will affect device standards and
data requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off-label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and hazardous substance disposal.
There can be no assurance the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations.
Political, economic and regulatory influences are subjecting the
healthcare industry in the United States to fundamental change. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery and payment systems. Legislative debate
is expected to continue in the future, and the Company cannot predict what
impact the adoption of any federal or state healthcare reform measure or future
private sector reform may have on its business.
Medical device laws are also in effect in many countries outside the
United States in which the Company does business. These range from comprehensive
device approval requirements to requests for product data or certifications. The
number and scope of these requirements are increasing. This trend toward
increasing product regulation is evident in the European Union, where efforts
are under way to harmonize the regulatory systems. In January 1995, the MDD was
fully implemented in the European Union, which is intended to make regulatory
requirements of European Union countries more consistent. The time required to
obtain approvals required by foreign countries may be longer or shorter than
that required for FDA approval and requirements for licensing may differ from
FDA requirements. Under MDD, the Company is subject to "prior notice" of intent
to conduct clinical studies in the European Union. This process, similar to the
FDA IDE process, requires regulatory documents and test information to be
submitted to the governmental agency of each country in which the Company
intends to conduct clinical studies. In order to commence commercial marketing
of its products in the European Union and the European Free Trade Association,
the Company is required to file for a CE Mark approval. Although the Company
obtained a CE Mark for the HTA, which allows the Company to commence marketing
of the HTA in countries that are members of the European Union and the European
Free Trade Association, subject to limited regulations in certain countries,
there can be no assurance that the Company will be successful in obtaining CE
Mark approval for any other products on a timely basis if at all, and any
failure to receive or delay in receiving approval could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-- Government Regulation."
Future Capital Needs and Applications
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 HTA 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 restrictive covenants
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Prior to the receipt of FDA approval, in order to attempt to maximize the
return on assets of the Company and to provide a contingency plan in the event
the Company does not receive such approval in a timely manner, or at all, the
Board of Directors will be evaluating various strategic alternatives that may be
available to the Company, including: (i) an affiliation with a third party to
exploit the HTA technology, (ii) the licensing or sale of the HTA technology,
and (iii) possible reinvestment of the proceeds derived from such license or
sale in an appropriate business based on the Company's existing expertise,
goodwill and management.
Scale-Up Risk
In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA through third parties in accordance with FDA requirements in
commercial quantities, at high quality levels and at commercially reasonable
costs. The Company has no experience in managing the manufacture and assembly of
the HTA in commercial quantities. The HTA has not yet been manufactured in
commercial quantities at commercially reasonable costs, and there can be no
assurance that it will be. As a result, there can be no assurance that BEI will
not encounter difficulties in scaling up manufacturing, including problems
involving production yields, quality control, component supply and shortages of
qualified manufacturing personnel. Failure 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.
Dependence on Third Party Vendors
Following the transition period related to the Asset Sale, the Company
will cease all manufacturing and transfer its manufacturing activities for the
HTA system and disposable components to third party vendors. Additionally, a
number of significant components, such as thermisters and heater rods, are
purchased from sole source suppliers. For certain contract manufactured products
and components there are relatively few sources of supply, and establishing
additional or replacement suppliers for such components or services cannot be
accomplished quickly. Although the Company will try to maintain sufficient
quantities of inventory of such components to minimize production delays or
interruptions, there can be no assurance that the Company will find suitable
alternatives at reasonable prices, if at all, or that any such alternatives will
remain available to the Company. The Company's inability to obtain acceptable
contract manufacturing services or suppliers of components in a timely manner or
to find and maintain suitable replacement contract manufacturing services or
suppliers of components would have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Direct Sales Experience
The Company has only limited experience in direct field sales and
marketing of the HTA both domestically and internationally. The Company has no
direct international or domestic field sales force, and has only a limited
number of partnership relationships with international distributors to market
the HTA. There can be no assurance that the Company will be successful in
establishing additional partnership relationships on commercially reasonable
terms, if at all. Achieving market acceptance for the HTA will require BEI to
establish additional marketing and direct sales capability sufficient to support
sales in commercial quantities. Establishing such capability will require
significant resources and there can be no assurance that the Company will be
able to recruit and retain additional qualified marketing personnel or direct
sales personnel or that future sales efforts by the Company will be successful.
The failure to establish and maintain an effective distribution channel for the
HTA or to establish and retain qualified and effective sales personnel to
support commercial sales of the HTA would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated with International Sales
The Company markets and sells the HTA internationally through a network of
distributors. The Company's international sales are dependent upon the marketing
efforts of, and sales by, these distributors. BEI may also rely on these
distributors to assist it in obtaining reimbursement approvals from both
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government and private insurers in certain international markets. In general,
the Company has chosen to operate through small distribution firms because of
its belief that these firms will devote greater attention to the HTA. The use of
small distributors increases the risks associated with financial instability of
distributors, which includes the risk that distributors will cease operations or
will be unable to satisfy financial obligations to the Company. If a distributor
were to fail to invest adequate capital promoting the HTA or were to cease
operation, the Company would likely be unable to achieve significant revenues in
the territory. In addition, because the Company has only recently commenced
international sales, it has only limited sell-through experience with many of
its distributors. BEI also does not currently have distributors in a number of
significant international markets that it has targeted and will need to
establish additional international distribution relationships. There can be no
assurance that the Company will engage qualified distributors on commercially
reasonable terms in a timely manner. The failure to engage such distributors or
the failure of such distributors to achieve significant revenues from sales of
the HTA would have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of other risks are inherent in international operations and
transactions. International revenues and operations may be limited or disrupted
by the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in managing
international operations and fluctuations in foreign currency exchange rates.
There can be no assurance that the Company will be able to successfully
commercialize the HTA in any international market. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Reliance on Patents and Protection of Proprietary Technology
BEI's ability to compete effectively will depend substantially on its
ability to develop and maintain the proprietary aspects of its technology. There
can be no assurance that any of the Company's issued patents, or any future
patents that may be issued, will offer any degree of protection to the HTA
against competitive products. There can be no assurance that any patents that
may be issued or licensed to the Company or any of the Company's patent
applications will not be challenged, invalidated or circumvented in the future.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell the HTA
either in the United States or in international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property disputes, and some companies
in the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference or other proceedings in the USPTO. The defense and prosecution of
intellectual property suits, USPTO proceedings and related legal and
administrative proceedings are both costly and time consuming. Litigation may be
necessary to enforce patents issued or licensed to the Company, to protect the
Company's trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others.
Any litigation or USPTO proceedings involving the Company will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or USPTO proceedings to which the Company may become a party could
subject the Company to significant liabilities to third parties or require the
Company to seek licenses from third parties. Although some patent and
intellectual property disputes in the medical device area have been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include substantial ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. An adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling the
HTA, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's disposable HTA procedure kit and the HTA system are or will
be manufactured by third party vendors, who are or will be responsible for
registering and maintaining their own facility
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regulatory and compliance approvals. Any regulatory or compliance actions
against a third party vendor by either the FDA or any other regulatory body
could affect the third party vendor's ability to supply the Company, which in
turn could have a material adverse impact on the Company.
In addition to patents, BEI relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
an individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties
or utilized by the individual, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to BEI shall be the exclusive property of the
Company. There can be no assurance that the Company's proprietary information
will not be misused or confidentiality agreements with employees, consultants
and others will not be breached, that the Company will become aware of such
breach or will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors. See "Business -- Research and Development; Technology" and "--
Patents and Proprietary Technology."
Uncertainty Relating to Third-Party Reimbursement and Healthcare Reform
In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
government health administration authorities and private health insurance plans,
to reimburse all or part of the cost associated with the treatment of patients.
Although reimbursement for diagnostic and therapeutic procedures to treat
uterine disorders such as menorrhagia, or excessive uterine bleeding and fibroid
treatment have generally been available in the United States, there is no
assurance that it will continue to be the case or that the fees currently
allowed for these procedures will not be reduced. BEI could also be adversely
affected by changes in reimbursement policies of government or private
healthcare payors, particularly to the extent that any such changes affect
reimbursement for diagnostic or therapeutic procedures in which the HTA is used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from healthcare payors for procedures in which
the HTA is used, or adverse changes in government and private third-party
payors' policies toward reimbursement for such procedures, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Market acceptance of the HTA in international markets may be dependent in
part upon the availability of reimbursement within prevailing healthcare payment
systems. Reimbursement and healthcare payment systems in international markets
vary significantly by country, and include both government sponsored and private
healthcare insurance. Although BEI will seek international reimbursement
approvals, obtaining such approvals can require 12 to 18 months or longer and
there can be no assurance that any such approvals will be obtained in a timely
manner, that the Company will obtain sufficient reimbursement, or that the
Company will obtain any reimbursement at all. Failure to receive additional
international reimbursement approvals could have a material adverse effect on
market acceptance of the HTA in the international markets in which the Company
is seeking approvals and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Sales
and Marketing."
The Company expects that there will be continued pressure on
cost-containment throughout the United States healthcare system. Reforms may
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company.
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Competition; Uncertainty of Technology Change
One of the principal competitors for the Company's HTA is Gynecare, a
subsidiary of Ethicon, Inc./Johnson & Johnson ("J&J"), whose ThermaChoice
balloon, a device for endometrial ablation, has been cleared to be marketed in
the United States by the FDA. Other principal competitors for the 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 would 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 in the future.
Competing companies may succeed in developing technologies and products that are
efficacious or more cost effective than the HTA. There can be no assurance that
these companies will not succeed in developing technologies and products that
are more effective than the HTA or that would render the Company's technologies
or HTA obsolete or not competitive. The Company expects competition for devices
and service to treat excessive menstrual bleeding to increase. Such competition
could have a material adverse effect on the Company's business, financial
condition and results of operations See "Business -- Competition."
Product Liability Risk; Limited Insurance Coverage
The medical device industry has historically been litigious, and BEI faces
an inherent business risk of financial exposure to product liability claims in
the event that the use of its products results in personal injury. Although the
Company has not experienced any claims to date, the Company plans to market new
technology and there can be no assurance that the Company will not experience
losses due to product liability claims in the future. The HTA is complex and
will be used in medical procedures and in situations where there is a potential
risk of serious injury, adverse side effects or death. As a result, BEI
currently maintains product liability insurance with coverage limits of
$1,000,000 per occurrence and $2,000,000 in the aggregate. It cannot be
predicted, however, whether such insurance is sufficient, or if not, whether the
Company will be able to obtain such insurance as is sufficient, to cover the
risks associated with the Company's business or whether such insurance will be
available at premiums that are commercially reasonable. A successful claim
against - or settlement by - the Company in excess of its insurance coverage or
the Company's inability to maintain insurance in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Employees
BEI is dependent upon a number of key management and technical personnel.
The loss of the services of one or more key employees would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's ability to manage its transition to commercial-scale
operations, and hence its success, will depend on the efforts of these
individuals. The Company's success will also depend on its ability to attract
and retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, and there can be no
assurance that the Company will be able to attract and retain such personnel.
The Company does not currently have key person insurance on the life of any
employee.
Risks Related to Possible Acquisitions
The Company may seek to expand its operations through future acquisitions
of other complementary businesses or product lines. There can be no assurance
that the Company will be able to identify or acquire additional businesses, or
to successfully integrate and profitably manage acquired businesses. In
addition, increased competition for acquisition candidates may develop, in which
event there may be fewer acquisition opportunities available to BEI as well as
higher acquisition prices. Further, acquisitions involve a number of special
risks, including possible adverse effects on the Company's operating results,
diversion of
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management's attention, risks related to having adequate corporate and financial
controls and procedures to manage and monitor the Company's operations as they
expand, risks associated with unanticipated events or liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly in the fiscal quarters immediately following
the consummation of such transactions. There also can be no assurance that
businesses acquired in the future will achieve anticipated revenues and
earnings. In addition, margins may be negatively impacted to the extent that
margins on acquired product lines are lower than BEI's average margins. There
can be no assurance that acquisitions can be consummated on acceptable terms,
that any acquired businesses can be integrated successfully into the Company's
operations, or that any such acquisitions will not have a material adverse
effect on BEI's business, financial condition and results of operations.
Year 2000
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such Year 2000 requirements,
especially those with internally developed systems.
The Company and third parties with which the Company does business rely on
numerous computer programs in their day-to-day operations. The Company's Year
2000 project was divided into the following major sections: (i) infrastructure
and applications software, commonly referred to as "IT Systems", (ii) third
party suppliers and customers, commonly referred to as "External Agents", (iii)
process control and instrumentation and (iv) 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 representations 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 believes that all server hardware and operating systems software in use
are now Year 2000 compliant. Through independent and internal testing, the
Company also believes its business systems to be compliant. The Company is
currently operating in Fiscal Year 2000 and is experiencing no date-related
problems.
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. Based on the responses received, 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: This category includes such items as
telephone systems, security systems, HVAC, copiers, FAX machines, production
equipment, tools and other process systems. The Company has found no significant
Year 2000 related issues and believes there will be no major disruption in this
area.
Company Products: In addition, the Company 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.
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Conclusion: The Company believes that it has effectively identified and
resolved all major Year 2000 related issues that could cause a significant
disruption to its business. However management recognizes that it is possible
that unforeseen issues may arise and will keep a vigilant watch for any sign of
such issues. 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 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.
Control by Existing Stockholders and Management
The Company's directors, officers and their affiliates beneficially own
approximately 28.6% of the outstanding Common Stock (assuming exercise of vested
stock options). As a result of such Common Stock ownership, the Company's
directors, officers and their affiliates, if they voted together, would be able
to exercise significant influence over the election of members of the Company's
Board of Directors and other corporate actions requiring stockholder approval.
Anti-Takeover Effects of Delaware Law and Certain Charter Provisions;
Stockholder Rights Plan
The Company's Board of Directors has the authority to issue up to
2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"), and
the Company's Certificate of Incorporation contains a fair price provision, the
combined effect of which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 and the fair price provision could have the
effect of delaying or preventing a change of control of the Company. The
Company's Certificate of Incorporation provides for staggered terms for the
members of the Board of Directors. The staggered Board of Directors and certain
other provisions of the Company's Certificate of Incorporation and Bylaws may
have the effect of delaying or preventing changes in control or management of
the Company, which could adversely affect the market price of the Company's
Common Stock. Furthermore, the Board of Directors of the Company has adopted a
Stockholder Rights Plan that has certain anti-takeover effects. Rights issued
under the plan will cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Company's Board of
Directors.
Forward-Looking Statements
The statements contained in this Form 10-K Annual Report that are not
historical fact are "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "would," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. Management wishes to caution the reader that
these forward-looking statements contained in this Form 10-K Annual Report
regarding matters that are not historical facts are only predictions. The
Company's future results of operations and other forward looking statements
contained in the Form 10-K Annual Report, in particular the statements
concerning revenues, pricing, development and commercialization of the HTA,
future capital needs and Year 2000 issues, involve a number of risks and
uncertainties. No assurances can be given that the future results
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indicated, whether expressed or implied, will be achieved. Forward-looking
statements are based upon a variety of assumptions relating to the business of
the Company, which, although considered reasonable by the Company, may not be
realized. Because of the number and range of the assumptions underlying the
Company's forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond the reasonable control of the
Company, some of the assumptions inevitably will not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
Form 10-K Annual Report. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Therefore, the actual experience of the Company and results achieved during the
period covered by any particular forward-looking statements may differ
substantially from those predicted. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
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Executive Officers and Directors of the Company {PENDING UPDATE}
The directors, executive officers and key employees of the Company and
their ages and titles as of December 10, 1999 are as follows:
Name Age Title
- ---- --- -----
Charles Crocker 60 Chairman of the Board of Directors
Richard W. Turner 53 President and Chief Executive Officer &
Director
Samuel Dickstein 59 Vice President, New Business Development
and Technology
Thomas W. Fry 55 Vice President, Finance and Administration,
Secretary and Treasurer
Dr. Ralph M. Richart (1) 65 Director
Dr. Lawrence A. Wan (2) 61 Director
Gary D. Wrench (1) (2) 66 Director
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Charles Crocker, a founder of the Company, has served as Chairman of
the Board of Directors of the Company since October 1974. Mr. Crocker served as
President and Chief Executive Officer of the Company from October 1995 until the
Distribution. Mr. Crocker is President and Chief Executive Officer of
Technologies. He served as President of Crocker Capital Corporation (a Small
Business Investment Company), from 1970 to 1985, and as General Partner of
Crocker Associates, a venture capital investment partnership, from 1970 to 1990.
He currently serves as a director of Technologies, Fiduciary Trust Company
International, Pope & Talbot, Inc. and KeraVision. Mr. Crocker holds a B.S. from
Stanford University and an M.B.A. from the University of California, Berkeley.
Mr. Richard W. Turner founded in 1991 what is now the Company as a
subsidiary of Electronics. Mr. Turner served as President of that subsidiary
from 1991 until it merged into the Company in November 1997, and then as
President of the Company until April 1998. He rejoined the Company as President
and Chief Executive Officer in January 1999. He has served as a director of the
Company since September 1997. Previously President of the Healthcare Group for
the Cooper Companies, Mr. Turner has held executive leadership positions in the
medical industry for over 20 years, including President and Director of
Cooper-LaserSonics, Inc., President of CooperVision Inc., President and Chief
Executive Officer/Director for Pancretec, Inc. and President of Kay
Laboratories. Mr. Turner holds a B.S. from Old Dominion University and an M.B.A.
from Pepperdine University.
Mr. Samuel Dickstein served as Vice President, New Business Development
and Technology of BEI Medical Systems Company, Inc. from June 1997 until the
merger of that entity into BEI Electronics, Inc. ("Electronics") in November
1997. He served as Vice President, Operations, from the acquisition of Meditron
Devices, Inc. by BEI Medical Systems Company, Inc. in 1992 until June 1997.
Prior to the acquisition, Mr. Dickstein, a co-founder of Meditron Devices, Inc.,
served as a Vice President from 1987 to 1992. From 1979 to 1987 Mr. Dickstein,
was a vice president of Xylog Corporation, a subsidiary of Meditron Devices,
Inc. From 1970 to 1978 Mr. Dickstein served as Electro-Medical Engineering
Manager for American Cystoscope Makers (Circon Corp.). Mr. Dickstein holds a
B.S.E.E. from the City College of New York and has also completed graduate level
studies in Electrical Engineering at both New York University and the New Jersey
Institute of Technology.
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Mr. Thomas W. Fry served as Vice President, Finance and Administration of
BEI Medical Systems Company, Inc. from October 1992 until the merger of that
subsidiary into Electronics in November 1997. Mr. Fry was employed by
Disctronics Ltd. as Corporate Controller from 1989 to 1992, by Cavitron,
Inc./CUSA, a medical device, engineering and manufacturing company, as
Controller/CFO from 1986 to 1989, and by Cheeseborough-Ponds International as
Manager of Profit Planning and Manufacturing Controller from 1979 to 1986. Prior
to that time, Mr. Fry was employed by GTE from 1970 to 1979 in various
accounting and financial roles, including three years as the Controller of GTE
Sylvania in Caracas, Venezuela. Mr. Fry holds a B.S. from Southeast Missouri
State University and an M.B.A. with academic honors from Pace University.
Dr. Ralph M. Richart has been a director of the Company since November
1997 and was a director of BEI Medical Systems Company, Inc. from 1996 until
that company's merger into Electronics in November 1997. Dr. Richart is
Professor of Pathology in Obstetrics and Gynecology at the Columbia University
College of Physicians and Surgeons and Associate Director of Gynecological
Pathology and Cytology at the Sloane Hospital for Women in New York City. He
served as a Career Research Development Awardee at the Medical College of
Virginia before moving to Columbia-Presbyterian Medical Center in 1963. His
professional interests have centered around obstetrical and gynecological
pathology and cytology with particular emphasis on the study of cervical
neoplasia and, more recently, the relationship of the human papillomavirus to
lower genital tract neoplasia. He is the past President of the International
Gynecologic Cancer Society. He received his medical training at the University
of Rochester School of Medicine and Dentistry, and completed his pathology
residency in the Harvard Hospitals system.
Dr. Lawrence A. Wan has been a director of the Company since November
1997. He served as Vice President and Chief Technical Officer of Electronics
from July 1990 to September 1997, and is currently Vice President and Chief
Technical Officer of Technologies. From 1984 until 1990, he served as Vice
President, Engineering, of Systron Donner Corporation, and also held various
other technical and general management positions with that company between 1979
and 1984. From 1968 through 1979, he served as Chief Executive Officer of Sycom,
Inc., a commercial electronics company which he founded. From 1964 to 1968, he
worked for Hughes Aircraft Company where he headed the Radar Systems Section of
the Hughes Ground Systems Group. In 1962, Dr. Wan and two other professors
established an Engineering School at the University of California, Santa
Barbara, where he also taught Engineering. Dr. Wan holds B.S., M.S. and Ph.D.
degrees in Engineering and Applied Sciences from Yale University.
Mr. Gary D. Wrench has been a director of the Company since 1986. He
served as Senior Vice President and Chief Financial Officer of Electronics from
July 1993 to September 1997. From April 1985 to July 1993, he served as Vice
President of Electronics and President and Chief Executive Officer of Motion
Systems Company, Inc., then a wholly owned subsidiary of Electronics that is now
a part of Technologies. Previous experience includes 20 years with Hughes
Aircraft Company including an assignment as President of Spectrolab, Inc., a
Hughes subsidiary. He currently serves as a director of Technologies. Mr. Wrench
holds a B.A. from Pomona College and an M.B.A. from the University of
California, Los Angeles.
Staggered Board of Directors
The Company has a staggered Board of Directors, which may have the effect
of deterring hostile takeovers or delaying changes in control or management of
the Company. For purposes of determining their term of office, directors are
divided into three classes, with the term of office of the first class to expire
at the 2001 annual meeting of stockholders, the term of office of the second
class to expire at the 2002 annual meeting of stockholders and the term of
office of the third class to expire at the 2000 annual meeting of stockholders.
Class I consists of Dr. Wan; Class II consists of Mr. Crocker and Dr.
Richart; and Class III consists of Mr. Turner and Mr. Wrench. Directors elected
to succeed those directors whose term expires will be elected for a three-year
term of office. All directors hold office until the next annual meeting of
stockholders, at which their term expires, and until their successors have been
duly elected and qualified. Executive officers serve at the discretion of the
Board. There are no family relationships among any of the officers and
directors.
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Board Committees
The Board of Directors of the Company has established an Audit Committee
(consisting of Dr. Richart and Mr. Wrench) which reviews the results and the
scope of the audit and other services provided by the Company's independent
accountants and periodically reviews the results of the Company's internal audit
controls, and a Compensation Committee (consisting of Dr. Wan and Mr. Wrench)
which makes recommendations concerning salaries, incentives and other forms of
compensation for directors, executive officers and other key employees of the
Company and administers various incentive compensation and benefits plans.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased office
space in Teterboro, New Jersey. The Company operates one other facility in
Chatsworth, California, and maintains office space in various locations
throughout the United States for sales and technical support. BEI's principal
facilities are as follows:
Location Description of Facility
Teterboro, New Jersey Leased 24,400 square foot manufacturing,
engineering, and administrative facility.
Chatsworth, California Leased 3,400 square foot administrative and
marketing facility.
The lease agreement for the Teterboro facility expires on June 8, 2004,
and the Company has the option to extend the term of this lease for five
additional years. The monthly base rent through February 2000 is approximately
$21,445, plus the Company's pro rata share of maintenance expenses and real
estate taxes with immaterial increases thereafter through the end of the lease
term. The lease agreement for the Chatsworth facility expires on May 31, 2000.
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. As a result of the Asset Sale, 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.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
29
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was initially offered to the public in July
1989 and traded on the Nasdaq National Market System under the Nasdaq symbol
"BEII" from August 1, 1989 through the fiscal year end of September 27, 1997.
During the period from October 3 to October 7, 1997, the stock traded under the
Nasdaq symbol "BEIV". After October 7, 1997, the Company's common stock began
trading under the Nasdaq symbol "BMED."
On September 27, 1997, having transferred all of its non-medical device
businesses to Technologies in exchange for all of Technologies' outstanding
common stock, Electronics distributed that stock to its stockholders in a
tax-free spin-off of Technologies (the "Distribution"). As a result of the
spin-off of Technologies, whose business represented the majority of
Electronic's assets and revenues, the market price of the Company's stock
adjusted to account for the Distribution. On November 4, 1997, Electronics
merged with its subsidiary, BEI Medical Systems Company, Inc., and changed its
name to BEI Medical Systems Company, Inc. The closing price of the Company's
common stock was $1.438 on December 10, 1999.
Set forth below are the high and low closing sale prices on the National
Market System for the periods indicated. Such quotations do not reflect retail
markups, markdowns or commissions.
1999 Fiscal Year
(ended 10/2/99) High Low
Fourth Quarter $3.50 $1.12
Third Quarter $1.56 $0.94
Second Quarter $2.19 $1.44
First Quarter $2.06 $1.50
1998 Fiscal Year
(ended 10/03/98) High Low
Fourth Quarter $4.25 $1.06
Third Quarter $5.50 $3.13
Second Quarter $4.88 $3.69
First Quarter (from October 9, 1997) $4.38 $3.50
As of December 10, 1999, there were approximately 342 holders of record of
the Company's common stock. There are no restrictions on the Company's ability
to pay dividends; however, it is currently the intention of the Board of
Directors to retain any and all earnings for use in the Company's business and
the Company does not anticipate paying cash dividends in the foreseeable future.
Any future determination as to the payment of dividends will depend, among other
factors, upon the earnings, capital requirements, operating results and
financial condition of the Company
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five fiscal years presented below is
derived from the audited Consolidated Financial Statements of the Company. The
data should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.
The data and the accompanying analysis in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" cover periods in
which the Company's operations included business segments which are now operated
by Technologies and include the results of those business segments as
discontinued operations by the Company. Continuing operations of the Company are
comprised of the medical device business carried on by the Company's
majority-owned subsidiary BEI Medical Systems Company, Inc. prior to the
Distribution, which subsequent to the Distribution comprised all of the
Company's operations. For further information see Note 1 to the Consolidated
Financial Statements, Technologies' Form 10, "General Form for Registration of
Securities", as amended (File No. 0-22799) and the Technologies Form 10-K for
the fiscal year ended September 27, 1997 (File No. 0-22799).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
in thousands, except per share amounts Year Ended
-----------------------------------------------------------------------
October 2, October 3, September 28, September 27, September 30,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 8,419 $ 9,651 $ 10,005 $ 9,357 $ 8,847
Loss from continuing operations (6,909) (4,971) (4,348) (2,682) (2,350)
Income (loss) from discontinued operations -- -- 4,583 4,571 (2,041)
Net income (loss) (6,909) (4,971) 235 1,889 (4,391)
Loss from continuing operations per common
share, basic and diluted ($0.92) ($0.68) ($0.64) ($0.40) ($0.36)
Earnings (loss) from discontinued
operations per common share, basic and
diluted -- -- 0.67 0.68 (0.30)
Earnings (loss) per common share, basic and
diluted ($0.92) ($0.68) $ 0.03 $ 0.28 ($0.66)
Cash dividends per common share -- -- $ 0.08 $ 0.08 $ 0.08
Weighted average shares outstanding 7,503 7,354 6,817 6,737 6,617
Balance Sheet Data:
Cash and cash equivalents 1,654 $ 3,504 $ 9,271 $ 9,128 $ 9,023
Working capital (1) 6,905 8,284 11,085 38,102 35,923
Total assets (1) 10,962 17,388 22,584 115,011 113,738
Long-term debt (excluding current portion) -- -- 22 212 392
Stockholders' equity (1) 7,699 14,440 17,660 55,972 53,319
</TABLE>
31
<PAGE>
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for fiscal years 1996 and 1995.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and in
"Business."
The following discussion and analysis of the financial condition and
results of operations reflects historical results prior to the 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 have been significantly reduced (see " Financial Statements
and Supplementary Data"). The Company's product focus has become narrowed and
dependent upon the successful completion of the FDA Phase III clinical trials
and commercialization of the HTA technology (see "Business -- Risk Factors").
The cash proceeds of the Asset Sale have been and will be utilized by BEI: (i)
to pay expenses associated with the Asset Sale in the approximate amount of
$1,155,000, including estimated professional fees ($465,000), employee bonuses
related to 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 ($275,000); (ii) to repay the
amounts outstanding to Transamerica Business Credit Corporation ("TBCC"),
including interest and cancellation fees; (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 HTA 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, 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 restrictive covenants.
33
<PAGE>
The following table sets forth, for the fiscal periods indicated, the
percentage of revenue represented by certain items in the Company's Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
Year Ended
--------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of sales 61.6% 58.4 59.7
- -------------------------------------------------------------------------------------
Gross profit 38.4% 41.6 40.3
Selling, general and administrative expenses 87.3% 90.0 78.8
Research, development and related expenses 37.8% 29.7 18.6
- -------------------------------------------------------------------------------------
Loss from operations (86.7%) (78.1) (57.1)
Interest income 1.2 3.2 1.3
Interest expense (1.1) (0.2) (0.7)
- -------------------------------------------------------------------------------------
Loss before income taxes (86.6) (75.1) (56.5)
Income tax benefit (4.5) (23.6) (13.0)
- -------------------------------------------------------------------------------------
Loss from continuing operations (82.1) (51.5) (43.5)
Income from discontinued operations -- -- 45.8
- -------------------------------------------------------------------------------------
Net income (loss) (82.1)% (51.5)% 2.3%
=====================================================================================
</TABLE>
Revenue
Fiscal years 1999, 1998 and 1997
The Company's revenues decreased 12.8% to $8,419,000 in fiscal year 1999
compared to $9,651,000 in fiscal year 1998. Revenues from gynecological products
were $6,335,000 in fiscal year 1999, reflecting a decrease of $1,148,000 or
15.3%. The decline in gynecological revenues was reflected in all major product
categories but primarily reflects the impact of reduced shipments of reusable
instruments to domestic customers due to soft market conditions and increased
competition. Additionally, revenues from disposable instruments declined by
$189,000 or 5.9% reflecting the market impact early in the fiscal year of a
temporary supply shortfall from one outside vendor and soft market conditions in
the fourth quarter of fiscal 1999. Revenues from gastrointestinal products
declined $211,000 or 22.4%, reflecting lower volume in electrosurgical
generators and related disposable products. Partially offsetting the above were
higher OEM revenues which increased to $1,086,000 or 14.6% in fiscal year 1999
compared to $948,000 in fiscal year 1998.
International revenues from shipments of the Company's HTA system for
endometrial ablation were $269,000 in fiscal year 1999 compared to $275,000 in
fiscal year 1998. Revenues from shipment of HTA products to international
distributors during fiscal years 1999 and 1998 were principally to establish
demonstration stock, and also included limited commercial sales outside the
United States to private healthcare service end-users. During fiscal year 1999,
the Company continued working with its international distributors to establish
clinical treatment sites with leading gynecologists at key institutions in their
respective markets.
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 Hydro
ThermAblator grew 40.3% to $275,000 in fiscal year 1998 compared to $196,000 in
fiscal year 1997. However, offsetting the above was a decline in OEM shipments
from $1,710,000 in fiscal year 1997 to $950,000 in fiscal year 1998, reflecting
the Company's decision to reduce marketing efforts related to its lower-margin
OEM products in order to focus
34
<PAGE>
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 from international customers were approximately
17.2%, 15.5% and 14.3% of the Company's revenue for fiscal years 1999, 1998 and
1997, 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
Gross profit as a percentage of revenues decreased to 38.4% in fiscal year
1999 compared to 41.6% for fiscal year 1998. The decrease was principally due a
write-down of the bipolar product line of approximately $173,000 to reflect
negotiated concessions related to the anticipated sale of this category of
inventory to CSAC pursuant to the Asset Purchase Agreement. In addition the
decrease reflects a change in the product mix, with a larger portion of lower
margin products being sold during fiscal year 1999 compared to fiscal year 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 $410,000 for the fiscal year 1999, compared to the
prior period. This decrease resulted primarily from the consolidation of the
Company's manufacturing and distribution facilities, which was completed in the
fourth quarter of fiscal 1998.
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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1,338,000 to
$7,350,000 or 87.3% of revenues for fiscal year 1999 compared to $8,688,000 or
90.0% of revenues for fiscal year 1998. The decline in expenses reflects reduced
amortization of intangible assets of $526,000 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 second quarter of fiscal 1998. Selling
expenses declined approximately $841,000 for fiscal year 1999 compared to fiscal
year 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 year 1999 of one-time net charge of $ 159,000 incurred in
fiscal 1998. Fiscal 1998 results included the benefit of $701,000 representing
the reversal of previously expensed legal fees which were reimbursed by the
Company's insurance carrier, partially offset by a charge of approximately
$329,000 related to the consolidation of the Company's facilities and a charge
of $531,000 to reduce the carrying value of certain intangible assets to their
net realizable value. Partially offsetting the above were increased
administrative expenses of approximately $511,000 reflecting higher legal and
other professional services fees, salaries and fringe benefits.
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 above 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.
35
<PAGE>
Research, Development and Related Expenses
Research, development and related expenses as a percentage of revenue were
37.8% or $3,184,000 for the fiscal year 1999 compared to 29.7% or $2,866,000 for
the same period of fiscal year 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 treat 276 patients at
its nine U.S. clinical sites under the Phase III protocol. As of August 6, 1999,
all of the 276 patients were treated. Data from examinations one year following
treatment is one of the requirements for FDA approval.
Research, development and related expenses 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.
The Company anticipates that research, development and related expenses
will decline in absolute amount in the coming fiscal year due to completion of
the patient treatment portion of the HTA Phase III clinical trials, but will
increase as a percentage of revenue due to substantially lower revenue.
Interest Expense and Other Income
Interest income in fiscal years 1999, 1998 and 1997 was comprised of
interest income earned on highly liquid investments. Interest income declined to
$105,000 or 1.2% of revenue in fiscal year 1999 compared to $312,000 or 3.2% of
revenue in fiscal year 1998, as a result of lower average cash balances during
the period.
Interest income in fiscal year 1998 increased as a percentage of revenue
to 3.2% from 1.3% in fiscal year 1997 reflecting larger average cash balances.
Interest expense increased to $96,000 or 1.1% of revenue in fiscal year
1999 compared to $21,000 or 0.2% of revenue in fiscal year 1998 as a result of
the Company's $1,000,000 term note and related credit facility, which the
Company entered into in May 1999.
Interest expense as a percentage of revenue decreased to 0.2% in fiscal
year 1998 from 0.7% in fiscal year 1997 because existing debt was paid down and
no new debt incurred.
Income Tax Benefit
The income tax benefit was 5.2% of the pretax loss in fiscal year 1999
compared to 31.4% of the pretax loss in fiscal year 1998. The income tax benefit
reflects the Company's ability to carryback 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 year 1999 results from the reduced amount of remaining carryback
available to the Company compared to fiscal year 1998.
There is no remaining carryback available to the Company after fiscal year
1999. The net operating losses from fiscal year 1999 that can not be carried
back against prior years' earnings are approximately $5.4 million. These losses
remain available to the Company on a carryforward basis to offset against any
future earnings, but they have been fully offset by a valuation allowance in the
financial statements, as their future realization is uncertain.
The fiscal year 1998 and 1997 tax rates vary from the statutory federal
income tax rate as a result of an increase in the valuation allowance due to
substantial uncertainties regarding the ability to realize 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 years 1996 and 1997.
36
<PAGE>
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 each is entitled to its respective portion of any income
tax refunds for the same periods. For the periods after the Distribution, the
Company is entitled to 100% of any carryback of losses or credits to prior
years.
Discontinued Operations
Net income for business segments now operated by Technologies was $4.6
million in fiscal year 1997.
Liquidity and Capital Resources
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 HTA 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, 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 restrictive covenants. During fiscal year 1999, cash used
by operations was $2,788,000 principally due to the $6,909,000 net loss for the
period, partially offset by reductions in refundable income taxes ($1,897,000)
trade receivables ($381,000) inventory ($921,000) plus noncash charges for
depreciation ($331,000), amortization ($639,000) and deferred income taxes
($174,000). The above was partially offset by a reduction in accounts payable
and accrued expenses of $339,000
Cash used in investing activities during fiscal year 1999 of $41,000
consisted of purchases of equipment.
Cash received from financing activities consisted of $1,000,000 from the
issuance of debt, which the Company repaid in full subsequent to the fiscal year
end. Cash flows used in financing activities consisted of $21,000 in scheduled
payments made on other notes payable.
The Company had no material capital or other commitments as of October 2,
1999.
The Company signed an agreement, effective as of May 7, 1999, with
Transamerica Business Credit Corporation ("TBCC") to provide senior secured
financing. TBCC provided the Company with a revolving credit facility under
which the Company could 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 provided the Company
with a ("Term Loan") in the amount of $1,000,000 on May 7, 1999 bearing interest
at a rate of 14.14%. No borrowings were outstanding under the Revolving Loan as
of October 2, 1999. On November 1, 1999, the Company borrowed $500,000 under the
Revolving Loan. All borrowings under the TBCC agreement were collaterized by all
of the assets of the Company.
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.
As a result of the Asset Sale, both the Term Loan and the Revolving Loan
were repaid in full on December 8, 1999 and all of the related agreements were
terminated. Cancellation fees aggregating $85,000 were incurred in connection
with the termination of the agreement.
37
<PAGE>
Year 2000
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such Year 2000 requirements,
especially those with internally developed systems.
The Company and third parties with which the Company does business rely on
numerous computer programs in their day-to-day operations. The Company's Year
2000 project was divided into the following major sections: (i) infrastructure
and applications software, commonly referred to as "IT Systems", (ii) third
party suppliers and customers, commonly referred to as "External Agents", (iii)
process control and instrumentation and (iv) 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 representations 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 believes that all server hardware and operating systems software in use
are now Year 2000 compliant. Through independent and internal testing, the
Company also believes its business systems to be compliant. The Company is
currently operating in Fiscal Year 2000 and is experiencing no date-related
problems.
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. Based on the responses received, 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: This category includes such items as
telephone systems, security systems, HVAC, copiers, FAX machines, production
equipment, tools and other process systems. The Company has found no significant
Year 2000 related issues and believes there will be no major disruption in this
area.
Company Products: In addition, the Company 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.
Conclusion: The Company believes that it has effectively identified and
resolved all major Year 2000 related issues that could cause a significant
disruption to its business. However management recognizes that it is possible
that unforeseen issues may arise and will keep a vigilant watch for any sign of
such issues. 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 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.
38
<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, 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
a significant 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.
39
<PAGE>
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in United
States dollars and, as such, are not subject to material foreign currency
exchange rate risk and all outstanding debt has been repaid in full subsequent
to the fiscal year end. Accordingly, the Company believes its market risk
exposures are not significant.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
dollars in thousands except share amounts October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,654 $ 3,504
Trade receivables, less allowance for doubtful accounts
(1999--$93; 1998--$174) 338 1,897
Inventories 339 3,087
Refundable income taxes 487 2,384
Other current assets 68 186
Deferred income taxes -- 174
Net assets held for sale 7,282 --
- ------------------------------------------------------------------------------------------------------------
Total current assets 10,168 11,232
Property and equipment
Equipment 1,125 1,569
Leasehold improvements 32 31
- ------------------------------------------------------------------------------------------------------------
1,157 1,600
Less accumulated depreciation and amortization (734) (780)
- ------------------------------------------------------------------------------------------------------------
Net property and equipment 423 820
Other assets, less accumulated amortization
Tradenames, patents and related assets, less accumulated
amortization (1999--$48; 1998--$2,028) 234 1,846
Goodwill, less accumulated amortization (1998--$1,457) -- 3,353
Other 137 137
- ------------------------------------------------------------------------------------------------------------
Total other assets 371 5,336
- ------------------------------------------------------------------------------------------------------------
Total assets $ 10,962 $ 17,388
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
dollars in thousands except share amounts October 2, October 3,
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 536 $ 1,551
Accrued expenses and other liabilities 1,727 1,376
Notes payable 1,000 21
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 3,263 2,948
Stockholders' equity
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; 1999--7,685,707 shares; 1998--7,778,296 shares) 10 10
Additional paid-in capital 16,174 16,291
Retained earnings (deficit) (8,434) (1,525)
- ------------------------------------------------------------------------------------------------------------
7,750 14,776
Less: Unearned restricted stock and other (51) (336)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,699 14,440
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,962 $ 17,388
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended
- ------------------------------------------------------------------------------------------------------------------
dollars in thousands except share and October 2, October 3, September 27,
per share amounts 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 8,419 $ 9,651 $ 10,005
Cost of sales 5,182 5,638 5,972
- ------------------------------------------------------------------------------------------------------------------
Gross profit 3,237 4,013 4,033
Selling, general and administrative expenses 7,350 8,688 7,883
Research, development and related expenses 3,184 2,866 1,864
- ------------------------------------------------------------------------------------------------------------------
10,534 11,554 9,747
- ------------------------------------------------------------------------------------------------------------------
Loss from operations (7,297) (7,541) (5,714)
Interest income 105 312 136
Interest expense (96) (21) (70)
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes (7,288) (7,250) (5,648)
Income tax benefit (379) (2,279) (1,300)
- ------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (6,909) (4,971) (4,348)
Income from discontinued operations, net of
income taxes of $1,788 -- -- 4,583
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) ($6,909) ($4,971) $ 235
==================================================================================================================
Loss from continuing operations per common share, basic
and diluted ($0.92) ($0.68) ($0.64)
Earnings (loss) from discontinued operations per common
share, basic and diluted -- -- 0.67
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share,
basic and diluted ($0.92) ($0.68) $ 0.03
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 7,503,463 7,354,416 6,816,702
- ------------------------------------------------------------------------------------------------------------------
Dividends per common share -- -- $ 0.08
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended
- -----------------------------------------------------------------------------------------------------------
October 2, October 3, September 27,
dollars in thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations ($6,909) ($4,971) ($4,348)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 331 311 269
Amortization 639 1,115 1,356
Provision for losses on trade receivables 74 76 57
Loss on sale of assets -- 545 --
Deferred income taxes 174 (233) (261)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Trade receivables 306 (15) (302)
Inventories 921 (423) (854)
Refundable income taxes 1,897 (2,374) --
Other assets 118 (31) (142)
Trade accounts payable, accrued expenses and other
liabilities (339) (172) 164
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities of
continuing operations (2,788) (6,172) (4,061)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant and equipment (41) (372) (263)
Purchases of patents and licenses -- (24) (186)
Proceeds from sale of assets -- 975 --
Other -- -- 18
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities of
continuing operations (41) 579 (431)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of warrants 1,000 -- --
Principal payments on long-term debt and other liabilities (21) (191) (715)
Proceeds from issuance of common stock, net -- -- 872
Proceeds from stock option exercises -- 17 --
Repurchase of stock -- -- (1,303)
Payment of cash dividends -- -- (563)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities of continuing operations 979 (174) (1,709)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations -- -- 6,344
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,850) (5,767) 143
Cash and cash equivalents at beginning of year 3,504 9,271 9,128
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,654 $ 3,504 $ 9,271
===========================================================================================================
</TABLE>
See notes to consolidated financial statements
44
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
dollars in thousands 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 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 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, 10 14,204 42,727 -- (1,393) 55,548
1997 before Distribution
Distribution (39,281) 1,393 (37,888)
- ----------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997 10 14,204 3,446 -- -- 17,660
Net loss for 1998 (4,971) (4,971)
Restricted Stock Plan 329 (250) 79
Deferred compensation 218 (86) 132
Stock options exercised 17 17
Conversion of minority interest 1,523 1,523
- ----------------------------------------------------------------------------------------------------------------------
Balances at October 3, 1998 10 16,291 (1,525) -- (336) 14,440
- ----------------------------------------------------------------------------------------------------------------------
Net loss for 1999 (6,909) (336) (6,909)
Restricted Stock Plan (175) 231 56
Deferred compensation 54 54
Issuance of warrants 58 58
- ----------------------------------------------------------------------------------------------------------------------
Balances at October 2, 1999 $10 $16,174 ($8,434) -- ($51) $ 7,699
======================================================================================================================
</TABLE>
See notes to consolidated financial statements
45
<PAGE>
Note 1
Basis of Presentation
The Distribution: 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.
After the Distribution, the sole asset of 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 were 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"), ("BEI").
The Asset Sale: On December 8, 1999, BEI completed the sale of a
substantial portion of the assets of the Company to CooperSurgical Acquisition
Corp., a Delaware corporation ("CSAC"), for approximately $10.5 million in cash,
pursuant to an Asset Purchase Agreement, dated as of October 1, 1999, between
the Company and CSAC, as amended (the "Asset Purchase Agreement") (the "Asset
Sale"). The assets 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"). Following the Asset Sale, the Company is
focusing exclusively on developing a new therapeutic system, the Hydro
ThermAblator (the "HTA") for treatment of excessive uterine bleeding.
The net assets of the Base Business, which totaled $7,282,000 are included
in the accompanying consolidated balance sheet as net assets held for sale and
consist of the following:
dollars in thousands October 2,
1999
--------------------------------------------------------------------------
Trade receivables, net $ 1,179
Inventories 1,827
Property and equipment, net 107
Tradenames, patents and related assets, net 1,381
Goodwill, net 3,113
Less: trade accounts payable, accrued expenses
and other liabilities (325)
--------------------------------------------------------------------------
Net assets held for sale $ 7,282
==========================================================================
The cash consideration received at the closing of the Asset Sale was
approximately $10.5 million, subject to certain post-closing adjustments. The
consideration received by the Company also included the assumption of
approximately $350,000 of specified liabilities, the assumption of liabilities
under certain contracts of the Company, and the forgiveness of royalty payments
that may in the future be owed by the Company to an affiliate of the Purchaser
in an amount of up to $100,000.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
The following unaudited pro forma statement of operations data has been
prepared assuming the Asset Sale was completed as of October 3, 1998. 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
date.
Statement of Operations Data
in thousands, except per share amounts
<TABLE>
<CAPTION>
Year Ended October 2, 1999
Pro Forma Pro Forma
Historical Adjustments as Adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Revenues ........................................ $ 8,419 $ 8,150(1) $ 269
Cost of sales ................................... 5,182 4,236(1) 946
----------------------------------------------
Gross Profit .................................... 3,237 3,914(1) (677)(3)
Selling, general and administrative expenses .... 7,350 3,248 4,102
Research, development and related expenses ...... 3,184 -- 3,184
----------------------------------------------
10,534 3,248 7,286
----------------------------------------------
Income (loss) from operations ................... (7,297) 666 (7,963)
Interest income ................................. 105 -- 105
Interest expense ................................ (96) (96)(2) --
----------------------------------------------
Income (loss) before income taxes ............... (7,288) 570 (7,858)
Income tax benefit .............................. (379) -- (379)
----------------------------------------------
----------------------------------------------
Net income (loss) ............................... ($ 6,909) $ 570 ($ 7,479)
==============================================
Income (loss) per common share:
Income (loss) per common share, basic and diluted ($0.92) ($1.00)
==============================================
Weighted average shares outstanding ............. 7,503 7,503
==============================================
</TABLE>
- ------------
(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.
(2) To reflect a reduction in interest expense incurred related to the
$1,000,000 Transamerica Business Credit Corporation credit facility,
assuming the application of proceeds from the Asset Sale to repay the
outstanding indebtedness under this facility and financing charges on
accounts receivable related to the Base Business.
(3) The negative gross margins of $677,000 reflect direct product costs for
the HTA business of $208,000, as well as pro forma allocations of $469,000
of fixed manufacturing overhead costs, which are projected to continue
following the Asset Sale.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Balance Sheet Data:
dollars in thousands
<TABLE>
<CAPTION>
As of October 2, 1999
Historical Assets Proceeds Debt Pro Forma
Sold (4) of Sale (5) Repayment (7) as Adjusted
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 1,654 $ -- $ 10,481(6) ($1,000) $ 11,135
Trade receivables, net ................................ 338 338
Inventories ........................................... 339 339
Refundable income taxes ............................... 487 487
Other current assets .................................. 68 (48) 20
Net assets held for sale .............................. 7,282 (7,282) --
-----------------------------------------------------------------------
Total current assets .................................... 10,168 (7,282) (1,048) 12,319
Plant and equipment, net ................................ 423 -- 423
Tradenames, patents and other, net ...................... 234 234
Other assets ............................................ 137 137
-----------------------------------------------------------------------
Total assets ............................................ $ 10,962 ($7,282) $ 10,481 ($1,048) $ 13,113
======================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable ................................ $ 536 $ -- $ -- $ -- $ 536
Accrued expenses and other liabilities ................ 1,727 1,185 2,912
Notes payable ......................................... 1,000 (1,000) --
-----------------------------------------------------------------------
Total current liabilities ............................... 3,263 -- 1,185 (1,000) 3,448
Stockholders' equity .................................... 7,699 (7,282) 9,296 (48) 9,665
-----------------------------------------------------------------------
Total liabilities and stockholders' equity .............. $ 10,962 ($7,282) $ 10,481 ($1,048) $ 13,113
======================================================================
</TABLE>
- ----------
(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 Asset 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 related to 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 ($275,000). The resulting estimated gain on the sale of the
Base Business of $2,014,000 (estimated net proceeds of $9,296,000 less
basis of $7,282,000) 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.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
(6) Represents gross cash sales price of $11,206,000 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. Such adjustments
have been calculated in accordance with the terms prescribed by the Asset
Purchase Agreement.
(7) Represents 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. Following the close of the
fiscal year on November 1, 1999, the Company borrowed an additional
$500,000 under the revolving credit facility, therefore the actual
principal repayment under the credit facility was $1,500,000.
(8) Represents the write-off of the fair value of stock purchase warrants
issued to Transamerica Business Credit Corporation in connection with the
$1,000,000 credit facility.
Note 2
Summary of Significant Accounting Policies
Operations: Prior to the Asset Sale, the Company was a manufacturer of
diagnostic and therapeutic products focused on gynecology and women's health
issues. In the U.S., the Company utilized 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 were also sold through a network
of international distributors. BEI's operations consisted of Zinnanti Surgical
Instruments in Chatsworth, California and Xylog Corporation, Meditron Devices,
Inc., and BEI Medical Systems International, Inc. in Teterboro, New Jersey.
The accompanying consolidated financial statements reflect the historical
results of operations of the Company prior to the 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
have been significantly reduced and the Company's product focus has become
narrowed and dependent upon the successful completion of the FDA Phase III
clinical trials and commercialization of the HTA technology.
The Company believes its existing cash balances together with operating
revenues and funds resulting from the Asset Sale will provide adequate funding
to meet the Company's liquidity 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 the Company will not
require additional financing or that such additional financing, if needed, will
be available on terms favorable to the Company, or at all. 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.
Fiscal Year: The Company's fiscal year ends on the Saturday nearest
September 30. Fiscal year 1998 contained 53 weeks. Fiscal years 1999 and 1997
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 were 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.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from these
estimates.
Revenue Recognition: Revenue is recognized as units are shipped.
Inventories: Inventories are carried at the lower of cost (first-in,
first-out method) or market.
Depreciation and Amortization: Plant and equipment are recorded at cost.
Depreciation and amortization are provided in amounts sufficient to amortize the
cost of such assets over their estimated useful lives, which range from three to
ten years, using the straight-line method.
Long-Lived Assets: The Company accounts for any impairment of its
long-lived assets using Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("FAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Long-lived assets consists of plant and equipment, patents, and trade names,
related non-competition agreements and goodwill acquired in purchase
acquisitions. Patents and non-competition agreements are being amortized on a
straight-line basis over their terms. Trade names are amortized on a
straight-line basis over ten to twenty-five years. Goodwill consists of the
excess of cost over fair value of net tangible assets and identifiable
intangible 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 in fiscal 1998, 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 the 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: Earnings per common share are calculated in
accordance with SFAS No. 128, "Earnings Per Share." This statement 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. 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 139,000, 184,000 and 211,000 shares for 1999, 1998 and
1997, 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.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Advertising Costs: Advertising costs are charged to expense when incurred
and were approximately $371,000, $489,000 and $412,000 in fiscal years 1999,
1998 and 1997, respectively.
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, 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 a significant effect on the Company's consolidated
financial position or results of operations.
Note 3
Discontinued Operations
Technologies was incorporated on June 30, 1997 in the State of Delaware,
as a wholly owned subsidiary of Electronics. On September 27, 1997, Electronics
distributed to holders of Electronics common stock one share of common stock of
Technologies for each share of Electronics common stock held on September 24,
1997. In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its Sensors and
Defense business segments. Accordingly, the financial position and results of
operations of Sensors and Defense are shown as discontinued operations for all
periods presented.
Note 4
Inventories
dollars in thousands 1999 1998
------------------------------------------------------------------------
Finished products $ 87 $2,128
Work in process 118 196
Materials 134 763
------------------------------------------------------------------------
Inventories $ 339 $3,087
========================================================================
Included in fiscal year 1999 and 1998 finished goods is $87,000 and
$245,000, respectively of HTA inventory which is currently subject to FDA
approval prior to its sale in the United States.
Note 5
Bank Credit Agreements
The Company signed an agreement, effective as of May 7, 1999, with
Transamerica Business Credit Corporation ("TBCC") to provide senior secured
financing. TBCC provided the Company with a revolving credit facility under
which the Company could 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 provided the Company
with a ("Term Loan") in the amount of $1,000,000 on May 7, 1999 bearing interest
at a rate of 14.14%. No borrowings were outstanding under the Revolving Loan as
of October 2, 1999. On November 1, 1999, the Company borrowed $500,000 under the
Revolving Loan. All borrowings under the TBCC agreement were collaterized by all
of the assets of the Company.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
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.
As a result of the Asset Sale, both the Term Loan and the Revolving Loan
were repaid in full on December 8, 1999 and all of the related agreements were
terminated. Cancellation fees aggregating $85,000 were incurred in connection
with the termination of the agreement.
Interest of approximately $89,000, $7,000 and $11,000 was paid on
long-term debt by the Company during fiscal 1999, 1998 and 1997, respectively.
Interest of approximately $35,000 and $50,000 was paid on noncompetition
agreements by the Company during fiscal 1998 and 1997, respectively.
Note 6
Accrued Expenses and Other Liabilities
dollars in thousands 1999 1998
------------------------------------------------------------------------
Professional fees $ 522 $ 134
Employee compensation 114 268
Taxes 161 141
Commissions 97 180
Royalties and related costs 74 130
Tax refund payable to BEI Technologies 420 327
Other 339 196
------------------------------------------------------------------------
Accrued Expenses and Other Liabilities $1,727 $1,376
========================================================================
Note 7
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 2, 1999 and October
3, 1998 are as follows:
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
dollars in thousands 1999 1998
------------------------------------------------------------------------
Deferred tax liabilities
Property and equipment ($68) ($20)
Deferred tax assets
Federal tax credits 141 --
Federal net operating loss carryforwards 1,840 --
Intangibles 435 465
Other 60 193
Inventory valuation 221 92
State net operating loss carryforwards 1,758 1,177
Allowance for doubtful accounts 58 51
------------------------------------------------------------------------
Total deferred tax assets 4,513 1,978
Valuation allowance for deferred tax assets (4,445) (1,784)
------------------------------------------------------------------------
Net deferred tax assets $ -- $ 174
========================================================================
As of October 2, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $5.4 million, which expire
through 2014 and net operating loss carryforwards for state income tax purposes
of approximately $19.5 million, which expire from 2001 through 2006. As of
October 2, 1999, a valuation allowance has been established equal to the entire
net tax benefit associated with all carryforwards and temporary differences, as
their realization is uncertain. The net deferred tax assets of $174,000 as of
October 3, 1998, represented the net federal tax benefit available for carryback
as of that date.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Significant components of the provision (benefit) for income taxes from
continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------
dollars in thousands 1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ($553) ($2,046) ($1,039)
State -- -- --
-----------------------------------------------------------------------------------------
Total current (553) (2,046) (1,039)
Deferred
Federal 174 (233) (261)
State -- -- --
-----------------------------------------------------------------------------------------
Total deferred 174 (233) (261)
-----------------------------------------------------------------------------------------
Total income tax benefit ($379) ($2,279) ($1,300)
=========================================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.
<TABLE>
<CAPTION>
Year Ended
------------------------------
dollars in thousands 1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax benefit at the statutory rate of 34% ($2,478) ($2,465) ($1,920)
Goodwill amortization 121 131 81
Increase in valuation allowance 2,661 -- 607
Other 75 55 (68)
-----------------------------------------------------------------------------------------
Income tax benefit ($ 379) ($2,279) ($1,300)
=========================================================================================
</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 the Company 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, the Company is
entitled to 100% of any carryback of losses or credits to prior years.
Note 8
Stockholders' Equity
The Company's preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to establish from time to time
the number of shares to be included in each series, and
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
to designate the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences.
Note 9
Stock Option and Restricted Stock Plans
The Amended Plan: Pursuant to the Company's Amended 1987 Stock Option Plan
(the "Amended Plan") the Company may grant both incentive and non-statutory
stock options to employees as well as grant stock options to non-employee
consultants to the Company. The Amended plan provides for the grant of options
to purchase up 2,100,000 shares of common stock, of which 390,749 remain
available for grant as of October 2, 1999. The Amended plan expires on January
15, 2007. The exercise price of options granted pursuant to the Amended Plan
must be not less than the fair market value of the common stock on the date such
options are granted, as determined by the Board of Directors.. Options generally
become exercisable in four equal installments commencing one year from the date
of grant and such vesting may be accelerated upon the occurrence of certain
events.
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. 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.
On November 4, 1997, Medical and Electronics merged with Electronics as
the surviving legal entity. As a result of the Merger, options outstanding under
separate stock option plans of Medical were converted to Electronics options at
a rate of 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 after the Distribution. Medical's stock option
plans were cancelled as a result of the Merger.
In December 1998, options representing the right to purchase 102,847
shares of the Company's common stock outstanding under the Amended Plan at
exercise prices ranging from $3.7437 to $4.00 per share were repriced to $1.625
per share, an amount equal to the fair market value of the common stock
outstanding at that time.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Transactions relating to the Amended Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price Exercise Price
Common Shares Per Share Per Share
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 of outstanding
options to Technologies (315,596) $2.88 - $9.13 $5.35
- ----------------------------------------------------------------------------------------------
Options outstanding as of September 27, 1997 -- -- --
Conversion of outstanding Medical options 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
Granted 459,908 $1.44 - $1.63 $1.56
Terminated (106,970) $1.63 - $4.00 $2.24
- ----------------------------------------------------------------------------------------------
Options outstanding at October 2, 1999 1,097,005 $0.31 - $1.94 $1.02
==============================================================================================
</TABLE>
Details of the options outstanding as of October 2, 1999 were as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Average
Remaining Weighted Average Exercise
Exercise Options Contractual Life Exercise Price Number Price
Prices Outstanding (Years) Per Share Exercisable Per Share
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.31 366,821 5.8 $0.31 366,821 $0.31
$0.54 52,403 6.3 $0.54 40,681 $0.54
$0.70 107,564 6.6 $0.70 80,673 $0.70
$1.44 166,000 9.5 $1.44 -- --
$1.63 380,467 8.2 $1.63 119,027 $1.63
$1.94 23,750 8.5 $1.94 23,750 $1.94
====================================================================================================
$0.31 - $1.94 1,097,005 7.4 $1.02 630,952 $0.69
====================================================================================================
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
The Restricted Plan: In February 1992, the Company's Board of Directors
approved the 1992 Restricted Stock Plan (the "Restricted Plan"), ratified by the
Company's stockholders in February 1993, authorizing up to 350,000 shares of the
Company's common stock to be issued to certain key individuals subject to
forfeiture if employment terminated prior to the end of prescribed vesting
periods. In March 1997, the stockholders approved an amendment to the Restricted
Plan to increase the shares reserved for issuance under the plan from 350,000 to
700,000, imposed a limit on the number of shares which any one participant may
receive under the Restricted Plan in any one fiscal year and extended the term
of the restricted Plan to January 15, 2007. In March of 1999 the stockholders
approved an amendment to the Restricted Plan to increase the shares reserved for
issuance under the plan from 700,000 to 900,000.
As of October 2, 1999, 517,850 shares of the Company's common stock had
been issued pursuant to awards of restricted stock granted under the Restricted
Plan (excluding any shares that have been returned to the Restricted Plan as a
result of termination or forfeiture) and 465,750 shares (plus any shares that
might in the future be returned to the Restricted Plan as a result of
termination or forfeiture) remained available for future issuance under the
Restricted Plan. Of the outstanding shares, 288,371 had vested. Restricted
shares outstanding are included in the Company's total common stock outstanding.
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. In fiscal years
1999 and 1998, $56,000 and $79,000, respectively of compensation expense was
recognized. No compensation expense for Medical was recorded in fiscal 1997.
Pro forma Information: 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 fiscal years 1999 and 1998:
weighted-average risk-free interest rate of 6.10% and 4.92%, respectively; no
dividends; volatility factors of the expected market price of the Company's
common stock of .611 and 0.562, respectively and a weighted average expected
life of the options of 9.3 and 9.3 years for, respectively .
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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 are subject to vesting
and 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.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1999 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal years 1999 and 1998 was $1.45 and $2.10, respectively. The Company's pro
forma net loss was $7,171,000 and $5,036,000 for 1999 and 1998, respectively,
and pro forma net loss per common share, basic and diluted, was $0.96 and $0.68,
respectively
The pro forma disclosures presented for fiscal year 1999 may not necessarily be
indicative of the pro forma effect of SFAS No. 123 for future periods in which
options may be granted. The impact of the calculation required by FAS No. 123 on
pro forma results of operations and earnings (loss) per share was determined to
be immaterial for fiscal year 1997.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Note 11
Employee Benefit Plans
The Company has a defined contribution retirement plan for the benefit of
all eligible employees. The plan qualifies under Section 401(k) of the Internal
Revenue Code thereby allowing eligible employees to make tax-deductible
contributions to the plan. Non-discretionary employer contributions are based on
a fixed percentage of total eligible employee compensation and a formula based
matching of the participant's contribution to the plan. Additional contributions
are at the discretion of the Board of Directors. The Company's contributions to
the plan for fiscal year 1999, 1998 and 1997 were approximately $72,000, $76,000
and $62,000, respectively.
Note 12
Lease and Other Commitments
Leases: Operating leases consist principally of leases for facilities and
equipment, which expire through 2004. 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 2, 1999:
dollars in thousands
-----------------------------------------------------------
2000 $354
2001 327
2002 323
2003 334
2004 304
Thereafter --
-----------------------------------------------------------
Total minimum lease payments $1,642
===========================================================
Total rental expense attributable to property and equipment amounted to
approximately $374,000, $297,000, and $268,000 for fiscal 1999, 1998 and 1997,
respectively.
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 disposable products. The agreement
is subject to minimum royalty payments through fiscal year 2001. The minimum
royalty payment due during the next fiscal year is $33,000.
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
license agreement mentioned above all other license and royalty agreements were
either assigned to CSAC in connection with the Asset Sale or terminated by the
Company by December 8, 1999. Total royalty expense attributable to various
license agreements amounted to approximately $207,000, $314,000, and $270,000
for fiscal 1999, 1998 and 1997, respectively.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999
Note 13
Contingencies and Litigation
From time to time, the Company may become involved in or subject to
various litigation and legal proceedings incidental to the normal conduct of its
business. The Company is not currently involved in any material legal
proceedings.
Note 14
Revenues
Revenue from customers in foreign countries amounted to $1,441,000,
$1,500,000 and $1,430,000 in fiscal 1999, 1998 and 1997, respectively. In fiscal
1999, 1998 and 1997, foreign revenue did not exceed 10% of consolidated revenue
in any individual geographic area. All of the Company's revenues related to HTA
products were to customers in foreign countries.
Note 15
Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for
fiscal 1999 and 1998:
dollars in thousands except per share amounts
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------------------
Jan. 2, Apr. 3, Jul. 3, Oct. 2,
1999 1999 1999 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 2,164 $ 2,001 $ 2,347 $ 1,907
Gross profit 856 820 958 603
Net loss ($1,527) ($1,654) ($1,710) ($2,018)
Loss per common share, basic and diluted ($ 0.20) ($ 0.22) ($ 0.23) ($ 0.27)
----------------------------------------------------------------------------------------
Dec. 27, Mar. 28, Jun. 27, Oct. 3,
1997 1998 1998 1998
----------------------------------------------------------------------------------------
Revenue $ 2,418 $ 2,535 $ 2,293 $ 2,405
Gross profit 923 1,141 943 1,006
Net loss ($1,196) ($1,151) ($ 977) ($1,647)
Loss per common share, basic and diluted ($ 0.17) ($ 0.16) ($ 0.13) ($ 0.22)
</TABLE>
59
<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 2,
1999 and October 3, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 2, 1999. 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 2, 1999 and October 3, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 2, 1999 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
December 8, 1999
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
61
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive officers is
set forth in Part I of this Report. Additional information required by this Item
is incorporated herein by reference to the section entitled "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement
related to the Company's 2000 Annual Meeting of Stockholders to be filed by the
Company with the Securities and Exchange Commission (the "Definitive Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Transactions" of
the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Transactions" of
the Definitive Proxy Statement.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
Form 10-K
Page Number
<S> <C>
(a)(1) Index to Consolidated Financial Statements.
The following Consolidated Financial Statements of BEI
Medical Systems Company, Inc. are filed as part of this Form 10-K:
Consolidated Balance Sheets -
October 2, 1999 and October 3, 1998 39
Consolidated Statements of Operations -
Years ended October 2, 1999, October 3, 1998 and
September 27, 1997 40
Consolidated Statements of Cash Flows -
Years ended October 2, 1999, October 3, 1998 and
September 27, 1997 41
Consolidated Statements of Stockholders' Equity -
Years ended October 2, 1999, October 3, 1998 and
September 27, 1997 42
Notes to Consolidated Financial Statements -
October 2, 1999 43
Report of Independent Auditors 58
(a)(2) Index to Financial Statement Schedule.
The following Consolidated Financial Statement Schedule of BEI
Medical Systems Company, Inc. (formerly BEI Electronics, Inc.) for
each of the years ended October 2, 1999, October 3, 1998 and
September 27, 1997 is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts S-1
Independent Auditors' Report S-2
</TABLE>
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(b) The Registrant did not file any reports in Form 8-K during its fiscal
quarter ended October 2, 1999.
63
<PAGE>
(a)(3) Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit Numbers Description Footnote
--------------- ----------- --------
<S> <C> <C>
2.1 Distribution Agreement between BEI Electronics, Inc.
and BEI Technologies, Inc. dated September 26, 1997 (i)
2.2 Corporate Services Agreement between BEI Technologies,
Inc. and BEI Electronics, Inc. dated as of September
26, 1997 (i)
2.3 Tax Allocation and Indemnity Agreement between BEI
Electronics, Inc. and BEI Technologies, Inc. dated as
of September 26, 1997 (i)
2.4 Assumption of Liabilities and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.5 Technology Transfer and License Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.6 Trademark Assignment and Consent Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc. dated as of September 26, 1997 (i)
2.7 Agreement Regarding Certain Representations and
Covenants by and between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of September 26, 1997 (i)
3.1 Restated Certificate of Incorporation (ii)
3.2 Amended Bylaws of the Company as of June 30, 1997 (iii)
3.3 Certificate of Designation of Series A Junior
Participating Preferred Stock (iii)
4.1 Reference is made to exhibits 3.1, 3.2 and 3.3 (iii)
4.2 Form of Rights Certificate (iii)
4.3 Summary of Rights to Purchase Preferred Shares (iii)
10.2 * Registrant's Amended 1987 Stock Option Plan (iv)
</TABLE>
64
<PAGE>
10.3 * Standard option grant form used in
connection with Registrant's Amended 1987
Stock Option Plan. (v)
10.6 * Description of Management Incentive Bonus
Plan (ii)
10.8 * Registrant's 1992 Restricted Stock Plan, as
amended (iv)
10.27 Rights Agreement dated June 30, 1997 between
the Registrant and ChaseMellon Shareholder
Services, LLC (vi)
10.28 * Consulting Agreement between the Registrant
and Ralph Richart, M.D. dated as of March 1, (vii)
1998
10.29 * Employment agreement between the Registrant
and Herbert H. Spoon dated February 27, 1998
10.30 * Severance Agreement between the Registrant
and Thomas W. Fry dated February 12, 1997 (vii)
10.31 Amendment to Tax Allocation and Indemnity
Agreement dated December 15, 1998 between
the Registrant and BEI Technologies dated as
of September 26, 1997 (vii)
10.32 Asset Purchase Agreement between the
Registrant and CooperSurgical Acquisition
Corp. dated October 1, 1999, as amended on
November 2, 1999. (viii)
10.33 Amendment No. 2 to the Asset Purchase
Agreement, dated as of December 7, 1999 (ix)
10.34 Transition Agreement between the Registrant
and CooperSurgical Acquisition Corp. dated
December 8, 1999.
10.35 Noncompetition Agreement between the
Registrant and CooperSurgical Acquisition
Corp. dated December 8, 1999.
10.36 * Employment Agreement between the Registrant
and Richard W. Turner dated October 7, 1999.
10.37 Loan and Security Agreement between the
Registrant and Transamerica Business Credit
Corporation, and Streamlined Facility
Agreement between the same parties, each
dated May 6, 1999.
65
<PAGE>
10.38 Agreement of Lease between the Registrant
and Hollister '97, L.L.C. for 100 Hollister
Road, Teterboro, New Jersey facility, dated
January 20, 1998.
10.39* Separation letter to Herbert H. Spoon dated
January 29, 1999.
10.40 Nonqualified Deferred Compensation Plan
Trust Agreement between the Registrant and
Merrill Lynch Trust, dated July 15, 1999.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule (EDGAR only)
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of regulation S-K.
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated September 27, 1997.
(ii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-29032).
(iii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 30, 1997.
(iv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (File No. 333-64155).
(v) Incorporated by reference. Previously filed as an exhibit to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (No.
33-29032).
(vi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 2, 1993.
(vii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 3, 1998.
(viii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's definitive proxy statement for the special meeting of
stockholders held December 7, 1999 (0000929624-99-001921).
(ix) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 8-K, dated December 22, 1999.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEI MEDICAL SYSTEMS COMPANY, INC.
By: /s/ Thomas W. Fry
--------------------
Thomas W. Fry
Vice President of Finance and Administration,
Secretary & Treasurer
December 30, 1999
67
<PAGE>
SCHEDULE II
BEI MEDICAL SYSTEMS COMPANY, INC.
----------------
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column C
Column A Column B Additions Column D Column E
- ------------------------------ ----------- ------------------------ ---------- -----------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------ ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
dollars in thousands
Year ended October 2, 1999:
- ---------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $ 174 $ 74 $ ($155)(C) $ 93
Valuation allowance for
deferred tax assets 1,784 2,661(A) -- -- 4,445
------ ------ ---- ----- ------
Total $1,958 $2,735 $-- ($155) $4,538
====== ====== ==== ===== ======
dollars in thousands
Year ended October 3, 1998:
- ---------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $ 112 $ 76 $-- ($14) (B) $ 174
Valuation allowance for
deferred tax assets 1,784 -- -- -- 1,784
------ ------ ---- ----- ------
Total $1,896 $ 76 $-- ($14) $1,958
====== ====== ==== ===== ======
Year ended September 27, 1997:
- ------------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $ 236 $ 57 $-- ($181)(B) $ 112
Valuation allowance for
deferred tax assets 929 855 (A) -- -- 1,784
Valuation allowance for
discontinued operations 701 75 (94) (682) --
------ ------ ---- ----- ------
Total $1,866 $ 987 ($94) ($863) $1,896
====== ====== ==== ===== ======
</TABLE>
(A) Allowance adjustment resulting from evaluation of the realizability
of the related deferred tax assets.
(B) Uncollectible accounts written off.
(C) Includes adjustment based on allowance allocated to CSAC in the
Asset Sale ($80,000) and uncollectible accounts written off
($75,000).
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BEI Medical Systems Company, Inc.
We have audited the consolidated financial statements of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 2, 1999 and
October 3, 1998, and for each of the three years in the period ended October 2,
1999, and have issued our report thereon dated December 8, 1999. Our audits also
included the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
December 8, 1999
S-2
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10.34 Transition Agreement between the Registrant and CooperSurgical
Acquisition Corp. dated December 8, 1999.
10.35 Noncompetition Agreement between the Registrant and CooperSurgical
Acquisition Corp. dated December 8, 1999.
10.36* Employment Agreement between the Registrant and Richard W. Turner
dated October 7, 1999.
10.37 Loan and Security Agreement between the Registrant and
Transamerica Business Credit Corporation, and Streamlined Facility
Agreement between the same parties, each dated May 6, 1999.
10.38 Agreement of Lease between the Registrant and Hollister '97,
L.L.C. for 100 Hollister Road, Teterboro, New Jersey facility,
dated January 20, 1998.
10.39* Separation letter to Herbert H. Spoon dated January 29, 1999.
10.40 Nonqualified Deferred Compensation Plan Trust Agreement between
the Registrant and Merrill Lynch Trust, dated July 15, 1999.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors (Reference is made to page 69 of
the 10-K)
24.1 Power of Attorney (Reference is made to page 66 of the 10-K)
27.1 Financial Data Schedule
TRANSITION AGREEMENT
This Transition Agreement (the "Agreement") is entered into as of this 8th
day of December, 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, as amended, 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
1
<PAGE>
hereunder, an amount equal to the number of direct labor hours multiplied by
direct labor costs for each product as set forth on Schedule 1(c), which product
is delivered by Seller to or at the direction of Buyer pursuant to the Mutual
Production Plan, (vi) costs and expenses such as employment agency fees which
are incurred as a direct result of Seller's efforts to replace on a temporary
basis any employee performing transition services under this Agreement who
voluntarily terminates employment with Seller during the Transition Period,
(vii) all incremental costs approved by Buyer that are associated with customer
solicitation activity including, but not limited to: sales commissions, postage,
sales literature, freight, samples and other free goods, telephone and
communications, computer and office supplies, maintenance and repairs, outside
computer services and travel and entertainment expenses, (viii) all related
pre-approved collection charges and (ix) the commissions provided for in Annex
A. Seller shall send bills and/or invoices in connection with the foregoing
items at the end of each one-week period of the Transition Period. Buyer shall
within five days after receipt of such bills and/or invoices, pay to Seller the
amounts specified in such bills and/or invoices in full. Notwithstanding the
foregoing, although Seller shall bill all amounts to be paid pursuant to this
subsection, Buyer shall have no obligation to pay to Seller the first $275,000
for products and services due under this Agreement (the "Credit") and such
amount will not be considered due to Seller under this Agreement as Seller has
agreed to provide the first $275,000 of products and services delivered
hereunder without cost to Buyer. The Seller shall, promptly after the
termination of this Agreement (the "Termination Date"), pay to the Buyer that
portion of the Credit that, as of the Termination Date, had not been applied as
a credit against amounts billed by the Seller to the Buyer pursuant to this
subsection, in order to give the Buyer the benefit of the total amount of the
Credit either as a credit or in cash.
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.
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(b) Notwithstanding Section 3(a), Buyer may elect to extend the term of
this Agreement on a month-to-month basis for up to three (3) months by providing
written notice at least thirty (30) days prior to the expiration of the then
applicable Transition Period of this Agreement specifying the products and
services attached hereto that Buyer requires that Seller continue to provide and
the duration for which such products and services shall be provided. During the
period of any such extension (i) products shall be provided at the costs
mutually agreed to pursuant to this Agreement, and (ii) services shall be
provided pursuant to the terms of this Agreement at the rate of one hundred
dollars ($100) per hour of Seller employee time and incidental costs incurred
for such services that are pre-approved by Buyer. If the mutually agreed upon
production schedule for a certain product has not been met by Seller during the
initial ninety (90) days of the Transition Period and such production schedule
contemplated that the products would be completed within such ninety (90) day
period, then the costs for completing such products shall be pursuant to the
costs applicable during such ninety (90) day period, as specified on Schedule
1(c), rather than pursuant to this Section 3(b).
(c) Notwithstanding Section 3(a), Seller, at the request of Buyer, from
time to time during and for up to fifteen (15) months following the date of this
Agreement will provide on reasonable notice reasonable consulting services with
respect to issues such as regulatory affairs, product details, engineering and
sales and marketing. Such services shall be provided during the term of
Transition Period for payment provided for in this Agreement and after the
Transition Period at the rate of one hundred twenty dollars ($120) per hour of
Seller employee time and incidental costs incurred for such services that are
pre-approved by Buyer.
(d) Buyer may, at any time and from time to time, terminate any product or
service to be provided by Seller under this Agreement by delivering to Seller a
"Buyer Termination Notice". Each Buyer Termination Notice shall specify the
product or service to be terminated and the date on which termination shall
occur (which shall be not less than fourteen (14) days from the delivery to
Seller of such notice). From and after each such date of termination, Buyer
shall have no further obligation under this Agreement to pay Seller the charges
specified in this Agreement for each such terminated service or product, except
for any product for which an order has already been placed by Buyer and for any
service or product provided prior to such date of termination.
4. Insurance.
(a) Buyer possesses those insurance policies, including product liability
insurance, which are necessary to fully insure the services to be conducted by
Seller against all risks normally insured against by a person or entity
conducting the same business as Buyer and the business to be conducted by Seller
pursuant to this Agreement, and such policies name Buyer as the insured. Such
insurance policies comply with any federal, state, local or foreign laws and
regulations applicable to the business and operations conducted by Buyer,
including the transactions contemplated by this Agreement.
(b) Buyer will continue to carry its existing insurance or reasonably
comparable coverage throughout the term of this Agreement. Upon the written
request of Seller, Buyer will provide copies of certificates of insurance as
evidence thereof.
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(c) Seller will continue to carry its existing insurance as disclosed in
Schedule 2.20 to, or as may be otherwise required by the Asset Purchase
Agreement, or reasonably comparable coverage throughout the term of this
Agreement.
(d) Seller's insurance shall cover loss or damage to property of Seller
located on Seller's facilities used to provide transition services and on such
facilities to the extent required by any lease therefor. Buyer's insurance shall
cover loss or damage to Buyer's property located on such facilities. Each party
shall request its insurers to waive subrogation against the other party for
Losses to property covered by such party's insurance as described in this
subsection 4(d).
5. Certain Seller Payments. Seller represents to Buyer that to induce each
employee of Seller listed on the Personnel Consolidation Plan attached hereto as
Annex B (the "Retained Employee") to remain as an employee of Seller during the
Transition Period, Seller has offered each such employee the stay bonus and
severance payment set forth opposite the name of such employee on such Plan.
Seller shall make the payments required to be made by it to each such employee
pursuant to such offer. Other than as set forth on Annex B, Seller shall have no
further obligation to provide any stay bonus, severance payment or other
compensation to the Retained Employees. If Buyer instructs Seller to attempt to
retain a specific Retained Employee beyond the Transition Period, Buyer shall be
solely responsible for any stay bonus, severance payment or other compensation
to be provided at the instruction of Buyer to any such Retained Employee in
order to retain such Retained Employee beyond the Transition Period, and Seller
shall not be obligated hereunder to provide any compensation to any such
Retained Employee beyond the Transition Period (including any extensions of such
Transition Period made pursuant to this Agreement) unless instructed to do so by
Buyer.
6. Indemnification.
(a) Indemnification by Buyer. As of the date of this Agreement and subject
to the other provisions of this Section 6, Buyer shall indemnify, defend (with
counsel reasonably acceptable to Seller), and hold Seller, and its respective
directors, officers, agents and employees (collectively, the "Seller Indemnified
Parties") harmless from and against, and will pay to the Seller Indemnified
Parties the amount of any and all losses, damages, liabilities, costs and
expenses, direct and indirect (including reasonable attorneys' and consultants'
fees) (collectively, the "Losses"), arising, directly or indirectly, from or in
connection with:
(i) any breach of any representation or warranty made by Buyer in
this Agreement;
(ii) any breach by Buyer of any covenant or obligation of Buyer in
this Agreement;
(iii) any suit or proceeding brought against any Seller Indemnified
Party arising out of Seller's performance or non-performance contemplated by
this Agreement except to the extent caused by the gross negligence or willful
misconduct of a Seller Indemnified Party or Seller's wrongful failure to render
the services or produce the products contemplated by this Agreement; or
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(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.
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(e) Defense of Third Party Actions.
(i) If either party hereto (the "Indemnitee") receives notice or
otherwise obtains knowledge of any action, hearing, arbitration, litigation,
suit or claim ("Proceeding") or any threatened Proceeding that may give rise to
an indemnification claim against the other party hereto (the "Indemnifying
Party"), then the Indemnitee shall promptly deliver to the Indemnifying Party a
written notice describing such Proceeding in reasonable detail. The failure to
give such written notice shall not relieve the Indemnifying Party of any
liability under this Section 6 with respect to such matter except to the extent
the Indemnifying Party shall have been materially prejudiced by such failure.
(ii) If any Proceeding referred to in Section 6(e)(i) is brought
against an Indemnitee and it gives notice to the Indemnifying Party of the
commencement of such Proceeding, the Indemnifying Party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless the
Indemnifying Party is also a party to such Proceeding and the Indemnitee
reasonably determines in good faith that joint representation would be
inappropriate), to assume the defense of such Proceeding with counsel reasonably
satisfactory to the Indemnitee and, after notice from the Indemnifying Party to
the Indemnitee of its election to assume the defense of such Proceeding, the
Indemnifying Party will not, as long as it diligently conducts such defense, be
liable to the Indemnitee under this Section 6(e) for any fees of other counsel
or any other expenses with respect to the defense of such Proceeding, in each
case subsequently incurred by the Indemnitee in connection with the defense of
such Proceeding. If the Indemnifying Party assumes the defense of a Proceeding,
(i) it will be conclusively established for purposes of this Agreement that the
claims made in that Proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be effected
by the Indemnifying Party without the Indemnitee's consent and the Indemnitee
will have no liability with respect to any compromise or settlement of such
claims effected without its consent. If notice is given to an Indemnifying Party
of the commencement of any Proceeding and the Indemnifying Party does not,
within ten (10) days after the Indemnitee's notice is given, give notice to the
Indemnitee of its election to assume the defense of such proceeding, the
Indemnitee shall have the right to control the defense of, and to compromise or
settle such Proceeding.
(f) Survival. All representations and warranties in this Agreement will
survive for a period of one year after termination of this Agreement. The right
to indemnification, payment of damages or other remedy based on the provisions
of this Section 6 shall survive the time at which it would otherwise terminate
pursuant to Section 3, if prior to such termination, the party seeking
indemnification shall have duly delivered a Claim Notice to the party against
whom such indemnity may be sought in conformity with all of the applicable
procedures set forth in this Section 6.
(g) If the Indemnifying Party exercises its right to assume the defense of
a Proceeding pursuant to Section 6(e), (i) the Indemnitee shall be entitled to
participate in such defense with its own counsel at its own expense and (ii) the
Indemnifying Party shall not make any settlement of any claims without the
written consent of the Indemnitee, which consent shall not be unreasonably
withheld or delayed, unless the terms of such settlement requires no more than
the payment of money and the Indemnifying Party pays such amount.
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(h) If the Indemnifying Party assumes the defense of a Proceeding, the
Indemnitee shall cooperate fully as reasonably requested by the Indemnifying
Party in the defense of such Proceeding, and shall make available to the
Indemnifying Party all books, records and other materials that are under the
direct or indirect control of the Indemnitee and that the Indemnifying Party
reasonably considers necessary or desirable for the defense of such Proceeding.
(i) Absent fraud or willful misconduct, no party hereto shall be entitled
to recover special or punitive damages with respect to any breach of any
representation or warranty or nonperformance of any obligation under this
Agreement.
(j) Notwithstanding anything to the contrary contained in this Agreement
(i) to the extent Losses hereunder also constitute Losses under the Asset
Purchase Agreement, then those provisions of the Asset Purchase Agreement
applicable to such Losses shall determine the rights and obligations of the
parties with respect thereto and the provisions of this Agreement shall not
apply, (ii) except as provided in the previous clause (i) of this subsection
6(j), Buyer's product liability insurance shall be applicable to sales of
products by Buyer which occur subsequent to the date of this Agreement and
Seller's product liability insurance shall not be applicable to such sales,
(iii) the Indemnitee shall use commercially reasonable efforts to seek recovery
from its insurance providers with respect to any Losses for which indemnity
(other than indemnity for product liability) may be sought against the
Indemnifying Party under this Section 6 and for which the Indemnitee's insurance
may be available and such Losses shall be net of any insurance proceeds or other
amounts actually recovered by or on behalf of Indemnitee.
(k) To the extent that any Indemnifying Party makes any indemnification
payment to any Indemnitee, the Indemnifying Party shall be entitled to exercise,
and shall be subrogated to, any rights and remedies (including rights of
indemnity, rights of contribution and other rights of recovery) that the
Indemnitee may have against any other Person with respect to any Losses to which
such indemnification payment is related. The Indemnitee shall take such actions
as the Indemnifying Party may reasonably request for the purpose of enabling the
Indemnifying Party to perfect or exercise its right of subrogation hereunder.
(l) Any legal action or other legal proceeding relating to this Agreement
or the enforcement of any provision of this Agreement may be brought by an
Indemnitee against an Indemnifying Person, and may be contested by such
Indemnifying Person. In that event, if the court or arbitrator in such
proceeding determines that the Indemnifying Person is not obligated under this
Agreement to indemnify the Indemnitee for all or any part of the amount claimed
by the Indemnitee in such proceeding, then the Indemnifying Person shall be
entitled to recover a portion of the reasonable attorneys' fees, costs and
disbursements incurred by the Indemnifying Person contesting the claim of the
Indemnitee against the Indemnifying Person in such proceeding (in addition to
any other relief to which it may be entitled) based upon the extent to which the
Indemnitee was successful in contesting the amount claimed by the Indemnifying
Person. This provision shall not limit in any way Losses to which an Indemnitee
is entitled under the provisions of this Agreement.
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7. General.
(a) This Agreement is made in accordance with and will be governed and
construed under the laws of the State of New York, excluding conflict of law
principles that would cause the law of another jurisdiction to apply.
(b) This Agreement is not assignable or transferable by either party in
whole or in part except with the written consent of Buyer, which consent shall
not be unreasonably withheld, provided, however, this Agreement may be assigned
by Buyer to an Affiliate of Buyer to which Buyer assigns its rights and duties
under the Asset Purchase Agreement. In the case of any permitted assignment or
transfer of or under this Agreement, this Agreement or the relevant provisions
thereof will be binding upon, and inure to the benefit of, the successors and
assigns of the parties hereto.
(c) All notices and other communications required or permitted to be given
under this Agreement will be in writing and will be effective if delivered
during business hours on a business day when delivered personally by facsimile
or sent by a nationally recognized commercial overnight carrier, or by
registered or certified mail, postage prepaid, and addressed to the party at its
address set forth on the signature page hereof, unless by such notice a
different person, address or number has been designated for giving notice
hereunder or, if not delivered during business hours on a business day, the next
succeeding business day.
(d) The parties hereto agree that under this Agreement, each party is an
independent contractor and not an agent or employee of the other party. In no
way will any party be liable to the other party, its employees or agents for any
losses, injury, damages or the like occasioned by such party's activities in
connection with this Agreement, except as expressly provided herein.
(e) This Agreement may be amended only with the written approval of each
party hereto. Any of the provisions of this Agreement may be waived, generally
or in a specific instance, with the written approval of the party giving such
waiver. The failure of either party to enforce any provision of this Agreement
will not be deemed a waiver of such provision or of the right of such party
thereafter to enforce such provision or any other provision.
(f) In the event that any provision of this Agreement will be
unenforceable or invalid under any applicable law or be so held by applicable
court decision, such unenforceability or invalidity will not render this
Agreement unenforceable or invalid as a whole and, in such event, such provision
will be changed and interpreted so as to best accomplish the objectives of such
unenforceable or invalid provision within the limits of applicable law or
applicable court decision.
(g) Except as expressly provided in this Agreement, the rights and
remedies provided in this Agreement will be cumulative and not exclusive of any
other rights and remedies provided by law or otherwise.
(h) No liability shall result from delay in performance or non-performance
caused by circumstances beyond the reasonable control of the party affected,
including, without limitation, the voluntary termination of employment with
Seller by any of Seller's employees, reassignment or termination of any
employees of Seller at the direction of Buyer, acts of God, acts of a public
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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 $275,000 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."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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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.
100 Hollister Road c/o The Cooper Companies, Inc.
Teterboro, NJ 07608 6140 Stoneridge Mall Road, Suite 590
Attn: Richard W. Turner, President Pleasanton, CA 94588
and CEO Attn: Carol R. Kaufman, V.P.,
Facsimile Number: (210) 727-4998 Legal Affairs
Facsimile Number: (925) 460-3660
with a copy to: with a copy to:
Cooley Godward LLP O'Sullivan Graev & Karabell, LLP
One Maritime Plaza, 20th Floor 30 Rockefeller Plaza
San Francisco, CA 94111 New York, NY 10112
Attn: Christopher A. Westover, Esq. Attn: David I. Karabell, Esq.
Facsimile Number: (415) 951-3699 Facsimile Number: (212) 728-5950
<PAGE>
ANNEX A
TRANSITIONAL SERVICES
Definitions: "B" is Seller and "C" is Buyer.
1. Operations
(a) B will prepare a production/purchasing schedule in support of key
product lines based upon existing practices and submit to C for
approval.
(b) B will prepare purchase orders in support of approved
production/purchasing schedules and submit to C for approval before
submission to vendors.
(c) B will schedule work orders based upon production plan approved by
C.
(d) B will continue to perform cycle counts for raw materials and
finished goods and submit to C worksheets on a weekly basis.
(e) B will continue to process C's Return Good Authorizations according
to B's existing work instructions, policies and procedures.
(f) B will continue to process stainless instruments according to B's
existing work instructions, policies and procedures.
(g) B will submit to C work schedules and receive C's approval for light
assembly and packaging of ancillary products in support of core
product lines.
(h) B will submit to C within five (5) working days after month-end
close current sales/inventory reports generated by its Vice
President, Operations.
(i) B will submit to C for C's approval, based upon the current
Backorder Report generated from Open Orders, purchase orders for
non-standard type items for purchase.
(j) B will provide C weekly with a copy of its current backorder report.
(k) B will ship all products to fill orders according to B's existing
work instructions based on customer demand, provided there is
sufficient on hand finished goods inventory.
2. Engineering
(a) B will continue to support product activities related to
manufacturing engineering issues.
(b) B will process Engineering Change Notices relating to product
maintenance.
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(c) B will evaluate non-conforming material for disposition decisions by
C.
(d) B will assist QC/QA as it relates to product conformance issues.
(e) B will generate autocad documentation as it relates to ECN's.
3. Quality Control
(a) B will continue to inspect all incoming material.
(b) B will inspect and test all in-process sub-assemblies.
(c) B will calibrate and test all final product for release to finished
goods.
(d) B will assist customer service as it relates to product technical
issues.
(e) B will maintain all final inspection documentation records.
(f) B will maintain calibration records for all inspection gauges and
test equipment.
(g) B will provide month end summaries of all customer complaints.
(h) B will continue to process complaints and take appropriate action in
accordance with B procedures as currently being conducted.
4. Customer Solicitation
(a) B will continue to operate the sales office in Chatsworth, CA for
the benefit of C.
(b) B's inside sales representatives will continue to solicit customer
orders via the telephone, follow-up on appropriate sales leads and
process customer orders through B's sales order processing system
for the benefit of C and under C's direction.
(c) B will continue to manage the outside sales force for the benefit of
C with the support of A. Manna but with direction from C.
5. Customer Service
(a) B Customer Service at both sites will continue under C's direction
to interface with customers, telemarketing and external sales force
supporting GYN/GI (domestic and international) product lines,
process orders, returned goods and repairs according to existing
work instructions, policies and procedures presently used by B.
6. Customer Invoicing
(a) B will continue to invoice customers as products are sold and
shipped for the account of C.
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(b) B will continue to use its standard existing invoice forms with B's
name, the Chatsworth, CA address and phone numbers. Text will be
added to the invoice to indicate that sales are for the account of
C. As soon as C provides B with a replacement invoice of its design,
the revised invoice will be substituted for the existing standard
invoice.
(c) Customer credit terms, shipping terms and all other terms and
conditions of sales will be in accordance with B's current
commercial practice.
(d) B will mail a copy of the invoice to the customer. Postage will be
paid by C.
(e) B will provide C with copies of all invoices and a set of its
standard sales and cost reports no later than five (5) business days
after the end of each week.
7. Credit Notes
(a) B will continue to authorize and issue customer RGA's and process
credit notes in accordance with B's current commercial practice.
(b) All credits will be for the account of C.
(c) B will provide C with copies of all credit notes no later than five
(5) business days after the end of each week.
(d) Any cash refunds due to customers for duplicate or erroneous
payments will be forwarded to C for approval and payment. C will
advise B regarding any payments made for entry into its accounts
receivable ledger.
8. Sales Taxes
(a) Sales taxes will be billed and collected in accordance with B's
current commercial practices.
(b) B will provide C at the end of the month with a set of its current
standard sales tax reports to include in C's sales tax returns no
later than five (5) business days after the close of each month.
(c) All sales tax filings related to the sales that B transacts on the
behalf of C will be prepared and filed by C.
9. Commercial Credit
(a) B will continue to check its customers' credit history, review
credit references, authorize and issue customer credit, assign
customer credit limits and refuse to ship customer orders in
accordance with B's current credit practices, provided, however,
that if C provides B with C's credit practices, B will use C's
credit practices in lieu of B's current credit practices.
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(b) B will not be responsible for any credit decisions made on behalf of
C.
10. Accounts Receivable Collections
(a) B will continue to collect outstanding commercial accounts
receivable in accordance with B's current collection practices. All
related collection charges approved by C and telephone charges will
be for the account of C.
(b) B will mail account statements to customers at the end of each
month. Postage will be paid by C.
(c) B will have authority to assign accounts to third parties for
collection for the account of C when C deems it necessary.
(d) B will not be responsible for any uncollected accounts at the end of
the transition period.
(e) B will provide C with a copy of its standard detailed accounts
receivable aging and a listing of identified problem accounts no
later than five (5) business days after the close of each month.
11. Bank Accounts
(a) C will establish a depository bank account in Chatsworth, California
and B shall make deposits into the account of all amounts collected
for C. B will not have authority to make disbursements from this
account.
(b) B will make daily deposits into C's account of all funds received
from the collection of C's accounts receivable, and B will inform C
on a daily basis of the total amount of all funds deposited to the C
bank account.
(c) C will be responsible for the reconciliation and analysis of the C
bank account.
12. Accounts Receivable Reconciliation
(a) B will reconcile the accounts receivable aging at the end of the
month to the sales journal and cash receipts journal. A copy of the
accounts receivable reconciliation will be provided to C no later
than five (5) business days following the close of each month.
13. Accounts Payable
(a) All vendor invoices for purchases of C inventory and/or services
that can be identified as the responsibility of C will be forwarded
to C once a week with appropriate supporting documentation for
payment by C.
(b) Appropriate accounts payable documentation submitted to C will
include: a copy of the invoice, a copy of the purchase order (where
appropriate), a copy of any
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receiving documentation (if applicable), and the signature of the B
manager reviewing the proposed payment.
(c) At C's request, B will assist C in attempting to resolve any
disputes with vendors.
(d) C will make all required payments to vendors.
14. Commission Payments
(a) B will continue to prepare commission workpapers and commission
statements for both internal and external sales representatives in
accordance with B's standard reporting format and business practice.
(b) Commission payments due will be calculated based upon the current
sales commission plan as utilized by B immediately prior to the
execution of this Agreement and attached as Exhibit 1.
(c) Commission workpapers and commission statements will be forwarded to
C for approval and payment no later than fifteen (15) working days
following the close of each month.
(d) The commission payment schedules will be accompanied by an invoice
prepared by B that details the total commissions and related charges
to be paid by B.
(e) C will approve the commission invoice for payment, transfer the
appropriate funds to B's account and return the commission schedules
to B for process and payment to the sales representatives.
(f) B will process the commission payments either through its payroll or
individual checks, as appropriate.
15. Royalty Payments
(a) B will continue to prepare royalty workpapers and royalty payment
statements in accordance with B's standard business practices.
(b) Royalty workpapers and royalty payment statements will be forwarded
to C for approval and payment.
(c) C will make all royalty payments.
16. Payments of Shared Services
(a) B will prepare an invoice listing all items for payment and provide
reasonable supporting documentation to support the charge.
(b) Payments may only be withheld on disputed items, not on the total
amount of the invoice.
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17. Inventory
(a) B will separate the HTA inventory still owned by B from the
inventory sold to C.
(b) B will maintain perpetual inventory records for C in accordance with
current B work procedures and practices. All inventory transactions,
including incoming purchases, receipts of materials, shipments of
finished goods, returns to vendors, transfers to outside
contractors, and evaluation returns, will be recorded in perpetual
inventory records.
(c) B will provide C with a set of the current perpetual inventory and
transaction reports no later than five (5) business days after the
close of the month.
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EXHIBIT 1
TO ANNEX A
<PAGE>
ANNEX B
EXECUTION COPY
NONCOMPETITION AGREEMENT dated
December 8, 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 between the Company and the Covenantor, as amended (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;
<PAGE>
(iii) any other territory or possession of the United States; (iv) each country
in the European Union("EU"); and (v) any country other than (x) the United
States or any state, territory, possession or political subdivision thereof and
(y) a country in the EU. As used in this Agreement, the term "Non-Compete
Period" means the period beginning on the date of this Agreement and ending on
the fifth anniversary of the date of this Agreement. As used in this Agreement,
the term "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
Nothing in this Section 2 shall prohibit the Covenantor from (i)
engaging, directly or indirectly, as a partner, joint venturer or otherwise in
the development, manufacture, sales, marketing or service of the product known
as Hydro ThermAblator or HTA, or any improvement to such product (collectively,
"HTA") and, subject to the last two sentences of this paragraph, the
development, manufacture, marketing, sale or service of the products listed on
Exhibit A, or any improvement to or replacement for such products listed on
Exhibit A (the "HTA Related Products") or (ii) being a passive owner of not more
than (A) 4% of the outstanding capital stock of any class of a corporation (or
4% of the equity interest in any other Person), the securities of which are
publicly traded or (B) 1% of the outstanding capital stock of any class of a
corporation (or 1% of the equity interest in any other Person), the securities
of which are privately held, so long as the Covenantor has no active
participation in the business of such Person. The HTA Related Products may only
be marketed, sold or serviced, directly or through distribution channels, (A)
solely in connection with the sale or use of HTA by medical professionals, (B)
in a number reasonably necessary to facilitate the use by such medical
professionals of HTA and (C) to the medical professionals purchasing or using
HTA. Any marketing, sale or service of an HTA Related Product which does not
strictly comply with the immediately preceding sentence is a violation of the
Covenantor's obligations under this Agreement.
(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.
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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 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.
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<PAGE>
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
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
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<PAGE>
agreement, non-compete agreement, confidentiality agreement or similar agreement
with any other Person that is inconsistent with the provisions of this Agreement
and (iii) upon the execution and delivery of this Agreement by the Company and
the Covenantor, this Agreement will be a valid and binding obligation of the
Covenantor.
(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
5
<PAGE>
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 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.
6
<PAGE>
(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.
(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.
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<PAGE>
(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) 925-135
with a copy to:
The Cooper Companies, Inc.
6140 Stoneridge Mall Road
Suite 590
Pleasanton, CA 94588
Attention: Carol R. Kaufman, V.P., Legal Affairs
Telecopier: (510) 460-3660
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<PAGE>
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: David I. Karabell, Esq.
Telecopier: (212) 408-2400; and
(B) if to the Covenantor, to:
BEI Medical Systems Company, Inc.
100 Hollister Drive
Teterboro, NJ 07608
Attention: Richard W. Turner, President & CEO
Telecopier: (201) 727-4998
with a copy to:
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
Attention: Christopher A. Westover, Esq.
Telecopier: (415) 951-3699
* * * *
9
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has duly executed
this Noncompetition Agreement as of the date first written above.
COOPERSURGICAL ACQUISITION CORP.
By: _____________________________________
Name:
Title:
BEI MEDICAL SYSTEMS COMPANY, INC.
By: _____________________________________
Name:
Title:
<PAGE>
EXHIBIT 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.
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EXHIBIT B
The Company Affiliates
JURISDICTION OF
NAME INCORPORATION
- --------------------------------------------------------------------------------
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
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.
12
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made and entered into this 7th day of
October, 1999, between BEI MEDICAL SYSTEMS, INC., a Delaware corporation
(hereinafter referred to as "BEI") and RICHARD W. TURNER (hereinafter referred
to as "Turner").
RECITALS
A. Turner has been employed by BEI as President and Chief Executive
Officer under the terms and conditions of a letter agreement between BEI and
Turner dated January 24, 1999 ("the Letter Agreement.") A copy of the Letter
Agreement is attached to and is incorporated herein. The Letter Agreement and
this Employment Agreement collectively shall be referred to as " the Agreement."
B. Contemporaneously with the execution of this Agreement, BEI is
selling substantially all of its assets to CooperSurgical Acquisition Corp.
("CooperSurgical.") As an essential element of that transaction, CooperSurgical
has insisted that Turner sign a Non-Competition Agreement. In addition, after
the closing of that transaction, BEI desires that Turner remain employed by BEI.
C. Turner has agreed to sign the Non-Competition Agreement with
CooperSurgical and to accept employment with BEI following the transaction under
the terms and conditions of this Agreement.
D. The Board of Directors of BEI considers it essential to the best
interests of BEI that Turner continue his employment with BEI. In order to
induce Turner to accept employment and/or continued employment with BEI, BEI
desires to enter into this Agreement with Turner.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
form an integral part of this Agreement, and of the mutual covenants, terms and
conditions set forth in this Agreement, and for other good and valuable
consideration, BEI and Turner agree as follows:
1. EMPLOYMENT
1.1. BEI employs Turner, and Turner accepts employment with BEI,
under the terms and conditions of this Agreement. BEI hereby re-affirms the
terms and conditions of the Letter Agreement as if set forth in full in this
Agreement. In the event
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of any conflict between the terms of the Employment Agreement and the Letter
Agreement, the terms of the Employment Agreement first shall control.
2. MODIFICATIONS TO THE LETTER AGREEMENT
2.1. BEI agrees to pay Turner the single lump sum of $80,000.00 upon
the closing of the transaction between BEI and CooperSurgical described in
Recital B above, and the parties agree that this payment shall fully satisfy any
obligations BEI may have to Turner (a) under paragraph 2 of the Letter
Agreement, with respect to any such bonus for 1999 only, and (b) under paragraph
4 of the Letter Agreement, at any time.
2.2. In addition to the terms of paragraph 6 of the Letter
Agreement, BEI agrees to reimburse Turner for all travel, living and related
expenses arising from or reasonably related to (a) his normal commutation to the
offices of BEI, wherever located, and (b) any litigation, arbitration or other
legal proceedings involving Turner, BEI, CooperSurgical, or any other person or
entity, with respect to the business of BEI or Turner's employment by BEI;
provided, however, that BEI shall not reimburse Turner for any such expenses if
BEI and Turner are opposed to one another in any such proceeding.
2.3. Paragraph 8 of the Letter Agreement is modified to read as
follows: The term of this Agreement shall be for a term equal to the time Turner
is subject to any restriction contained in the Non-Competition Agreement with
CooperSurgical, and thereafter until terminated. Therefore, Turner shall be
entitled to full salary and all other benefits under this Agreement for a
minimum period equal to the time he is subject to any restriction contained in
the Non-Competition Agreement with CooperSurgical, and for such additional
periods beyond the expiration of the last of the restrictions under that
Non-Competition Agreement as he may remain employed by BEI or any "Successor,"
defined for the purposes of this Agreement as any person or entity that succeeds
to all or substantially all of the business and/or assets and/or shares and/or
voting control of BEI, whether by purchase, merger, change of control, sale of
assets, consolidation or otherwise, and for such additional periods as provided
in this Agreement. In the event Turner leaves the employ of BEI before the end
of the term of the last to expire of the restrictions under the Non-Competition
Agreement, he shall receive from BEI and/or from any Successor, and BEI and/or
any Successor shall be obligated to pay Turner, at a minimum the same salary and
benefits as provided in this Agreement for the remaining term of the last to
expire of the restrictions under the Non-Competition Agreement. However, if
Turner leaves the employ of BEI before the end of the term of the last to expire
of the restrictions under the Non-Competition Agreement and finds other
employment, BEI's obligations to pay salary and bonus shall be reduced by the
salary and bonus Turner receives from such other employment.
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2.4. Paragraph 9 of the Letter Agreement is modified as follows:
(a) The preamble of Paragraph 9 is amended to read: If BEI is
sold or undergoes any other change of control by January 31, 2001 (or such other
extended date to which the parties may later agree in writing), or if Turner is
terminated for any reason before BEI is sold or undergoes any other change of
control, or if BEI is not sold or does not undergo any other change of control
by January 31, 2001 (or such other extended date to which the parties may later
agree in writing), you shall have the option of departing BEI with the following
package:
(b) Paragraph 9(A) is amended to read as follows: Payment of
salary until the last to expire of the restrictions under the Non-Competition
Agreement.
(c) Paragraph 9(B) is amended by adding at the end thereof the
following: Payment shall be made within thirty (30) days after the date of
Turner's invoice or other request for payment.
(d) Without limiting the provisions of paragraph 3.2 below,
paragraph 9(E) is amended by adding at the end thereof the following: Such
coverage shall continue in effect until the last to expire of the restrictions
under the Non-Competition Agreement. If for any reason such coverage is
cancelled or unavailable to BEI or its Successor, then BEI and its Successor
shall reimburse Turner for the full costs and all expenses in connection with
Turner's procurement of substitute coverage in equivalent amounts.
(e) Paragraph 9(G) is amended to read as follows: BEI may not
terminate Turner's employment without cause during the period in which he is
subject to any restriction in the Non-Competition Agreement
(f) Paragraph 9(H) is amended by adding at the end thereof the
following: ", or upon the termination of Turner's employment."
2.5. It is acknowledged that the parties disagree as to whether the
sale of assets by BEI to CooperSurgical described in Recital B above constitutes
a sale of BEI pursuant to paragraph 9 of the Letter Agreement. Notwithstanding
this, so long as BEI remains in compliance with this Agreement Turner agrees not
to assert any rights he may have under paragraph 9 with respect to such
transaction.
2.6 Paragraph 10 of the Letter Agreement is deleted.
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3. ADDITIONAL TERMS AND CONDITIONS
3.1. Indemnification.
(a) Definitions. As used in this Agreement:
(1) The Term "Proceeding" shall include all threatened,
pending or completed actions, suits or proceedings, whether brought by or
against BEI or Turner and whether of a civil, criminal, administrative or
investigative nature with respect to the business of BEI or Turner's employment
by BEI. Without limiting the foregoing, "Proceeding" also includes (i) actions,
suits or proceedings brought under and/or predicated upon the Securities Act of
1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or
their respective state counterparts and/or any rule or regulation promulgated
thereunder, in which Turner may be or may have been involved as a party or
otherwise by reason of the fact that Turner is or was a director and/or officer
of BEI, by reason of any action taken by him or of any inaction on his part
while acting as such director and/or officer or by reason of the fact that he is
or was serving at the request of BEI as a director, officer, employee or agent
of or advisor to another company, partnership, joint venture, trust or other
enterprise, whether or not he is serving in such capacity at the time any
liability or expense is incurred for which indemnification or reimbursement can
be provided under this Agreement, and (ii) actions, claims, suits or proceedings
brought under or pursuant to the Non-Competition Agreement with CooperSurgical.
(2) The term "Expenses" includes, without limitation,
all monetary obligations, costs, and expenses arising from, related to, or
connected with any Proceedings, including, without limitation, all liabilities,
judgments, settlements, injunctions, bonds, fines, penalties, investigations,
judicial or administrative proceedings or appeals, attorneys' fees and
disbursements, and any costs of establishing a right to indemnification under
this Agreement.
(b) Indemnity. BEI shall indemnify Turner and shall hold him
harmless from and against all Proceedings and all Expenses and actually and
reasonably incurred by Turner in connection with the defense, settlement, or
other resolution of any Proceeding. Provided, however, that if Turner is not
employed by BEI at the time any Expense is incurred, and if Turner is employed
elsewhere and eligible for indemnification by his new employer for Expenses
arising from or related to Proceedings, then Turner agrees to resort first to
such new employer for reimbursement, defense, and indemnification, and BEI shall
be responsible for any portion of Expenses not reimbursed by Turner's new
employer.
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(c) Advances of Expenses. While Turner is employed by BEI, or
if Turner is employed elsewhere and not eligible for indemnification for
Expenses arising from Proceedings, then all Expenses shall be paid by BEI in
advance and on or prior to the date when payment of such Expenses is due. If
Turner is not employed by BEI at the time Expenses are incurred and is eligible
for indemnification for Expenses arising from Proceedings, then BEI agrees to
pay its portion, if any, arising under paragraph 3.1(b) within thirty days after
receiving a request for payment from Turner.
(d) Indemnification Hereunder Not Exclusive. The
indemnification provided by this Agreement shall not be deemed exclusive of any
other rights to which Turner may be entitled under the Certificate of
Incorporation, the Bylaws, any agreement, any vote of stockholders or
disinterested directors, the General Corporation Law of the BEI's state of
incorporation, or otherwise.
3.2. BEI and its Successors agree that for the period of Turner's
employment hereunder, and for and additional period of three (3) full calendar
years thereafter, BEI shall maintain in effect for Turner all Director and
Officers Liability insurance coverage in effect for other officers and directors
of BEI.
4. MISCELLANEOUS
4.1. Successors; Binding Agreement. BEI will require any Successor,
by agreement in form and substance satisfactory to Turner, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that BEI would be required to perform it if no such succession had taken place.
Failure of BEI to obtain such agreement before the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Turner to
compensation from BEI and its Successors in the same amount and on the same
terms as Turner would be entitled hereunder if his employment terminated under
this Agreement, except that for purposes of implementing the foregoing, the date
on which any such succession becomes effective shall be deemed the date of
termination. This Agreement shall inure to the benefit of and shall be
enforceable by Turner's personal or legal representatives, executors,
administrators, Successors, heirs, distributes, devisees and legatees. If Turner
should die or become disabled while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Turner's devisees, legatee or other designee or, if there be no such designee,
to his estate.
4.2. Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been given if delivered personally or sent by certified express
mail, return receipt requested, postage prepaid, to the parties to this
Agreement at the following addresses or
5
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to such other address as either party to this Agreement shall specify by notice
to the other:
If to BEI:
BEI Medical Systems, Inc,
One Post Street
Suite 2500
San Francisco, CA 94104
Attention: Charles Crocker, Chairman
With copies to:
Christopher Westover, Esq.
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
-- and --
Joseph J. Fleischman, Esq.
Norris McLaughlin & Marcus
721 Route 202-206
PO Box 1018
Somerville, NJ 08876-1018
if to Turner:
Richard W. Turner
9 Nomas Lane
Richmond. VA 23233
With copies to:
William J. Heller, Esq.
McCarter & English LLP
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102
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4.3. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New Jersey
applicable to agreements made and to be performed within New Jersey, without
regard to the principles of conflict of laws.
4.4. Resolution of Conflict. Any and all disputes, claims and
controversies between the parties hereto concerning the validity,
interpretation, performance, termination or breach of this Agreement, which
cannot be resolved by the parties within sixty (60) days after such dispute,
claim or controversy arises shall, at the option of either party, be referred to
and finally settled by arbitration. Such arbitration shall be initiated by the
initiating party giving notice (the "Arbitration Notice") to the other party
(the "Respondent") that it intends to submit such dispute, claim or controversy
to arbitration. The arbitration shall be conducted by a single arbitrator
according to the rules of the American Arbitration Association as in effect on
the date the notice of submission to arbitration is given (the "Rules"). The
arbitrator shall be selected by mutual agreement between the parties, or, in the
absence of such agreement, pursuant to the Rules. Such arbitration shall be held
in New Jersey in accordance with the Rules except as otherwise expressly
provided herein. The arbitrator shall render a written decision stating reasons
therefor in reasonable detail within three (3) months after the appointment of
the arbitrator. Each party shall bear its own costs and attorneys fees. All
other costs and expenses of arbitration shall be apportioned between the
parties. The award of the arbitrator shall be made in United States currency and
shall be final and binding, and judgment thereon may be rendered by any court
having jurisdiction thereof, or application may be made to such court for the
judicial acceptance of the award and an order of enforcement as the case may be.
4.5. Entire Agreement. This Agreement and its attachments sets forth
the entire agreement and understanding of the parties relating to the subject
matter hereof, and from and after the date hereof supersedes all prior
agreements, arrangements and understandings, written or oral, relating to the
subject matter hereof; provided, however, that the benefits conferred under this
Agreement are in addition to, and not in lieu of, any and all benefits conferred
under plans and arrangements currently in effect for Turner.
4.6. Assignment. This Agreement is binding upon and shall insure to
the benefit of the BEI and Turner and his Successors, heirs, estate and personal
representatives.
4.7. Modification; Waiver. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms or covenants hereof may
be waived, only by a written instrument executed by both of the parties hereto
or in the case of a waiver, by the party waiving compliance.
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<PAGE>
4.8. Authorization. BEI warrants and represents that the execution
of this Agreement has been duly authorized by the Board of Directors of BEI, and
is binding on BEI, and all permitted Successors and assigns.
4.9. Surviving Terms. The terms and conditions of this Agreement
which are required to survive in order to give effect to the letter and intent
of this Agreement shall survive termination of this Agreement or Turner's
employment with BEI.
4.10. Choice of Counsel. At all times Turner shall be entitled to
the attorneys of his choice to represent his personal or other interests, and
wherever this Agreement, or any other agreement or corporate document entitles
Turner to the reimbursement of expenses, Turner also shall be entitled to
reimbursement of his personal attorneys' fee and costs.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first set forth above.
BEI MEDICAL SYSTEMS, INC. RICHARD W. TURNER
By:_________________________________ ____________________________________
Charles Crocker Richard W. Turner
Chairman of the Board
Date:_______________________________ Date:_______________________________
8
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TBCC
Loan and Security Agreement
Borrower: BEI Medical Systems Company, Inc.,
a Delaware Corporation
Address: 100 Hollister Road
Teterboro, New Jersey 07608
Date: May 6, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date, between
the above borrower (the "Borrower"), having its chief executive office and
principal place of business at the address shown above, and TRANSAMERICA
BUSINESS CREDIT CORPORATION, a Delaware corporation ("TBCC"), having its
principal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018
and having an office at 15260 Ventura Boulevard, Sherman Oaks, California 91403.
The Schedule to this Agreement (the "Schedule") being signed concurrently is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 9 below.) The parties agree as follows:
1. LOANS.
1.1 Loans. TBCC, subject to the terms and conditions of this Agreement,
agrees to make loans (the "Loans") to Borrower, from time to time during the
period from the date of this Agreement to the Maturity Date set forth in the
Schedule, at Borrower's request, in an aggregate principal amount at any one
time outstanding not to exceed the Credit Limit shown on the Schedule. If at any
time the total outstanding Loans and other monetary Obligations exceed said
limit, Borrower shall repay the excess immediately without demand. Borrower
shall use the proceeds of all Loans solely for lawful general business purposes.
1.2 Due Date. The Loans, all accrued interest and all other monetary
Obligations shall be payable in full on the Maturity Date. Borrower may borrow,
repay and reborrow Loans (other than any Term Loans), in whole or in part, in
accordance with the terms of this Agreement.
1.3 Loan Account. TBCC shall maintain an account on its books in the name
of Borrower (the "Loan Account"). All Loans and advances made by TBCC to
Borrower or for Borrower's account and all other monetary Obligations will be
charged to the Loan Account. All amounts received by TBCC from Borrower or for
Borrower's account will be credited to the Loan Account. TBCC will send Borrower
a monthly statement reflecting the activity in the Loan Account, and each such
monthly statement shall be an account stated between Borrower and TBCC and shall
be final conclusive and binding absent manifest error.
1.4 Collection of Receivables. Borrower shall remit to TBCC all
Collections including all checks, drafts and other documents and instruments
evidencing remittances in payment (collectively referred to as "Items of
Payment") within one Business Day after receipt, in the same form as received,
with any necessary indorsements. For purposes of calculating interest due to
TBCC, credit will be given for Collections and all other proceeds of Collateral
and other payments to TBCC three Business Days after receipt of cleared funds.
For all purposes of this Agreement any cleared funds received by TBCC later than
10:00 a.m. (California time) on any Business Day shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue. Borrower's Loan Account will be credited only with the net
amounts actually received in payment of Receivables, and such payments shall be
credited to the Obligations in such order as TBCC shall determine in its
discretion. Pending delivery to TBCC, Borrower will not commingle any Items of
Payment with any of its other funds or property, but will segregate them from
the other assets of Borrower and will hold them in trust and for the account and
as the property of TBCC. Borrower hereby agrees to endorse any Items of Payment
upon the request of TBCC.
1.5 Reserves. TBCC may, from time to time, in its Good Faith business
judgment upon reasonable prior notice to Borrower: (i) establish and modify
reserves against Eligible Receivables and Eligible Inventory, (ii) modify
advance rates with respect to Eligible Receivables and Eligible Inventory, (iii)
modify the standards of eligibility set forth in the definitions of Eligible
Receivables and Eligible Inventory, and (iv) establish reserves against
available Loans.
1.6 Term.
(a) The term of this Agreement shall be from the date of this
Agreement to the Maturity Date set forth in the Schedule, unless sooner
terminated in accordance with the terms of this Agreement, provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this
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TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
Agreement effective on the next Maturity Date. On the Maturity Date or on any
earlier termination of this Agreement Borrower shall pay in full all
Obligations, and notwithstanding any termination of this Agreement all of TBCC's
security interests and all of TBCC's other rights and remedies shall continue in
full force and effect until payment and performance in full of all Obligations.
(b) This Agreement may be terminated prior to the Maturity Date as
follows: (i) by Borrower, effective three business days after written notice of
termination is given to TBCC; or (ii) by TBCC at any time after the occurrence
of an Event of Default, without notice, effective immediately. If this Agreement
is terminated by Borrower or by TBCC under this Section 1.6(b), Borrower shall
pay to TBCC a termination fee (the "Termination Fee") in the amount shown on the
Schedule. The Termination Fee shall be due and payable on the effective date of
termination. Notwithstanding the foregoing, Borrower shall have no right to
terminate this Agreement at any time that any principal of, or interest on any
of the Loans or any other monetary Obligations are outstanding, except upon
prepayment of all Obligations and the satisfaction of all other conditions set
forth in the Loan Documents.
1.7 Payment Procedures. Borrower hereby authorizes TBCC to charge the Loan
Account with the amount of all interest, fees, expenses and other payments to be
made hereunder and under the other Loan Documents. TBCC may, but shall not be
obligated to, discharge Borrower's payment obligations hereunder by so charging
the Loan Account. Whenever any payment to be made hereunder is due on a day that
is not a Business Day, the payment may be made on the next succeeding Business
Day and such extension of time shall be included in the computation of the
amount of interest due.
1.8 Conditions to Initial Loan. The obligation of TBCC to make the initial
Loan is subject to the satisfaction of the following conditions prior to or
concurrent with such initial Loan, and Borrower shall cause all such conditions
to be satisfied by the Closing Deadline set forth in the Schedule:
(a) Except for the filing of termination statements under the
Uniform Commercial Code by the existing lender to Borrower whose loans are being
repaid with the Loan proceeds and the documents and actions relating to the
Liens of TBCC created hereunder, as provided for in Section 1.8(c) below, no
consent or authorization of, filing with or other act by or in respect of any
Governmental Authority or any other Person is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement,
or the other Loan Documents or the consummation of the transactions contemplated
hereby or thereby or the continuing operations of the Borrower following the
consummation of such transactions.
(b) TBCC and its counsel shall have performed (i) a review
satisfactory to TBCC of all of the Material Contracts and other assets of the
Borrower, the financial condition of the Borrower, including all of its tax,
litigation, environmental and other potential contingent liabilities, and the
corporate and capital structure of the Borrower and (ii) a pre-closing audit and
collateral review, in each case with results satisfactory to TBCC.
(c) TBCC shall have received the following, each dated the date of
the initial Loan or as of an earlier date acceptable to TBCC, in form and
substance satisfactory to TBCC and its counsel: (i) a Blocked Account Agreement,
duly executed by the Borrower and its bank on TBCC's standard form; (ii)
acknowledgment copies of Uniform Commercial Code financing statements (naming
TBCC as secured party and the Borrower as debtor), duly filed in all
jurisdictions that TBCC deems necessary or desirable to perfect and protect the
Liens created hereunder, and evidence that all other filings, registrations and
recordings have been made in the appropriate governmental offices, and all other
action has been taken, which shall be necessary to create, in favor of TBCC, a
perfected first priority Lien on the Collateral (except for Excluded
Collateral). For purposes hereof, "Excluded Collateral" shall mean (i) any
deposit account held by the Borrower or any Guarantor at a depository
institution office located in a jurisdiction where TBCC's security interest in
such deposit account cannot be perfected by providing notice thereof to such
depository institution (provided, however, that with respect to any such deposit
account Borrower shall, at TBCC's request, provide TBCC with duly executed
agreements and instruments (all in form and substance satisfactory to TBCC)
necessary or, in the opinion of TBCC, desirable to perfect and maintain in favor
of TBCC a first priority security interest in such deposit account), and (ii)
specialized molds and demonstration equipment owned by Xylog Corporation and
located in jurisdictions other than California and New Jersey (provided that (a)
the aggregate book value of such specialized molds and demonstration equipment
at all such locations other than California and New Jersey shall not at any time
exceed $350,000, and (b) the aggregate book value of such specialized molds and
demonstration equipment at any single location outside of California or New
Jersey shall not at any time exceed $50,000).; (iii) the opinion of counsel for
the Borrower covering such matters incident to the transactions contemplated by
this Agreement as TBCC may specify in its discretion; (iv) certified copies of
all policies of insurance required by this Agreement and the other Loan
Documents, together with loss payee endorsements for all such policies naming
TBCC as lender loss payee and an additional insured; (v) copies of the
Borrower's articles or certificate of incorporation, certified as true, correct
and complete by the secretary of state of Borrower's state of incorporation
within 45 days of the date hereof; (vi) copies of the bylaws of the Borrower and
a copy of the resolutions of the Board of Directors of the Borrower authorizing
the execution, delivery and performance of this Agreement, the other Loan
Documents, and the transactions contemplated hereby and thereby, attached to
which is a certificate of the Secretary or an Assistant Secretary of the
Borrower certifying (A) that such copies of the bylaws and resolutions are true,
complete and accurate copies thereof, have not been amended or modified since
the date of such certificate and are in full force and effect and (B) the
incumbency, names and true signatures of the officers of the Borrower who are
authorized to sign the Loan Documents; (vii) a good standing certificate from
the Secretary of State of Borrower's state of incorporation and each state in
which the Borrower is qualified as a foreign corporation, each dated within ten
days of the date hereof; (viii) the additional documents and agreements, if any,
listed in the Schedule; and (ix) such other agreements and instruments as TBCC
deems necessary in its reasonable discretion in connection with the transactions
contemplated hereby.
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TBCC Loan and Security Agreement
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1.9 Conditions to Lending. The obligation of TBCC to make any Loan is
subject to the satisfaction of the following conditions precedent:
(a) There shall be no pending or, to the knowledge of Borrower after
due inquiry, threatened litigation, proceeding, inquiry or other action relating
to this Agreement, or any other Loan Document, which could reasonably be
expected to have a Material Adverse Effect in the judgment of TBCC;
(b) Borrower shall be in compliance with all Requirements of Law and
Material Contracts, other than such noncompliance that could not reasonably be
expected to have a Material Adverse Effect;
(c) The Liens in favor of TBCC shall have been duly perfected and
shall constitute first priority Liens, except for Permitted Liens and except
with respect to Excluded Collateral (as defined in Section 1.8(c) above);
(d) All representations and warranties contained in this Agreement
and the other Loan Documents shall be true and correct on and as of the date of
such Loan as if then made, other than representations and warranties that
expressly relate solely to an earlier date, in which case they shall have been
true and correct as of such earlier date;
(e) No Default or Event of Default shall have occurred and be
continuing or would result from the making of the requested Loan as of the date
of such request; and
(f) No Material Adverse Effect shall have occurred.
2. INTEREST AND FEES.
2.1 Interest. Borrower shall pay TBCC interest on all outstanding
Loans and other monetary Obligations, at the interest rate set forth in the
Schedule with respect to such Loans and other monetary Obligations. Interest
shall be payable monthly in arrears on the first Business Day of each month, and
on the Maturity Date. Following the occurrence and during the continuance of any
Event of Default, the interest rate applicable to each Loan shall be increased
to the extent provided for in the Note evidencing such Loan, and the interest
rate applicable to all other Obligations shall be increased by two percent per
annum.
2.2 Fees. Borrower shall pay TBCC the fees set forth in the Schedule.
2.3 Calculations. All interest and fees under this Agreement shall be
calculated on the basis of a year of 360 days for the actual number of days
elapsed in the period for which such interest or fees are payable.
2.4 Taxes. Any and all payments by Borrower under this Agreement or any
other Loan Document shall be made free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings and penalties, interest and all other liabilities with respect
thereto, excluding in the case of TBCC, taxes imposed on its net income and
franchise taxes imposed on it by the jurisdiction under the laws of which TBCC
is organized or any political subdivision thereof.
3. SECURITY.
3.1 Grant of Security Interest. To secure the payment and performance when
due of all of the Obligations, Borrower hereby grants to TBCC a security
interest in all of its present and future Receivables, Investment Property,
Inventory, Equipment, Other Property, and other Collateral, wherever located.
Notwithstanding the foregoing, the grant of a security interest as provided
herein shall not extend to, and the term "Collateral" shall not include, any
Receivables or general intangibles (whether owned or held as licensee or lessee,
or otherwise), to the extent that (i) such Receivables or general intangibles
are not assignable or capable of being encumbered as a matter of law or under
the terms of the license or lease applicable thereto (but solely to the extent
that any such restriction shall be enforceable under applicable law against an
assignee), without the consent of the licensor or lessor thereof and (ii) such
consent has not been obtained; provided, however, that the foregoing grant of
security interest shall extend to, and the term "Collateral" shall include, (A)
any and all proceeds of any Receivables or general intangibles which are
otherwise excluded to the extent that the assignment or encumbrance of such
proceeds is not so restricted, including under Section 9-318 of the Uniform
Commercial Code, and (B) upon obtaining the consent of any such licensor, lessor
or other applicable party with respect to any such otherwise excluded
Receivables or general intangibles, such Receivables or general intangibles as
well as any and all proceeds thereof that might have been excluded from such
grant of security interest and the term "Collateral."
3.2 Other Liens; Location of Collateral. Borrower represents, warrants and
covenants that all of the Collateral
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<PAGE>
TBCC Loan and Security Agreement
- --------------------------------------------------------------------------------
is, and will at all times continue to be, free and clear of all Liens, other
than Permitted Liens and Liens in favor of TBCC. All Collateral is and will
continue to be maintained at the locations shown on the Schedule.
3.3 Receivables.
(a) Schedules and Other Actions. As often as requested by TBCC,
Borrower shall execute and deliver to TBCC written schedules of Receivables and
Eligible Receivables (but the failure to execute or deliver any schedule shall
not affect or limit TBCC's security interest in all Receivables). On TBCC's
request, Borrower shall also furnish to TBCC copies of invoices to customers and
shipping and delivery receipts. Borrower shall deliver to TBCC the originals of
all letters of credit, notes, and instruments in its favor and such endorsements
or assignments as TBCC may reasonably request and, upon the request of TBCC,
Borrower shall deliver to TBCC all certificated securities with respect to any
Investment Property, with all necessary indorsements, and obtain such account
control agreements with securities intermediaries and take such other action
with respect to any Investment Property, as TBCC shall request, in form and
substance satisfactory to TBCC. Upon request of TBCC Borrower additionally shall
obtain consents from any letter of credit issuers with respect to the assignment
to TBCC of any letter of credit proceeds.
(b) Records, Collections. Borrower shall report all customer credits
to TBCC, on the regular reports to TBCC in the form from time to time specified
by TBCC. Borrower shall notify TBCC of all returns and recoveries of merchandise
and of all claims asserted with respect to merchandise, on its regular reports
to TBCC. Borrower shall not settle or adjust any dispute or claim, or grant any
discount, credit or allowance or accept any return of merchandise, except in the
ordinary course of its business, without TBCC's prior written consent.
(c) Representations. Borrower represents and warrants to TBCC that
each Receivable with respect to which Loans are requested by Borrower shall, on
the date each Loan is requested and made, represent an undisputed, bona fide,
existing, unconditional obligation of the account debtor created by the sale,
delivery, and acceptance of goods, the licensing of software or the rendition of
services, in the ordinary course of Borrower's business, and meet the Minimum
Eligibility Requirements set forth in Section 9.1(n) below.
3.4 Inventory. Borrower shall maintain full, accurate and complete records
respecting the Inventory describing the kind, type and quantity of the Inventory
and Borrower's cost therefor, withdrawals therefrom and additions thereto,
including a perpetual inventory for work in process and finished goods.
3.5 Equipment. Borrower shall at all times keep correct and accurate
records itemizing and describing the location, kind, type, age and condition of
the Equipment, Borrower's cost therefor and accumulated depreciation thereof and
retirements, sales, or other dispositions thereof. Borrower shall keep all of
its Equipment in a satisfactory state of repair and satisfactory operating
condition in accordance with industry standards, ordinary wear and tear
excepted. No Equipment shall be annexed or affixed to or become part of any
realty, unless the owner of the realty has executed and delivered a Landlord
Waiver in such form as TBCC shall specify. Where Borrower is permitted to
dispose of any Equipment under this Agreement or by any consent thereto
hereafter given by TBCC, Borrower shall do so at arm's length, in good faith and
by obtaining the maximum amount of recovery practicable therefor and without
impairing the operating integrity or value of the remaining Equipment.
3.6 Investment Property. Borrower shall have the right to retain all
Investment Property payments and distributions, unless and until a Default or an
Event of Default has occurred. If a Default or an Event of Default exists,
Borrower shall hold all payments on, and proceeds of, and distributions with
respect to, Investment Property in trust for TBCC, and Borrower shall deliver
all such payments, proceeds and distributions to TBCC, immediately upon receipt,
in their original form, duly endorsed, to be applied to the Obligations in such
order as TBCC shall determine. Upon the request of TBCC, any such distributions
and payments with respect to any Investment Property held in any securities
account shall be held and retained in such securities account as part of the
Collateral.
3.7 Further Assurances. Borrower will perform any and all steps that TBCC
may reasonably request to perfect TBCC's security interests in the Collateral,
including, without limitation, executing and filing financing and continuation
statements in form and substance satisfactory to TBCC. TBCC is hereby authorized
by Borrower to sign Borrower's name or file any financing statements or similar
documents or instruments covering the Collateral whether or not Borrower's
signature appears thereon. Borrower agrees, from time to time, at TBCC's
request, to file notices of Liens, financing statements, similar documents or
instruments, and amendments, renewals and continuations thereof, and cooperate
with TBCC, in connection with the continued perfection and protection of the
Collateral. If any Collateral is in the possession or control of any Person
other than a public warehouseman where the warehouse receipt is in the name of
or held by TBCC, Borrower shall notify such Person of TBCC's security interest
therein and, upon request, instruct such Person or Persons to hold all such
Collateral for the account of TBCC and subject to TBCC's instructions. If so
requested by TBCC, Borrower will deliver to TBCC warehouse receipts covering any
Collateral located in warehouses showing TBCC as the beneficiary thereof and
will also cause the warehouseman to execute and deliver such agreements as TBCC
may request relating to waivers of liens by such warehouseman and the release of
the Inventory to TBCC on its demand. Borrower shall defend the Collateral
against all claims and demands of all Persons.
3.8 Power of Attorney. Borrower hereby appoints and constitutes TBCC as
Borrower's attorney-in-fact (i) to request at any time from account debtors
verification of information concerning Receivables and the amount owing thereon,
(ii) upon the occurrence and during the continuance of an Event of Default, to
convey any item of Collateral to any purchaser thereof, (iii) to give or sign
Borrower's name to any notices or statements necessary or desirable to create or
continue the Lien on any Collateral granted hereunder, (iv) to execute and
deliver to any securities intermediary or other Person any entitlement
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order, account control agreement or other notice, document or instrument with
respect to any Investment Property, and (v) to make any payment or take any act
necessary or desirable to protect or preserve any Collateral. TBCC's authority
hereunder shall include, without limitation, the authority to execute and give
receipt for any certificate of ownership or any document, transfer title to any
item of Collateral and take any other actions arising from or incident to the
powers granted to TBCC under this Agreement. This power of attorney is coupled
with an interest and is irrevocable.
4. Representations and Warranties of Borrower. Borrower represents and warrants
as follows:
4.1 Organization, Good Standing and Qualification. Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State set forth above, (ii) has the corporate power and authority to own
its properties and assets and to transact the businesses in which it is engaged
and (iii) is duly qualified, authorized to do business and in good standing in
each jurisdiction where it is engaged in business, except to the extent that the
failure to so qualify or be in good standing would not have a Material Adverse
Effect.
4.2 Locations of Offices, Records and Collateral. The address of the
principal place of business and chief executive office of Borrower is, and the
books and records of Borrower and all of its chattel paper and records relating
to Collateral are maintained exclusively in the possession of Borrower at, the
address of Borrower specified in the heading of this Agreement. Borrower has
places of business, and Collateral is located, only at such address and at the
addresses set forth in the Schedule and at any additional locations reported to
TBCC as provided in Section 5.8(c) as to which Borrower has provided TBCC (i) 7
days prior written notice thereof, and (ii) duly executed financing statements
and other agreements and instruments (all in form and substance satisfactory to
TBCC) necessary or, in the opinion of TBCC, desirable to perfect and maintain in
favor of TBCC a first priority security interest in the Collateral (other than
Excluded Collateral, as defined in Section 1.8(c) above) located at such
additional locations.
4.3 Authority. Borrower has the requisite corporate power and authority to
execute, deliver and perform its obligations under each of the Loan Documents.
All corporate action necessary for the execution, delivery and performance by
Borrower of the Loan Documents has been taken.
4.4 Enforceability. This Agreement is, and, when executed and delivered,
each other Loan Document will be, the legal, valid and binding obligation of
Borrower enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity.
4.5 No Conflict. The execution, delivery and performance of each Loan
Document by Borrower does not and will not contravene (i) any of the Governing
Documents, (ii) any Requirement of Law or (iii) any Material Contract and will
not result in the imposition of any Liens other than in favor of TBCC.
4.6 Consents and Filings. No consent, authorization or approval of, or
filing with or other act by, any shareholders of Borrower or any Governmental
Authority or other Person is required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement or any other
Loan Document, the consummation of the transactions contemplated hereby or
thereby or the continuing operations of Borrower following such consummation,
except (i) those that have been obtained or made, (ii) the filing of financing
statements under the Uniform Commercial Code and (iii) any necessary filings
with U.S. Copyright Office and the U.S. Patent and Trademark Office.
4.7 Solvency. Borrower is Solvent and will be Solvent upon the completion
of all transactions contemplated to occur on or before the date of this
Agreement (including, without limitation, the Loans to be made on the date of
this Agreement).
4.8 Financial Data. Borrower has provided to TBCC complete and accurate
Financial Statements, which have been prepared in accordance with GAAP
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Borrower for each of the periods
covered, subject, in the case of any quarterly financial statements, to normal
year-end adjustments and the absence of notes. Borrower has no Contingent
Obligation or liability for taxes, unrealized losses, unusual forward or
long-term commitments or long-term leases, which is not reflected in such
Financial Statements or the footnotes thereto. Since the last date covered by
such Financial Statements, and other than transactions in the ordinary course of
business, there has been no sale, transfer or other disposition by Borrower of
any material part of its business or property and no purchase or other
acquisition of any business or property (including any capital stock of any
other Person) material in relation to the financial condition of Borrower at
said date. Since said date, (i) there has been no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect and (ii) none of the capital stock of Borrower has been
redeemed, retired, purchased or otherwise acquired for value by Borrower.
4.9 Accuracy and Completeness of Information. All data, reports and
information previously, now or hereafter furnished by or on behalf of Borrower
to TBCC or the Auditors are or will be true and accurate in all material
respects on the date as of which such data, reports and information are dated or
certified, and not incomplete by omitting to state any material fact necessary
to make such data, reports and information not materially misleading at such
time. There are no facts now known to Borrower which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect and
which have not been disclosed in writing to TBCC.
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4.10 No Joint Ventures, Partnerships or Subsidiaries. Borrower is not
engaged in any joint venture or partnership with any other Person. Except as
disclosed in the Schedule, Borrower has no Subsidiaries.
4.11 Corporate and Trade Name. During the past five years, Borrower has
not been known by or used any other corporate, trade or fictitious name except
for its name as set forth on the signature page of this Agreement and the other
names specified in the Schedule.
4.12 No Actual or Pending Material Modification of Business. There exists
no actual or, to the best of Borrower's knowledge after due inquiry, threatened
termination, cancellation or limitation of, or any modification or change in the
business relationship of Borrower with any customer or group of customers whose
purchases individually or in the aggregate are material to the operation of
Borrower's business or with any material supplier.
4.13 No Broker's or Finder's Fees. No broker or finder brought about this
Agreement or the Loans. No broker's or finder's fees or commissions will be
payable by Borrower to any Person in connection with the transactions
contemplated by this Agreement.
4.14 Taxes and Tax Returns. Borrower has properly completed and timely
filed all income tax returns it is required to file. The information filed is
complete and accurate in all material respects. All deductions taken in such
income tax returns are appropriate and in accordance with applicable laws and
regulations, except deductions that may have been disallowed but are being
challenged in good faith and for which adequate reserves have been made in
accordance with GAAP. All taxes, assessments, fees and other governmental
charges for periods beginning prior to the date of this Agreement have been
timely paid (or, if not yet due, adequate reserves therefor have been
established in accordance with GAAP) and Borrower has no liability for taxes in
excess of the amounts so paid or reserves so established. No deficiencies for
taxes have been claimed, proposed or assessed by any taxing or other
Governmental Authority against Borrower and no notice of any tax Lien has been
filed. There are no pending or threatened audits, investigations or claims for
or relating to any liability for taxes and there are no matters under discussion
with any Governmental Authority which could result in an additional liability
for taxes. No extension of a statute of limitations relating to taxes,
assessments, fees or other governmental charges is in effect with respect to
Borrower. Borrower is not a party to and does not have any obligations under any
written tax sharing agreement or agreement regarding payments in lieu of taxes.
4.15 No Judgments or Litigation. Except as set forth in the Schedule, no
judgments, orders, writs or decrees are outstanding against Borrower, nor is
there now pending or, to the knowledge of Borrower after due inquiry, threatened
litigation, contested claim, investigation, arbitration, or governmental
proceeding by or against Borrower that (i) could individually or in the
aggregate be likely in the reasonable business judgment of TBCC to have a
Material Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement, any other Loan Document or the consummation of
the transactions contemplated hereby or thereby.
4.16 Investments; Contracts. Borrower (i) has not committed to make any
Investment; (ii) is not a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, by-law or other corporate
restriction or any injunction, order, restriction or decree, which would
materially and adversely affect its business, operations, assets or financial
condition; (iii) is not a party to any "take or pay" contract as to which it is
the purchaser; or (iv) has no material contingent or long-term liability,
including management contracts (excluding employment contracts of full-time
individual officers or employees), which could reasonably be expected to have a
Material Adverse Effect.
4.17 No Defaults; Legal Compliance. Borrower is not in default under any
term of any Material Contract or in violation of any Requirement of Law, nor is
Borrower subject to any investigation with respect to a claimed violation of any
Requirement of Law.
4.18 Rights in Collateral; Priority of Liens. All Collateral is owned or
leased by Borrower, free and clear of any and all Liens in favor of third
parties, other than Permitted Liens. The Liens granted to TBCC pursuant to the
Loan Documents constitute valid, enforceable and perfected first-priority Liens
on the Collateral, except for Permitted Liens.
4.19 Intellectual Property. Set forth in the written Representations and
Warranties of Borrower previously delivered to TBCC is a complete and accurate
list of all patents, trademarks, trade names, service marks and copyrights
(registered and unregistered), and all applications therefor and licenses
thereof, of Borrower. Borrower owns or licenses all material patents,
trademarks, service-marks, logos, tradenames, trade secrets, know-how,
copyrights, or licenses and other rights with respect to any of the foregoing,
which are necessary or advisable for the operation of its business as presently
conducted or proposed to be conducted. To the best of its knowledge after due
inquiry, Borrower has not infringed any patent, trademark, service-mark,
tradename, copyright, license or other right owned by any other Person by the
sale or use of any product, process, method, substance, part or other material
presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect and no claim or
litigation is pending, or to the best of Borrower's knowledge, threatened
against or affecting Borrower that contests its right to sell or use any such
product, process, method, substance, part or other material.
4.20 Labor Matters. There are no existing or threatened strikes, lockouts
or other disputes relating to any collective bargaining or similar agreement to
which Borrower is a party which would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect.
4.21 Licenses and Permits. Borrower has obtained and holds in full force
and effect, all franchises, licenses, leases, permits, certificates,
authorizations, qualifications,
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easements, rights of way and other rights and approvals which are necessary or
advisable for the operation of its business as presently conducted and as
proposed to be conducted, except where the failure to possess any of the
foregoing (individually or in the aggregate) would not have a Material Adverse
Effect.
4.22 Government Regulation. Borrower is not subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940, or any other
Requirement of Law that limits its ability to incur indebtedness or its ability
to consummate the transactions contemplated by this Agreement and the other Loan
Documents.
4.23 Business and Properties. The business of Borrower is not affected by
any fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance) that could reasonably be expected
to have a Material Adverse Effect.
4.24 Status of Certain Subsidiaries. Calculus Instruments Company, Inc., a
New Jersey corporation and an indirect wholly-owned subsidiary of Borrower
("Calculus"), is a dormant company with no material assets of any kind and no
Indebtedness or Obligations whatsoever, whether to Borrower, to any other
Affiliate of Calculus or to any third party. Ovamed Corporation, a California
corporation and an indirect wholly-owned subsidiary of Borrower ("Ovamed"), is a
dormant company with no material assets of any kind and no Indebtedness or
Obligations whatsoever, whether to Borrower, to any other Affiliate of Ovamed or
to any third party. Borrower has no plans to transfer assets to, or otherwise
alter the dormant status of, either Calculus or Ovamed.
4.25 Affiliate Transactions. Borrower is not a party to or bound by any
agreement or arrangement (whether oral or written) to which any Affiliate of
Borrower is a party except (i) in the ordinary course of and pursuant to the
reasonable requirements of the business of Borrower and (ii) upon fair and
reasonable terms no less favorable to Borrower than it could obtain in a
comparable arm's-length transaction with an unaffiliated Person.
4.26 Survival of Representations. All representations made by Borrower in
this Agreement and in any other Loan Document executed and delivered by it in
connection herewith shall survive the execution and delivery hereof and thereof
and the closing of the transactions contemplated hereby and thereby.
5. AFFIRMATIVE COVENANTS OF THE BORROWER. Until termination of this Agreement
and payment and satisfaction of all Obligations:
5.1 Corporate Existence. Borrower shall (i) maintain its corporate
existence, (ii) maintain in full force and effect all material licenses, bonds,
franchises, leases, trademarks, qualifications and authorizations to do
business, and all material patents, contracts and other rights necessary or
advisable to the profitable conduct of its business, and (iii) continue in, and
limit its operations to, the same lines of business as presently conducted by
it or lines of business closely related or ancillary thereto.
5.2 Maintenance of Property. Borrower shall keep all property useful and
necessary to its business in good working order and condition (ordinary wear and
tear excepted)
5.3 Affiliate Transactions. Borrower shall conduct transactions with any
of its Affiliates on an arm's-length basis or other basis no less favorable to
Borrower and which are approved by the board of directors of Borrower.
5.4 Taxes. Borrower shall pay when due (i) all tax assessments, and other
governmental charges and levies imposed against it or any of its property and
(ii) all lawful claims that, if unpaid, might by law become a Lien upon its
property; provided, however, that, unless such tax assessment, charge, levy or
claim has become a Lien on any of the property of Borrower, it need not be paid
if it is being contested in good faith, by appropriate proceedings diligently
conducted and an adequate reserve or other appropriate provision shall have been
made therefor as required in accordance with GAAP.
5.5 Requirements of Law. Borrower shall comply with all Requirements of
Law applicable to it, including, without limitation, all applicable Federal,
State, local or foreign laws and regulations, including, without limitation,
those relating to environmental matters, employee matters, the Employee
Retirement Income Security Act of 1974, and the collection, payment and deposit
of employees' income, unemployment and social security taxes, provided that
Borrower shall not be deemed in violation hereof if Borrower's failure to comply
with any of the foregoing would not require more than $100,000 to cure the same.
5.6 Insurance. Borrower shall maintain public liability insurance,
business interruption insurance, third party property damage insurance and
replacement value insurance on its assets (including the Collateral) under such
policies of insurance, with such insurance companies, in such amounts and
covering such risks as are at all times satisfactory to TBCC in its commercially
reasonable judgment, all of which policies covering the Collateral shall name
TBCC as an additional insured and lender loss payee in case of loss, and contain
other provisions as TBCC may reasonably require to protect fully TBCC's interest
in the Collateral and any payments to be made under such policies.
5.7 Books and Records; Inspections. Borrower shall (i) maintain books and
records (including computer records) pertaining to the Collateral in such
detail, form and scope as is consistent with good business practice and (ii)
provide TBCC and its agents access to the premises of Borrower at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, and at any time on and after the occurrence of a Default or
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting
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and copying (at Borrower's expense) any and all records pertaining thereto, and
(C) discussing the affairs, finances and business of Borrower with any officer,
employee or director of Borrower or with the Auditors. Borrower shall reimburse
TBCC for the reasonable travel and related expenses of TBCC's employees or, at
TBCC's option, of such outside accountants or examiners as may be retained by
TBCC to verify or inspect Collateral, records or documents of Borrower on a
regular basis or for a special inspection if TBCC deems the same appropriate. If
TBCC's own employees are used, Borrower shall also pay therefor $600 per person
per day (or such other amount as shall represent TBCC's then current standard
charge for the same), or, if outside examiners or accountants are used, Borrower
shall also pay TBCC such reasonable sum as TBCC may be obligated to pay as fees
therefor, provided, however, that unless a Default or Event of Default has
occurred and is continuing, Borrower's obligation to reimburse TBCC for expenses
incurred pursuant to this Section 5.7 shall be limited to a maximum of $10,000
during any period of 12 consecutive months.
5.8 Notification Requirements. Borrower shall give TBCC the following
notices and other documents:
(a) Notice of Defaults. Borrower shall give TBCC written notice of
any Default or Event of Default within two Business Days after becoming aware of
the same.
(b) Proceedings or Adverse Changes. Borrower shall give TBCC written
notice of any of the following, promptly, and in any event within five Business
Days after Borrower becomes aware of any of the following: (i) any proceeding
being instituted or threatened by or against it in any federal, state, local or
foreign court or before any commission or other regulatory body involving a sum,
together with the sum involved in all other similar proceedings, in excess of
$100,000 in the aggregate, (ii) any order, judgment or decree being entered
against Borrower or any of its properties or assets involving a sum, together
with the sum of all other orders, judgments or decrees, in excess of $75,000 in
the aggregate, and (iii) any actual or prospective change, development or event
which has had or could reasonably be expected to have a Material Adverse Effect.
(c) Change of Name or Chief Executive Office; Opening Additional
Places of Business. Borrower shall give TBCC at least 7 days prior written
notice of any change of Borrower's corporate name or its chief executive office
or of the opening of any additional place of business where Inventory or
Equipment with an aggregate value of more than $50,000 will be located.
(d) Casualty Loss. Borrower shall (i) provide written notice to
TBCC, within ten Business Days, of any material damage to, the destruction of or
any other material loss to any asset or property owned or used by Borrower other
than any such asset or property with a net book value (individually or in the
aggregate) less than $50,000 or any condemnation, confiscation or other taking,
in whole or in part, or any event that otherwise diminishes so as to render
impracticable or unreasonable the use of such asset or property owned or used by
Borrower together with the amount of the damage, destruction, loss or diminution
in value and (ii) diligently file and prosecute its claim or claims for any
award or payment in connection with any of the foregoing.
(e) Intellectual Property. Borrower shall promptly give TBCC written
notice of any copyright registration made by it, any rights Borrower may obtain
to any copyrightable works, new trademarks or any new patentable inventions, and
of any renewal or extension of any trademark registration, or if it shall
otherwise become entitled to the benefit of any patent or patent application or
trademark or trademark application.
(f) Deposit Accounts and Security Accounts. Borrower shall promptly
give TBCC written notice of the opening of any new bank account or other deposit
account, and any new securities account.
5.9 Qualify to Transact Business. Borrower shall qualify to transact
business as a foreign corporation in each jurisdiction where the nature or
extent of its business or the ownership of its property requires it to be so
qualified or authorized and where failure to qualify or be authorized would have
a Material Adverse Effect.
5.10 Financial Reporting. Borrower shall timely deliver to TBCC the
following financial information: the information set forth in the Schedule, and,
when requested by TBCC in its good-faith judgment, any further information
respecting Borrower or any Collateral. Borrower authorizes TBCC to communicate
directly with its officers, employees and Auditors and to examine and make
abstracts from its books and records. Borrower authorizes its Auditors to
disclose to TBCC any and all financial statements, work papers and other
information of any kind that they may have with respect to Borrower and its
business and financial and other affairs. Borrower shall deliver a letter
addressed to the Auditors requesting them to comply with the provisions of this
paragraph when requested by TBCC.
5.11 Payment of Liabilities. Borrower shall pay and discharge, in the
ordinary course of business, all Indebtedness, except where the same may be
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto have been provided on the books and records of Borrower in
accordance with GAAP.
5.12 Patents, Trademarks, Etc. Borrower shall do and cause to be done all
things necessary to preserve, maintain and keep in full force and effect all of
its
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registrations of trademarks, service marks and other marks, trade names and
other trade rights, patents, copyrights and other intellectual property in
accordance with prudent business practices.
5.13 Proceeds of Collateral. Without limiting any of the other terms of
this Agreement, and without implying any consent to any sale or other transfer
of Collateral in violation of any provision of this Agreement, Borrower shall
deliver to TBCC all proceeds of any sale or other transfer or disposition of any
Collateral (other than (provided no Default or Event of Default has occurred and
is continuing) proceeds deriving from transactions in the ordinary course of
business), promptly upon receipt of the same (and in any event within one
Business Day of such receipt) and in the same form as received, with any
necessary endorsements, and Borrower will not commingle any such proceeds with
any of its other funds or property, but will segregate them from the other
assets of Borrower and will hold them in trust and for the account and as the
property of TBCC.
5.14 Solvency. Borrower shall be Solvent at all times.
6. Negative Covenants. Until termination of this Agreement and payment and
satisfaction of all Obligations:
6.1 Contingent Obligations. Borrower will not, directly or indirectly,
incur, assume, or suffer to exist any Contingent Obligation, excluding
indemnities given in connection with this Agreement or the other Loan Documents
in favor of TBCC or in connection with the sale of Inventory or other asset
dispositions permitted hereunder.
6.2 Corporate Changes. Borrower will not, directly or indirectly, merge or
consolidate with any Person, or liquidate or dissolve (or suffer any liquidation
or dissolution).
6.3 Change in Nature of Business. Borrower will not at any time make any
material change in the lines of its business as carried on at the date of this
Agreement or enter into any new line of business not closely related or
ancillary to the lines of Business of Borrower on the date hereof.
6.4 Sales of Assets. Borrower will not, directly or indirectly, in any
fiscal year, sell, transfer or otherwise dispose of any assets, or grant any
option or other right to purchase or otherwise acquire any assets other than (i)
Equipment with an aggregate value of less than $25,000 the proceeds of which
shall be paid to TBCC and applied to the Obligations (provided, however, that
the foregoing limit shall be $50,000 in the case of Equipment that is obsolete
or no longer useful in Borrower's business), (ii) sales of Inventory in the
ordinary course of business and (iii) licenses or sublicenses on a non-exclusive
basis of intellectual property in the ordinary course of Borrower's business.
6.5 Cancellation of Debt. Borrower will not cancel any claim or debt owed
to it, except in the ordinary course of business.
6.6 Loans to Other Persons. Borrower will not at any time make loans or
advance any credit (except to trade debtors in the ordinary course of business)
to any Person in excess of 50,000 in the aggregate at any time for all such
loans.
6.7 Liens. Borrower will not, directly or indirectly, at any time create,
incur, assume or suffer to exist any Lien on or with respect to any of the
Collateral, other than: Liens created hereunder and by any other Loan Document;
and Permitted Liens.
6.8 Dividends, Stock Redemptions. Borrower will not, directly or
indirectly, pay any dividends or distributions on, purchase, redeem or retire
any shares of any class of its capital stock or any warrants, options or rights
to purchase any such capital stock, whether now or hereafter outstanding
("Stock"), or make any payment on account of or set apart assets for a sinking
or other analogous fund for, the purchase, redemption, defeasance, retirement or
other acquisition of its Stock, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of Borrower, except for dividends paid solely in stock of the
Borrower.
6.9 Investments in Other Persons. Except as permitted by Section 6.6
hereof, Borrower will not, directly or indirectly, at any time make or hold any
Investment in any Person (whether in cash, securities or other property of any
kind) other than Investments in Cash Equivalents.
6.10 Partnerships; Subsidiaries; Joint Ventures; Management Contracts.
Borrower will not at any time create any direct or indirect Subsidiary, enter
into any joint venture or similar arrangement or become a partner in any general
or limited partnership or enter into any management contract (other than an
employment contract for the employment of an officer or employee entered into in
the regular course of Borrower's business) permitting third party management
rights with respect to Borrower's business.
6.11 Fiscal Year. Borrower will not change its fiscal year.
6.12 Accounting Changes. Borrower will not at any time make or permit any
change in accounting policies or reporting practices, except as required by
GAAP.
6.13 Broker's or Finder's Fees. Borrower will not pay or incur any
broker's or finder's fees in connection with this Agreement or the transactions
contemplated hereby.
6.14 (Reserved.)
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TBCC Loan and Security Agreement
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6.15 Amendments of Material Contracts. Borrower will not amend, modify,
cancel or terminate, or permit the amendment, modification, cancellation or
termination of, any Material Contract, if such amendment, modification,
cancellation or termination would be reasonably likely to have a Material
Adverse Effect.
6.16 Sale and Leaseback Obligations. Borrower will not at any time create,
incur or assume any obligations as lessee for the rental of real or personal
property in connection with any sale and leaseback transaction.
6.17 Acquisition of Stock or Assets. Borrower will not acquire or commit
or agree to acquire all or any stock, securities or assets of any other Person
other than Inventory and Equipment acquired in the ordinary course of business.
7. EVENTS OF DEFAULT.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default":
(a) Borrower shall fail to pay any principal, interest, fees,
expenses or other Obligations when payable, whether at stated maturity, by
acceleration, or otherwise; or
(b) Borrower shall default in the performance or observance of any
agreement, covenant, condition, provision or term contained in Section 1.1, 1.2,
1.4, 3.3, 5.7, 5.13, 6 (and its Sections and subsections), or 8.1 of this
Agreement, or Borrower shall fail to perform any non-monetary Obligation which
by its nature cannot be cured; or
(c) Borrower shall default in the performance or observance of any
other agreement, covenant, condition, provision or term of this Agreement (other
than those referred to in Section 7.1(a) above or Section 7.1(b) above) or any
other Loan Document, and such failure continues uncured for a period of seven
Business Days after the date it occurs; or
(d) Borrower or any Guarantor shall dissolve, wind up or otherwise
cease to conduct its business; or
(e) Borrower or any Guarantor shall become the subject of (i) an
Insolvency Event except as set forth in clause (e) of the definition of
Insolvency Event or (ii) an Insolvency Event as set forth in clause (e) of the
definition of Insolvency Event that is not dismissed within sixty days; or
(f) any representation or warranty made by or on behalf of Borrower
or any Guarantor to TBCC, under this Agreement or otherwise, shall be incorrect
or misleading in any material respect when made or deemed made; or
(g) A change in the ownership or control of more than 20% of the
voting stock of the Borrower compared to such ownership on the date of this
Agreement;
(h) any judgment or order for the payment of money shall be rendered
against Borrower in an amount in excess of $100,000 and shall not be stayed,
vacated, bonded or discharged within thirty days; or
(i) any defined "Event of Default" shall occur under any other Loan
Document; or Borrower or any Guarantor shall deny or disaffirm its obligations
under any of the Loan Documents or any Liens granted in connection therewith or
shall otherwise challenge any of its obligations under any of the Loan
Documents; or any Liens granted in any of the Collateral shall be determined to
be void, voidable or invalid, are subordinated or are not given the priority
contemplated by this Agreement; or
(j) any Loan Document shall for any reason cease to create a valid
and perfected Lien on the Collateral purported to be covered thereby, of first
priority (except for Permitted Liens and except with respect to Excluded
Collateral, as defined in Section 1.8(c) above); or
(k) the Auditors for Borrower shall deliver a Qualified opinion on
any Financial Statement; or
(l) Borrower or any Guarantor (i) shall fail to pay any Indebtedness
owing to TBCC under any other agreement with TBCC or note or instrument in favor
of TBCC, when due (whether at scheduled maturity or by required prepayment,
acceleration, demand or otherwise), or (ii) shall otherwise be in breach of or
default in any of its obligations under any such agreement, note or instrument
with respect to any such Indebtedness; or
(m) Borrower or any Guarantor (i) shall fail to pay any Indebtedness
in excess of $75,000 owing to any Person other than TBCC or any interest or
premium thereon, when due (whether at scheduled maturity or by required
prepayment, acceleration, demand or otherwise), or (ii) shall otherwise be in
breach or default in any of its obligations under any agreement with respect to
any such Indebtedness, if the effect of such breach, default or failure to pay
is to cause such Indebtedness to become due or redeemed or permit the holder or
holders of such Indebtedness (or a trustee or agent on behalf of such holder or
holders) to declare such Indebtedness due or require such Indebtedness to be
redeemed prior to its stated maturity; or
(n) the occurrence of any event or condition that, in TBCC's
judgment, could reasonably be expected to have a Material Adverse Effect.
TBCC may cease making any Loans hereunder during any of the above cure periods,
and thereafter if any Event of Default has occurred and is continuing.
7.2 Remedies. Upon the occurrence and during the continuance of an Event
of Default, TBCC shall have all rights and remedies under applicable law and the
Loan Documents, and TBCC may do any or all of the following:
(a) Declare all Obligations to be immediately due and payable
(except with respect to any Event of Default with respect to Borrower set forth
in Section 7.1(e), in which case all Obligations shall automatically become
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TBCC Loan and Security Agreement
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immediately due and payable) without presentment, demand, protest or any other
action or obligation of TBCC;
(b) Cease making any Loans or other extensions of credit to Borrower
of any kind;
(c) Take possession of all documents, instruments, files and records
(including the copying of any computer records) relating to the Receivables or
other Collateral and use (at the expense of Borrower) such supplies or space of
Borrower at Borrower's places of business necessary to administer and collect
the Receivables and other Collateral;
(d) Accelerate or extend the time of payment, compromise, issue
credits, or bring suit on the Receivables and other Collateral (in the name of
Borrower or TBCC) and otherwise administer and collect the Receivables and other
Collateral;
(e) Collect, receive, dispose of and realize upon any Investment
Property, including withdrawal of any and all funds from any securities
accounts;
(f) Sell, assign and deliver the Receivables and other Collateral,
with or without advertisement, at public or private sale, for cash, on credit or
otherwise, subject to applicable law; and
(g) Foreclose on the security interests created pursuant to the Loan
Documents by any available procedure, take possession of any or all of the
Collateral, with or without judicial process and enter any premises where any
Collateral may be located for the purpose of taking possession of or removing
the same.
(h) TBCC may bid or become a purchaser at any sale, free from any
right of redemption, which right is expressly waived by Borrower, if permitted
under applicable law. If notice of intended disposition of any Collateral is
required by law, it is agreed that ten days' notice shall constitute reasonable
notification. Borrower will assemble the Collateral and make it available at
such locations as TBCC may specify, whether at the premises of Borrower or
elsewhere, and will make available to TBCC the premises and facilities of
Borrower for the purpose of TBCC's taking possession of or removing the
Collateral or putting the Collateral in salable form.
(i) Borrower recognizes that TBCC may be unable to make a public
sale of any or all of the Investment Property, by reason of prohibitions
contained in applicable securities laws or otherwise, and expressly agrees that
a private sale to a restricted group of purchasers for investment and not with a
view to any distribution thereof shall be considered a commercially reasonable
sale.
7.3 Receivables. Upon the occurrence and during the continuance of an
Event of Default, or at any time that TBCC believes in good faith that fraud has
occurred or that Borrower has failed to deliver the proceeds of Receivables or
other Collateral to TBCC as required by this Agreement or any other Loan
Document, TBCC may (i) settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which it considers advisable, and (ii) notify
account debtors on the Receivables and other Collateral that the Receivables and
Collateral have been assigned to TBCC, and that payments in respect thereof
shall be made directly to TBCC. If an Event of Default has occurred and is
continuing or TBCC reasonably believes in good faith that fraud has occurred, or
that Borrower has failed to deliver the proceeds of Receivables or other
Collateral to TBCC as required by this Agreement or any other Loan Document,
Borrower hereby irrevocably authorizes and appoints TBCC, or any Person TBCC may
designate, as its attorney-in-fact, at Borrower's sole cost and expense, to
exercise, all of the following powers, which are coupled with an interest and
are irrevocable, until all of the Obligations have been indefeasibly paid and
satisfied in full in cash: (A) to receive, take, endorse, sign, assign and
deliver, all in the name of TBCC or Borrower, any and all checks, notes, drafts,
and other documents or instruments relating to the Collateral; (B) to receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as TBCC
may designate; and (C) to take or bring, in the name of TBCC or Borrower, all
steps, actions, suits or proceedings deemed by TBCC necessary or desirable to
enforce or effect collection of Receivables and other Collateral or file and
sign Borrower's name on a proof of claim in bankruptcy or similar document
against any obligor of Borrower.
7.4 Right of Setoff. In addition to all rights of offset that TBCC may
have under applicable law, upon the occurrence and during the continuance of any
Event of Default, and whether or not TBCC has made any demand or the Obligations
of Borrower have matured, TBCC shall have the right to appropriate and apply to
the payment of the Obligations of Borrower all deposits and other obligations
then or thereafter owing by TBCC to or for the credit or the account of
Borrower. In the event that TBCC exercises any of its rights under this Section,
TBCC shall provide notice to Borrower of such exercise, provided that the
failure to give such notice shall not affect the validity of the exercise of
such rights.
7.5 License for Use of Software and Other Intellectual Property. After the
occurrence and during the continuance of an Event of Default, unless expressly
prohibited by any licensor thereof, TBCC is hereby granted a license to use all
computer software programs, data bases, processes, trademarks, tradenames and
materials used by Borrower in connection with its businesses or in connection
with the Collateral.
7.6 No Marshalling; Deficiencies; Remedies Cumulative. The net cash
proceeds resulting from TBCC's exercise of any of its rights with respect to
Collateral, including any and all Collections (after deducting all of TBCC's
reasonable expenses related thereto), shall be applied by TBCC to such of the
Obligations in such order as TBCC shall elect in its sole and absolute
discretion, whether due or to become due. Borrower shall remain liable to TBCC
for any deficiencies and TBCC shall remit to Borrower or its successor or
assign, any surplus resulting therefrom. The remedies specified in this
Agreement are cumulative, may be exercised in such order and with respect to
such Collateral as TBCC may deem desirable and are not intended to be exclusive,
and the full or partial exercise of any of them shall not preclude the full or
partial exercise of any other available remedy under this Agreement, under any
other Loan Document, at equity or at law.
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TBCC Loan and Security Agreement
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7.7 Waivers. Borrower hereby waives any bonds, security or sureties
required by any statute, rule or any other law as an incident to any taking of
possession by TBCC of any Collateral. Borrower also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of TBCC's rights under
this Agreement or any other Loan Document including the taking of possession of
any Collateral or the giving of notice to any account debtor or the collection
of any Receivable or other Collateral (other than damages that are the result of
acts or omissions constituting gross negligence or willful misconduct of TBCC).
These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been negotiated by the parties and Borrower acknowledges
that it has been represented by counsel of its own choice and has consulted such
counsel with respect to its rights hereunder.
7.8 Right to Make Payments. In the event that Borrower shall fail to
purchase or maintain insurance required hereunder, or to pay any tax,
assessment, government charge or levy, except as the same may be otherwise
permitted hereunder, or in the event that any Lien prohibited hereby shall not
be paid in full or discharged, or in the event that Borrower shall fail to
perform or comply with any other covenant, promise or obligation to TBCC
hereunder or under any other Loan Document, TBCC may (but shall not be required
to) perform, pay, satisfy, discharge or bond the same for the account of
Borrower, and all amounts so paid by TBCC shall be treated as a Loan hereunder
to Borrower and shall constitute part of the Obligations.
8. ASSIGNMENTS AND PARTICIPATIONS.
8.1 Assignments. Borrower shall not assign this Agreement or any right or
obligation hereunder without the prior written consent of TBCC. TBCC may assign
(without the consent of Borrower) to one or more Persons all or a portion of its
rights and obligations under this Agreement and the other Loan Documents
provided, however, that unless a Default or Event of Default has occurred and is
continuing, TBCC shall not assign any of its rights or obligations under this
Agreement to a competitor of Borrower or to any subsidiary or affiliate of any
such competitor.
8.2 Participations. TBCC may sell participations in or to all or a portion
of its rights and obligations under this Agreement (including, without
limitation, all or a portion of the Loans); provided, however, that TBCC's
obligations under this Agreement shall remain unchanged.
8.3 Disclosure. TBCC may, in connection with any permitted assignment or
participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Borrower furnished to TBCC by or on
behalf of Borrower.
9. DEFINITIONS.
9.1 General Definitions. As used herein, the following terms shall have
the meanings herein specified (to be equally applicable to both the singular and
plural forms of the terms defined):
(a) "Affiliate" means as to any Person, any other Person who
directly or indirectly controls, is under common control with, is controlled by
or is a director or officer of such Person. As used in this definition,
"control" (including its correlative meanings, "controlled by" and "under common
control with") means possession, directly or indirectly, of the power to direct
or cause the direction of management or policies (whether through ownership of
voting securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person who owns directly or
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of the members of the board of directors or other
governing body of a corporation or twenty percent (20%) or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation, partnership or other Person.
(b) "Agreement" means this Loan and Security Agreement, as amended,
supplemented or otherwise modified from time to time.
(c) "Auditors" means a nationally recognized firm of independent
public accountants selected by Borrower and reasonably satisfactory to TBCC,
provided that Ernst & Young LLP is deemed to be reasonably satisfactory to TBCC.
(d) "Bankruptcy Code" means Title 11 of the United States Code
entitled "Bankruptcy," as that title may be amended from time to time, or any
successor statute.
(e) "Borrowing" means a borrowing of Loans.
(f) "Business Day" means any day other than a Saturday, Sunday or
any other day on which commercial banks in Chicago, Illinois are required or
permitted by law to close.
(g) "Cash Equivalents" means (i) securities issued, guaranteed or
insured by the United States or any of its agencies with maturities of not more
than one year from the date acquired; (ii) certificates of deposit with
maturities of not more than one year from the date acquired, issued by any U.S.
federal or state chartered commercial bank of recognized standing which has
capital and unimpaired surplus in excess of $100,000,000; (iii) investments in
money market funds registered under the Investment Company Act of 1940; and (iv)
other instruments, commercial paper or investments acceptable to TBCC in its
sole discretion.
(h) "Collateral" means Receivables, Investment Property, Inventory,
Equipment, and Other Property, and all additions and accessions thereto and
substitutions and replacements therefor and improvements thereon, and all
proceeds (whether cash or other property) and products thereof, including,
without limitation, all proceeds of insurance covering the same and all tort
claims in connection therewith, and all records, files, computer programs and
files, data and writings relating to the foregoing, and all equipment containing
the foregoing. Notwithstanding the foregoing, the term "Collateral" shall not
include any Receivables or
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<PAGE>
general intangibles (whether owned or held as licensee or lessee, or otherwise),
to the extent that (i) such Receivables or general intangibles are not
assignable or capable of being encumbered as a matter of law or under the terms
of the license or lease applicable thereto (but solely to the extent that any
such restriction shall be enforceable under applicable law against an assignee),
without the consent of the licensor or lessor thereof and (ii) such consent has
not been obtained; provided, however, that the term "Collateral" shall include
(A) any and all proceeds of any Receivables or general intangibles which are
otherwise excluded to the extent that the assignment or encumbrance of such
proceeds is not so restricted, including under Section 9-318 of the Uniform
Commercial Code, and (B) upon obtaining the consent of any such licensor, lessor
or other applicable party with respect to any such otherwise excluded
Receivables or general intangibles, such Receivables or general intangibles as
well as any and all proceeds thereof that might have been excluded from the term
"Collateral."
(i) "Collections" means all cash, funds, checks, notes, instruments,
any other form of remittance tendered by account debtors in respect of payment
of Receivables and any other payments received by Borrower with respect to any
other Collateral.
(j) "Compliance Certificate" means a certificate as to compliance
with the Obligations, on TBCC's standard form (in effect from time to time).
(k) "Contingent Obligation" means any direct, indirect, contingent
or non-contingent guaranty or obligation for the Indebtedness of another Person,
except endorsements in the ordinary course of business.
(l) "Default" means any of the events specified in Section 7.1,
whether or not any of the requirements for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
(m) "Eligible Inventory" means Inventory of Borrower which TBCC in
its sole discretion deems eligible for borrowing, based on such considerations
as TBCC in its sole discretion may deem appropriate from time to time and less
any such reserves as TBCC, in its sole discretion, may require. Without limiting
the fact that the determination of which Inventory is eligible for borrowing is
a matter of TBCC's sole discretion, the following are the minimum requirements
for Inventory to be Eligible Inventory: (i) the Inventory must consist of
finished goods, in good, new and salable condition which is not perishable, not
obsolete or unmerchantable, and is not comprised of raw materials, work in
process, packaging materials or supplies; (iii) the Inventory must meet all
applicable governmental standards; (iv) the Inventory must have been
manufactured in compliance with the Fair Labor Standards Act; (v) the Inventory
must conform in all respects to the warranties and representations set forth in
this Agreement; (vi) the Inventory must at all times be subject to TBCC's duly
perfected, first priority security interest; and (vii) the Inventory must be in
Borrower's exclusive possession, separately identifiable from goods of others,
and situated at Borrower's chief executive office or at one of the other
Borrower locations set forth on the Schedule. The value of Eligible Inventory
shall be computed at the lower of cost (computed on a "first in, first out"
basis) or wholesale market value.
(n) "Eligible Receivables" means and includes only those Receivables
which TBCC in its sole discretion deems eligible for borrowing, based on such
considerations as TBCC in its sole discretion may deem appropriate from time to
time and less any such reserves as TBCC, in its sole discretion, may require.
Without limiting the fact that the determination of which Receivables are
eligible for borrowing is a matter of TBCC's sole discretion, the following (the
"Minimum Eligibility Requirements") are the minimum requirements for a
Receivable to be an Eligible Receivable: (i) the Receivable must not be
outstanding for more than 90 days from its invoice date, (ii) the Receivable
must not represent progress billings, or be due under a fulfillment or
requirements contract with the account debtor, (iii) the Receivable must not be
subject to any contingencies (including Receivables arising from sales on
consignment, guaranteed sale or other terms pursuant to which payment by the
account debtor may be conditional), (iv) the Receivable must not be owing from
an account debtor with whom the Borrower has any dispute (whether or not
relating to the particular Receivable), (v) the Receivable must not be owing
from an Affiliate of Borrower, (vi) the Receivable must not be owing from an
account debtor which is subject to any insolvency or bankruptcy proceeding, or
whose financial condition is not acceptable to TBCC, or which, fails or goes out
of a material portion of its business, (vii) the Receivable must not be owing
from the United States or any department, agency or instrumentality thereof
(unless there has been compliance, to TBCC's satisfaction, with the United
States Assignment of Claims Act), (viii) the Receivable must not be owing from
an account debtor located outside the United States or Canada (unless
pre-approved by TBCC in its discretion in writing, or backed by a letter of
credit satisfactory to TBCC, or FCIA insured satisfactory to TBCC), (ix) the
Receivable must not be owing from an account debtor to whom Borrower is or may
be liable for goods purchased from such account debtor or otherwise, (x) the
Receivable must not violate any representation or warranty set forth in this
Agreement, and (xi) the Receivable must not be one in which TBCC does not have a
first-priority, valid, perfected Lien. Without limiting the generality of the
foregoing, Borrower must be in compliance with all requirements of the Loan
Documents regarding registration with the U.S. Copyright Office of any
copyrightable software in order for any Receivable arising from any licensing of
such software to constitute an Eligible Receivable hereunder. Receivables owing
from one account debtor will not be deemed Eligible Receivables to the extent
they exceed 30% of the total eligible Receivables outstanding. In addition, if
more than 50% of the Receivables owing from an account debtor are outstanding
more than 90 days from their invoice date (without regard to unapplied credits)
or are otherwise not eligible Receivables, then all Receivables owing from that
account debtor will be deemed ineligible for borrowing. TBCC may, from time to
time, in its sole discretion, revise the Minimum Eligibility Requirements, upon
written notice to the Borrower.
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(o) "Equipment" means all machinery, equipment, furniture, fixtures,
conveyors, tools, materials, storage and handling equipment, hydraulic presses,
cutting equipment, computer equipment and hardware, including central processing
units, terminals, drives, memory units, printers, keyboards, screens,
peripherals and input or output devices, molds, dies, stamps, vehicles, and
other equipment of every kind and nature and wherever situated now or hereafter
owned by Borrower or in which Borrower may have any interest as lessee or
otherwise (to the extent of such interest), together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
manuals, blueprints, know-how, warranties and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing.
(p) "Event of Default" means the occurrence of any of the events
specified in Section 7.1.
(q) "Financial Statements" means the balance sheets, profit and loss
statements, statements of cash flow, and statements of changes in intercompany
accounts, if any, for the period specified, prepared in accordance with GAAP and
consistent with prior practices.
(r) "GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances as of the date of determination. Whenever any accounting
term is used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.
(s) "Good Faith" means "good faith" as defined in the Uniform
Commercial Code, from time to time in effect in the State of Illinois.
(t) "Governing Documents" means the articles or certificate of
incorporation and by-laws of Borrower.
(u) "Governmental Authority" means any nation or government, any
state or other political subdivision thereof or any entity exercising executive,
legislative, judicial, regulatory or administrative functions thereof or
pertaining thereto.
(v) "Guarantor" means any present or future guarantor of any or all
of the Obligations.
(w) "Indebtedness" means, with respect to any Person, as of the date
of determination any indebtedness, liability or obligation of such Person
(including without limitation obligations under capital leases and Contingent
Obligations).
(x) "Insolvency Event" means, with respect to any Person, the
occurrence of any of the following: (a) such Person shall be adjudicated
insolvent or bankrupt, or shall generally fail to pay or admit in writing its
inability to pay its debts as they become due, (b) such Person shall seek
dissolution or reorganization or the appointment of a receiver, trustee,
custodian or liquidator for it or a substantial portion of its property, assets
or business or to effect a plan or other arrangement with its creditors, (c)
such Person shall make a general assignment for the benefit of its creditors, or
consent to or acquiesce in the appointment of a receiver, trustee, custodian or
liquidator for a substantial portion of its property, assets or business, (d)
such Person shall file a voluntary petition under any bankruptcy, insolvency or
similar law or take any corporate or similar act in furtherance thereof, or (e)
such Person, or a substantial portion of its property, assets or business shall
become the subject of an involuntary proceeding or petition for its dissolution,
reorganization, and such proceeding is not dismissed or stayed within sixty
days, or the appointment of a receiver, trustee, custodian or liquidator, and
such receiver is not dismissed within sixty days.
(y) "Inventory" means all present and future goods intended for
sale, lease or other disposition by Borrower in the ordinary course of business
including, without limitation, all raw materials, work in process, finished
goods and other retail inventory, goods in the possession of outside processors
or other third parties, goods consigned to Borrower to the extent of its
interest therein as consignee, materials and supplies of any kind, nature or
description which are or might be used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of any such goods, and all
documents of title or documents representing the same.
(z) "Investment" in any Person means, as of the date of
determination thereof, any payment or contribution, or commitment to make a
payment or contribution, by any Person including, without limitation, property
contributed or committed to be contributed by any Person, on its account for or
in connection with its acquisition of any stock, bonds, notes, debentures,
partnership or other ownership interest or any other security of the Person in
whom such Investment is made or any evidence of indebtedness by reason of a
loan, advance, extension of credit, guaranty or other similar obligation for any
debt, liability or indebtedness of such Person in whom the Investment is made.
(aa) "Investment Property" means any and all investment property of
Borrower, including all securities, whether certificated or uncertificated,
security entitlements, securities accounts, commodity contracts and commodity
accounts, and all financial assets held in any securities account or otherwise,
wherever located, and whether now existing or hereafter acquired or arising.
(bb) "Lien" means any lien, claim, charge, pledge, security
interest, assignment, hypothecation, deed of trust, mortgage, lease, conditional
sale, retention of title or other preferential arrangement having substantially
the same economic effect as any of the foregoing, whether voluntary or imposed
by law.
(cc) "Loan Account" has the meaning specified in Section 1.3.
(dd) "Loan Documents" means this Agreement and all present and
future documents and instruments delivered or to be delivered by Borrower or any
of its Affiliates or any Guarantor under, in connection with or relating to this
Agreement, or any other present or future instrument or agreement between TBCC
and Borrower, as
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TBCC Loan and Security Agreement
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each of the same may be amended, supplemented or otherwise modified from time to
time.
(ee) "Loans" means the loans and financial accommodations made by
TBCC hereunder.
(ff) "Material Adverse Effect" means (i) a material adverse effect
on the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of Borrower alone, or of
Borrower and its Subsidiaries on a consolidated basis, (ii) the impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of TBCC to enforce the Obligations or realize upon the
Collateral or (iii) a material adverse effect on the value of the Collateral or
the amount which TBCC would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of the
Collateral.
(gg) "Material Contract" means any contract or other arrangement to
which Borrower is a party (other than the Loan Documents) for which breach,
nonperformance, cancellation or failure to renew could reasonably be expected to
have a Material Adverse Effect.
(hh) "Obligations" means and includes all loans (including the
Loans), advances, debts, liabilities, obligations, covenants and duties owing by
Borrower to TBCC of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, whether or not arising
under or in connection with this Agreement, any other Loan Document or any other
present or future instrument or agreement, whether or not for the payment of
money, whether arising by reason of an extension of credit, opening,
guaranteeing or confirming of a letter of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect (including
those acquired by assignment, purchase, discount or otherwise), whether absolute
or contingent, due or to become due, now due or hereafter arising and however
acquired (including without limitation all loans previously made by TBCC to
Borrower). The term includes, without limitation, all interest (including
interest accruing on or after an Insolvency Event, whether or not an allowed
claim), charges, expenses, commitment, facility, closing and collateral
management fees, letter of credit fees, reasonable attorneys' fees, and any
other sum properly chargeable to Borrower under this Agreement, the other Loan
Documents or any other present or future agreement between TBCC and Borrower.
(ii) "Other Property" means all present and future: instruments,
documents, documents of title, securities, bonds, notes, promissory notes,
drafts, acceptances, letters of credit and rights to receive proceeds of letters
of credit, deposit accounts, chattel paper, certificates, insurance policies,
insurance proceeds, leases, computer tapes, causes of action, judgments, claims
against third parties, leasehold rights in any personal property, books,
ledgers, files and records, general intangibles (including without limitation,
all contract rights, tax refunds, rights to receive tax refunds, patents, patent
applications, copyrights (registered and unregistered), royalties, licenses,
permits, franchise rights, authorizations, customer lists, rights of
indemnification, contribution and subrogation, computer programs, discs and
software, trade secrets, computer service contracts, trademarks, trade names,
service marks and names, logos, goodwill, deposits, choses in action, designs,
blueprints, plans, know-how, telephone numbers and rights thereto, credits,
reserves, and all forms of obligations whatsoever now or hereafter owing to
Borrower), all property at any time in the possession or under the control of
TBCC, and all security given by Borrower to TBCC pursuant to any other Loan
Document or agreement.
(jj) "Permitted Liens" means such of the following as to which no
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced and be continuing: (i) Liens for taxes, assessments and other
governmental charges or levies or the claims or demands of landlords, carriers,
warehousemen, mechanics, laborers, materialmen and other like Persons arising by
operation of law in the ordinary course of business for sums which are not yet
due and payable, (ii) deposits or pledges to secure the payment of workmen's
compensation, unemployment insurance or other social security benefits or
obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business (but nothing in this clause (ii) shall permit the
creation of Liens on Receivables, Investment Property, Inventory or Other
Property), (iii) zoning restrictions, easements, encroachments, licenses,
restrictions or covenants on the use of the Property which do not materially
impair either the use of the Property in the operation of the business of
Borrower or the value of the Property, (iv) rights of general application
reserved to or vested in any municipality or other governmental, statutory or
public authority to control or regulate property, or to use property in a manner
which does not materially impair the use of the property for the purposes for
which it is held by Borrower, (v) state and municipal Liens for personal
property taxes which are not yet due and payable, (vi) Purchase Money Liens,
(vii) Liens on personal property leased by Borrower or any of its Subsidiaries
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such property; (viii) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payments of
customs duties in connection with the importation of goods; and (ix) Liens
(existing and disclosed to TBCC on or prior to the date hereof) in favor of
depository institutions and securities intermediaries constituting rights of
set-off of a customary nature or bankers' or brokers' Liens with respect to
amounts or investment property on deposit, whether arising by operation of law
or by contract, in connection with arrangements entered into with banks and
securities intermediaries in the ordinary course of business.
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TBCC Loan and Security Agreement
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(kk) "Person" means any individual, sole proprietorship,
partnership, joint venture, limited liability company, trust, unincorporated
organization, joint stock company, association, corporation, institution,
entity, party or government (including any division, agency or department
thereof) or any other legal entity, whether acting in an individual, fiduciary
or other capacity, and, as applicable, the successors, heirs and assigns of
each.
(ll) "Plan" means any employee benefit plan, program or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
(mm) "Purchase Money Lien" means a Lien on any item of Equipment
created substantially simultaneously with the acquisition of such Equipment for
the purpose of financing such acquisition, provided that such Lien shall attach
only to the Equipment acquired.
(nn) "Qualification" or "Qualified" means, with respect to any
report of Auditors covering Financial Statements, a material qualification to
such report (i) resulting from a limitation on the scope of examination of such
Financial Statements or the underlying data, (ii) as to the capability of
Borrower to continue operations as a going concern or (iii) which could be
eliminated by changes in Financial Statements or notes thereto covered by such
report (such as by the creation of or increase in a reserve or a decrease in the
carrying value of assets) and which if so eliminated by the making of any such
change and after giving effect thereto would result in a Default or an Event of
Default.
(oo) "Receivables" means all present and future accounts and
accounts receivable, together with all security therefor and guaranties thereof
and all rights and remedies relating thereto, including any right of stoppage in
transit.
(pp) "Requirement of Law" means (a) the Governing Documents, (b) any
law, treaty, rule, regulation, order or determination of an arbitrator, court or
other Governmental Authority or (c) any franchise, license, lease, permit,
certificate, authorization, qualification, easement, right of way, right or
approval binding on Borrower or any of its property.
(qq) "Schedule" means the Schedule to this Agreement being signed
concurrently by Borrower and TBCC, as amended from time to time.
(rr) "Solvent" means when used with respect to any Person that as of
the date as to which such Person's solvency is to be measured: (a) the fair
salable value of its assets is in excess of the total amount of its liabilities
(including contingent liabilities as valued in accordance with applicable law)
as they become absolute and matured; (b) it has sufficient capital to conduct
its business; and (c) it is able to meet its debts as they mature.
(ss) "Subsidiary" means, as to any Person, a corporation or other
entity in which that Person directly or indirectly owns or controls shares of
stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or appoint other managers of such corporation
or other entity.
9.2 Accounting Terms and Determinations. Unless otherwise defined or
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the Financial Statements delivered to TBCC on or before the date of this
Agreement. All accounting determinations for purposes of determining compliance
with this Agreement shall be made in accordance with GAAP as in effect on the
date of this Agreement and applied on a basis consistent in all material
respects with the audited Financial Statements delivered to TBCC on or before
the date of this Agreement. The Financial Statements required to be delivered
hereunder, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
Financial Statements delivered to TBCC on or before the date of this Agreement,
the Compliance Certificates required to be delivered pursuant to this Agreement
shall include calculations setting forth the adjustments necessary to
demonstrate how Borrower is in compliance with the Financial Covenants (if any)
based upon GAAP as in effect on the date of this Agreement.
9.3 Other Terms; Headings; Construction. Unless otherwise defined herein,
terms used herein that are defined in the Uniform Commercial Code, from time to
time in effect in the State of Illinois, shall have the meanings set forth
therein. Each of the words "hereof," "herein," and "hereunder" refer to this
Agreement as a whole. The term "including", whenever used in this Agreement,
shall mean "including (but not limited to)". An Event of Default shall
"continue" or be "continuing" unless and until such Event of Default has been
waived or cured within the grace period specified therefor under Section 7.1.
References to Articles, Sections, Annexes, Schedules, and Exhibits are internal
references to this Agreement, and to its attachments, unless otherwise
specified. The headings and any Table of Contents are for convenience only and
shall not affect the meaning or construction of any provision of this Agreement.
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against TBCC or Borrower under any rule of construction or
otherwise.
10. GENERAL PROVISIONS.
10.1 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.
10.2 SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND
TBCC, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED
ONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO
WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT TBCC SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
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BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD
FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
BY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF
THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.
10.3 SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT
CORPORATION SYSTEM, 1209 ORANGE STREET, WILMINGTON, DELAWARE 19801, AS THE
DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE
BORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH
PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL
TO THE BORROWER, BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF TBCC TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
10.4 LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE BORROWER
(WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE
BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY
A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THE
LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF TBCC. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST
TBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
10.5 Delays; Partial Exercise of Remedies. No delay or omission of TBCC to
exercise any right or remedy hereunder shall impair any such right or operate as
a waiver thereof. No single or partial exercise by TBCC of any right or remedy
shall preclude any other or further exercise thereof, or preclude any other
right or remedy.
10.6 Notices. Except as otherwise provided herein, all notices and
correspondence hereunder shall be in writing and sent by certified or registered
mail, return receipt requested, by overnight delivery service, with all charges
prepaid, or by telecopier followed by a hard copy sent by regular mail, to the
parties at their addresses set forth in the heading to this Agreement. All such
notices and correspondence shall be deemed given (i) if sent by certified or
registered mail, three Business Days after being postmarked, (ii) if sent by
overnight delivery service, when received at the above stated addresses or when
delivery is refused and (iii) if sent by telecopier transmission, when receipt
of such transmission is acknowledged. Borrower's and TBCC's telecopier numbers
for purpose of notice hereunder are set forth in the Schedule; each party's
number may be changed by written notice to the other party.
10.7 Indemnification; Reimbursement of Expenses of Collection. Borrower
hereby indemnifies and agrees, whether or not any of the transactions
contemplated by this Agreement or the other Loan Documents are consummated, to
defend and hold harmless (on an after-tax basis) TBCC, its successors and
assigns and their respective directors, officers, agents, employees, advisors,
shareholders, attorneys and Affiliates (each, an "Indemnified Party") from and
against any and all losses, claims, damages, liabilities, deficiencies,
obligations, fines, penalties, actions (whether threatened or existing),
judgments, suits (whether threatened or existing) or expenses (including,
without limitation, reasonable fees and disbursements of counsel, experts,
consultants and other professionals) incurred by any of them (collectively,
"Claims") (except, in the case of each Indemnified Party, to the extent that any
Claim is determined in a final and non-appealable judgment by a court of
competent jurisdiction to have directly resulted from such Indemnified Party's
gross negligence or willful misconduct) arising out of or by reason of (i) any
litigation, investigation, claim or proceeding which arises out of or is related
to (A) Borrower, or this Agreement, any other Loan Document or the transactions
contemplated hereby or thereby, (B) any actual or proposed use by Borrower of
the proceeds of the Loans, or (C) TBCC's entering into this Agreement or any
other Loan Document or any other agreements and documents relating hereto,
including, without limitation, amounts paid in settlement, court costs and the
reasonable fees and disbursements of counsel incurred in connection with any
such litigation, investigation, claim or proceeding, (ii) any remedial or other
action taken by Borrower in connection with compliance by Borrower, or any of
its properties, with any federal, state or local environmental laws, rules or
regulations, and (iii) any pending, threatened or actual action, claim,
proceeding or suit by any shareholder or director of Borrower or any actual or
purported violation of Borrower's charter, by-laws or any other agreement or
instrument to which Borrower is a party or by which any of its properties is
bound. In addition and without limiting the generality of the foregoing,
Borrower shall, upon demand, pay to TBCC all reasonable costs and expenses
incurred by TBCC (including the reasonable fees and disbursements of counsel and
other professionals) in connection with the preparation, execution, delivery,
administration, modification and amendment of the Loan Documents, and pay to
TBCC all reasonable costs and expenses (including the reasonable fees and
disbursements of counsel and other professionals) paid or incurred by TBCC in
order to enforce or defend any of its rights under or in respect of this
Agreement, any other Loan Document or any other document or instrument now or
hereafter executed and delivered in connection herewith, collect the
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TBCC Loan and Security Agreement
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Obligations or otherwise administer this Agreement, foreclose or otherwise
realize upon the Collateral or any part thereof, prosecute actions against, or
defend actions by, account debtors; commence, intervene in, or defend any action
or proceeding; initiate any complaint to be relieved of the automatic stay in
bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party
claim, or other claim; examine, audit, copy, and inspect any of the Collateral
or any of Borrower's books and records; protect, obtain possession of, lease,
dispose of, or otherwise enforce TBCC's security interest in, the Collateral;
and otherwise represent TBCC in any litigation relating to Borrower. Without
limiting the generality of the foregoing, Borrower shall pay TBCC a fee with
respect to each wire transfer in the amount of $15 plus all bank charges and a
fee of $15 for all returned checks plus all bank charges. If either TBCC or
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees, including (but not limited to) reasonable
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. If and to the extent that the
Obligations of Borrower hereunder are unenforceable for any reason, Borrower
hereby agrees to make the maximum contribution to the payment and satisfaction
of the Obligations which is permissible under applicable law. Borrower's
obligations under Section 2.4 and this Section shall survive any termination of
this Agreement and the other Loan Documents and the payment in full of the
Obligations, and are in addition to, and not in substitution of, any of the
other Obligations.
10.8 Amendments and Waivers. Any provision of this Agreement or any other
Loan Document may be amended or waived if, but only if, such amendment or waiver
is in writing and signed by Borrower and TBCC and then any such amendment or
waiver shall be effective only to the extent set forth therein. The failure of
TBCC at any time or times to require Borrower to strictly comply with any of the
provisions of this Agreement or any other present or future agreement between
Borrower and TBCC shall not waive or diminish any right of TBCC later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other agreement now
or in the future executed by Borrower and delivered to TBCC shall be deemed to
have been waived by any act or knowledge of TBCC or its agents or employees, but
only by a specific written waiver signed by an authorized officer of TBCC and
delivered to Borrower.
10.9 Counterparts; Telecopied Signatures. This Agreement and any waiver or
amendment hereto may be executed in counterparts and by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
10.10 Severability. In case any provision in or obligation under this
Agreement or any other Loan Document shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
10.11 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
10.12 Maximum Rate. Notwithstanding anything to the contrary contained
elsewhere in this Agreement or in any other Loan Document, the parties hereto
hereby agree that all agreements between them under this Agreement and the other
Loan Documents, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever shall
the amount paid, or agreed to be paid, to TBCC for the use, forbearance, or
detention of the money loaned to Borrower and evidenced hereby or thereby or for
the performance or payment of any covenant or obligation contained herein or
therein, exceed the maximum non-usurious interest rate, if any, that at any time
or from time to time may be contracted for, taken, reserved, charged or received
on the Obligations, under the laws of the State of Illinois (or the laws of any
other jurisdiction whose laws may be mandatorily applicable notwithstanding
other provisions of this Agreement and the other Loan Documents), or under
applicable federal laws which may presently or hereafter be in effect and which
allow a higher maximum non-usurious interest rate than under the laws of the
State of Illinois (or such other jurisdiction), in any case after taking into
account, to the extent permitted by applicable law, any and all relevant
payments or charges under this Agreement and the other Loan Documents executed
in connection herewith, and any available exemptions, exceptions and exclusions
(the "Highest Lawful Rate"). If due to any circumstance whatsoever, fulfillment
of any provisions of this Agreement or any of the other Loan Documents at the
time performance of such provision shall be due shall exceed the Highest Lawful
Rate, then, automatically, the obligation to be fulfilled shall be modified or
reduced to the extent necessary to limit such interest to the Highest Lawful
Rate, and if from any such circumstance TBCC should ever receive anything of
value deemed interest by applicable law which would exceed the Highest Lawful
Rate, such excessive interest shall be applied to the reduction of the principal
amount then outstanding hereunder or on account of any other then outstanding
Obligations and not to the payment of interest, or if such excessive interest
exceeds the principal unpaid balance then outstanding hereunder and such other
then outstanding Obligations, such excess shall be refunded to Borrower. All
sums paid or agreed to be paid to TBCC for the use, forbearance, or detention of
the Obligations and other indebtedness of Borrower to TBCC shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness, until payment in full thereof, so
that the actual rate of interest on account of all such indebtedness does not
exceed the Highest Lawful Rate throughout the entire term of such indebtedness.
The terms
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and provisions of this Section shall control every other provision of this
Agreement, the other Loan Documents and all other agreements between the parties
hereto.
10.13 Entire Agreement; Successors and Assigns. This Agreement and the
other Loan Documents constitute the entire agreement between the parties,
supersede any prior written and verbal agreements between them, and shall bind
and benefit the parties and their respective successors and permitted assigns.
There are no oral understandings, oral representations or oral agreements
between the parties which are not set forth in this Agreement or in other
written agreements signed by the parties in connection herewith.
10.14 MUTUAL WAIVER OF JURY TRIAl. TBCC and Borrower each hereby waive the
right to trial by jury in any action or proceeding based upon, arising out of,
or in any way relating to: (i) this Agreement; or (ii) any other present or
future instrument or agreement between TBCC and Borrower; or (iii) any conduct,
acts or omissions of TBCC or Borrower or any of their directors, officers,
employees, agents, attorneys or any other persons affiliated with TBCC or
Borrower; in each of the foregoing cases, whether sounding in contract or tort
or otherwise.
{REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.)
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TBCC Loan and Security Agreement
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Borrower:
BEI MEDICAL SYSTEMS COMPANY, INC.
By: ________________________________
Title: ____________________________
TBCC:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: ________________________________
Title: ____________________________
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TBCC
Schedule to
Loan and Security Agreement
Borrower: BEI Medical Systems Company, Inc.,
a Delaware Corporation
Address: 100 Hollister Road
Teterboro, New Jersey 07608
Date: May 6, 1999
This Schedule is an integral part of the Loan and Security Agreement between
TRANSAMERICA BUSINESS CREDIT CORPORATION ("TBCC") and the above borrower
("Borrower") of even date.
1. CREDIT LIMIT (Section 1.1):
1. REVOLVING LOANS.
An amount not to exceed the lesser of (a) or (b) below:
(a) $1,000,000 at any one time outstanding; or
(b) an amount equal to 85% of the amount of Borrower's Eligible Receivables (as
defined in Section 9.1(n) above).
2. TERM LOANS.
Subject to the terms and conditions of this Agreement and the Term Notes
referenced below, and in addition to the revolving credit facility that is
subject to the Credit Limit set forth above, TBCC agrees to make senior term
loans (the "Senior Term Loans") to Borrower in an aggregate principal amount not
to exceed $1,500,000 (the "Senior Term Loan Credit Limit") in two disbursements.
Each Senior Term Loan shall be evidenced by a Term Note in form and substance
satisfactory to TBCC (each a "Term Note") made by Borrower to the order of TBCC.
The Senior Term Loans shall be made (i) in an initial disbursement in the amount
of $1,000,000; and (ii) thereafter in an additional disbursement in the amount
of $500,000 upon the closing of a capital-raising transaction from which
Borrower receives net proceeds of not less than $2,000,000. Each Senior Term
Loan shall be repayable on the terms set forth in the Term Note evidencing such
Senior Term Loan.
2. INTEREST (Section 2.1):
1. The following shall apply to the Loans constituting the revolving credit
facility:
The interest rate in effect throughout each calendar month during the term of
this Agreement shall be the highest "Base Rate" in effect during such month,
plus 3.0% per annum, provided that the interest rate in effect in each month
shall 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. Interest shall
be calculated on the basis of a 360-day year for the actual number of days
elapsed. "Base Rate" shall mean the 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
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TBCC Schedule to Loan and Security Agreement
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such bank).
2. Interest on each Senior Term Loan shall accrue at the interest rate set forth
in the Term Note corresponding thereto, which interest rate shall not, in any
event, be less than 13.5% per annum. With respect to any Senior Term Loan made
hereunder, TBCC shall have the right to increase the foregoing interest rate in
proportion to the change in the weekly average of the interest rates of U.S.
Treasury Securities (as published in The Wall Street Journal) from the week
ending November 13, 1998 (4.57%) to the week preceding commencement of such
Senior Term Loan.
3. FEES (Section 2.2):
Termination Fee: If the Revolving Loan Period is terminated by Borrower under
Section 4(b) below, or if this Agreement is terminated by Borrower or by TBCC
under Section 4(d) below, then Borrower shall pay to TBCC a termination fee (the
"Termination Fee") in an amount equal to $5,000 multiplied by each month (or
portion thereof) from the effective date of termination to the next Revolving
Loan Maturity Date, which Termination Fee shall be payable on the date of
termination.
4. MATURITY DATE (Section 1.6):
(a) Term of Revolving Loan Facility. The period during which Revolving Loans
will be made (the "Revolving Loan Period") shall be from the date of this
Agreement to May 31, 2000 (the "Revolving Loan Maturity Date"), unless sooner
terminated in accordance with the terms of this Agreement, provided that the
Revolving Loan Maturity Date shall automatically be extended for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than sixty days prior to the next Revolving Loan Maturity Date,
that such party elects to terminate the Revolving Loan Period effective on the
next Revolving Loan Maturity Date. On the Revolving Loan Maturity Date or on any
earlier termination of this Agreement, no further Revolving Loans will be made,
and Borrower shall pay in full all outstanding Revolving Loans.
(b) Early Termination of Revolving Loan Facility at Borrower's Option. The
Revolving Loan Period may be terminated prior to the Revolving Loan Maturity
Date by Borrower, effective three Business Days after written notice of
termination is given by Borrower to TBCC.
(c) Term of Agreement. The term of this Agreement shall be from the date of this
Agreement to the later of the following (the "Maturity Date"): (i) the
termination of the Revolving Loan Period, or (ii) the date the last installment
of principal on the Senior Term Loan is due or, if more than one Senior Term
Loan is outstanding, the latest of the dates on which the last installment of
principal on each such Senior Term Loan is due. On the Maturity Date or on any
earlier termination of this Agreement Borrower shall pay in full all
Obligations, and notwithstanding any termination of this Agreement all of TBCC's
security interests and all of TBCC's other rights and remedies shall continue in
full force and effect until payment and performance in full of all Obligations
(other than the Surviving Indemnities, as defined below).
(d) Early Termination of Agreement. This Agreement may be terminated prior to
the Maturity Date as follows: (i) by Borrower, effective three Business Days
after written notice of termination is give to TBCC; or (ii) by TBCC at any time
after the occurrence of an Event of Default, without notice, effective
immediately.
(e) Payment of Obligations. Notwithstanding anything herein to the contrary,
Borrower shall have no right to terminate this Agreement at any
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<PAGE>
TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
time that any principal of, or interest on any of the Loans or any other
monetary Obligations are outstanding, except upon prepayment of all Obligations
and the satisfaction of all other conditions set forth in the Loan Documents.
(f) Surviving Indemnities. As used in this Agreement, the term "Surviving
Indemnities" means any Obligations in the nature of an indemnity or hold
harmless by Borrower in favor of TBCC arising under or pursuant to this
Agreement or any of the other Loan Documents, which by its terms survives the
latest of (the "Cut-off Date"): (i) the termination of this Agreement, and (ii)
the payment of all principal, interest, prepayment penalties, fees and all other
Obligations (not in the nature of an indemnity or hold harmless) due at the time
of such payment under this Agreement and the Loan Documents; provided that there
shall be excluded from such indemnity or hold harmless Obligations all amounts
that are due and payable thereunder upon the Cut-off Date.
5. REPORTING (Section 5.10):
Borrower shall provide TBCC with the following reports:
(a) Monthly Financial Statements. Monthly unaudited financial statements, as
soon as available, and in any event within 30 days after the end of each
month.
(b) Monthly Receivable Agings. Monthly Receivable agings, aged by invoice
date, within 10 days after the end of each month.
(c) Monthly Payable Agings. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers within 10 days after the end
of each month.
(d) Quarterly Financial Statements. Quarterly unaudited financial statements,
as soon as available, and in any event within 45 days after the end of
each fiscal quarter of Borrower.
(e) Annual Financial Statements. As soon as available, but not later than 90
days after the end of the Borrower's fiscal year, (A) Borrower's annual
audited Financial Statements; (B) a comparison in reasonable detail to the
prior year's audited Financial Statements; (C) the Auditors' opinion
without Qualification, a "Management Letter" and a statement indicating
that the Auditors have not obtained knowledge of the existence of any
Default or Event of Default during their audit; (D) a narrative discussion
of Borrower's financial condition and results of operations and the
liquidity and capital resources for such fiscal year.
6. BORROWER INFORMATION:
(a) Prior Names of Borrower (Section 4.11): See Attachment hereto.
(b) Prior Trade Names of Borrower (Section 4.11): See Attachment hereto.
(c) Existing Trade Names of Borrower (Section 4.11): See Attachment hereto.
(d) Other Places of Business and Locations of Collateral (Section 4.2): See
Attachment hereto.
(e) Litigation, etc. (Section 4.15): See Attachment hereto.
7. FACSIMILE NUMBERS:
Borrower: 201-727-4950
TBCC: 818-995-3214
8. CLOSING DEADLINE (Section 1.8):
May 10, 1999.
-3-
<PAGE>
TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
9. ADDITIONAL CLOSING CONDITIONS (Section 1.8):
The following additional agreements, in form and substance satisfactory to TBCC
and its counsel, shall be exeuted and delivered by Borrower as conditions
precedent to closing:
(a) Streamlined Facility Agreement;
(b) Patent and Trademark Security Agreement;
(c) Subsidiary Patent and Trademark Security Agreements for BEI Medical Systems
International, Inc., Meditron Devices, Inc. and Zinnanti Surgical Instruments,
Inc.;
(d) Security Agreements from BEI Medical Systems International, Inc., Meditron
Devices, Inc., Xylog Corporation and Zinnanti Surgical Instruments, Inc;
(e) Continuing Guaranties from BEI Medical Systems International, Inc., Meditron
Devices, Inc., Xylog Corporation and Zinnanti Surgical Instruments, Inc; and
(f) Warrant (as described below).
10. ADDITIONAL PROVISIONS:
1. Warrant. Concurrently herewith, the Borrower shall provide TBCC with
seven-year warrants to purchase 92,308 shares of common stock of the Borrower,
on the terms to be set forth in a Stock Subscription Warrant (the "Warrant"), in
form and substance satisfactory to TBCC, at an exercise price equal to $1.625
per share. Said warrants shall be deemed fully earned on the date of issuance
thereof, shall be in addition to all interest and other fees, and shall be
non-refundable.
2. Landlord Agreements. Not later than June 11, 1999, Borrower shall furnish to
TBCC, in form and substance satisfactory to TBCC and its counsel, fully executed
Landlord Agreements with respect to (i) Borrower's leased facilities at 100
Hollister Road, Teterboro, New Jersey and (ii) leased facilities occupied by
Borrower's Subsidiary, Zinnanti Surgical Instruments, Inc., at 9430 Topanga
Canyon Road, Chatsworth, California.
3. Patent and Trademark Ownership and Registration. Borrower covenants and
agrees to provide TBCC with prompt written notice of any filings by Borrower
with the U.S. Patent and Trademark Office (the "PTO") concerning the legal
ownership or assignment of legal ownership of any patent or trademark now owned
or hereafter acquired or created by Borrower or any Affiliate of Borrower. Such
written notice shall be provided to TBCC within ten Business Days of the date of
any such filing with the PTO. Borrower further covenants and agrees to promptly
provide TBCC with copies of such filings and other related documents, and to
promptly execute, or to cause its Affiliates to promptly execute, such
agreements or other documents as TBCC may reasonably request in order to enable
TBCC to perfect (and/or record with the PTO) its security interest in such
patents and/or trademarks.
4. Securities Accounts. Borrower covenants and agrees that it will not, and will
ensure that each Subsidiary will not, with respect to any securities accounts or
other accounts (whether now existing or hereafter established) containing
Investment Property of Borrower or any Subsidiary, enter into any control
agreement, or take any other action, whereby Borrower or any Subsidiary cedes,
shares or otherwise relinquishes (in whole or in part, on a contingent basis or
otherwise) control over any such account with, or to, any Person other than
TBCC. In addition, Borrower covenants and agrees to use its best efforts to
ensure that TBCC, within 30 days of the date hereof, will receive a control
agreement, in form and substance satisfactory to TBCC and its counsel, in
respect of any such account of Borrower or any Subsidiary, including, but not
limited to, any such account held at Fidelity Investments Institutional
Operations Company, Inc. ("Fidelity") or any Affiliate of Fidelity.
-4-
<PAGE>
TBCC Schedule to Loan and Security Agreement
- --------------------------------------------------------------------------------
Borrower: TBCC:
BEI Medical Systems Company, Inc. TRANSAMERICA BUSINESS CREDIT CORPORATION
By:________________________________ By: ____________________________________
Title: ____________________________ Title: _________________________________
-5-
<PAGE>
- --------------------------------------------------------------------------------
TBCC
STREAMLINED FACILITY AGREEMENT
May 6, 1999
Ladies and Gentlemen:
This Streamlined Facility Agreement (this "Agreement") is entered
into between Transamerica Business Credit Corporation ("TBCC") , and BEI Medical
Systems Company, Inc. ("Borrower"), in connection with the Loan and Security
Agreement between TBCC and Borrower dated May 6, 1999 (the "Loan Agreement").
(This Agreement, the Loan Agreement, and all other written documents and
agreements between TBCC and Borrower are referred to herein collectively as the
"Loan Documents". Capitalized terms used but not defined in this Agreement,
shall have the meanings set forth in the Loan Agreement.)
This will confirm our agreement that the following provisions (the
"Streamlined Provisions") shall apply, effective on the date hereof, until
terminated as provided below:
1. Borrower will provide TBCC with a monthly Borrowing Base
Certificate, in such form as TBCC shall from time to time specify, within 10
days after the end of each month, and TBCC shall not require more frequent
schedules of Receivables or other Collateral reporting with respect to the
Receivables, except for the information required in connection with an advance
request. In the event, as of the end of any month, the total of all Loans and
all other Obligations exceeds the Credit Limit, Borrower shall immediately pay
the amount of the excess to TBCC.
2. Delivery of the proceeds of Receivables and other Collateral
within one Business Day after receipt, as called for by Section 1.4 of the Loan
Agreement, will not be required.
3. TBCC will also not require any Blocked Account Agreement, as
called for by Section 1.8 of the Loan Agreement. In addition, Borrower will not
be required to provide TBCC with copies of invoices to customers or shipping and
delivery receipts, as called for by Section 3.3(a) of the Loan Agreement, or to
report customer credits, returns and recoveries of merchandise as called for by
Section 3.3(b) of the Loan Agreement.
The Streamlined Provisions shall immediately terminate if any
Default or Event of Default occurs and is continuing.
Upon any termination of the Streamlined Provisions, Borrower shall,
then and thereafter, provide TBCC with such other or additional reporting of
Receivables as TBCC shall request under Section 3.3(a) of the Loan Agreement,
comply in all respects with Section 3.3(b) of the Loan Agreement, and deliver
all proceeds of Receivables and other Collateral to TBCC, within one Business
Day after receipt, as called for by Section 1.4 of the Loan Agreement.
Additionally, Borrower and its
-1-
<PAGE>
TBCC Streamlined Facility Agreement
- --------------------------------------------------------------------------------
bank shall execute and deliver a Blocked Account Agreement, in form and
substance satisfactory to TBCC.
Please confirm your agreement to the foregoing by signing the
enclosed copy of this Agreement and returning it to us.
Sincerely yours,
Transamerica Business Credit Corporation
By: ______________________________________
Title: ___________________________________
Acknowledged and Agreed:
BEI Medical Systems Company, Inc.
By: _____________________________
Title: __________________________
-2-
AGREEMENT OF LEASE
-between-
HOLLISTER '97, L.L.C.,
a New Jersey limited liability company
Landlord,
-and-
BEI MEDICAL SYSTEMS COMPANY, INC.,
a Delaware corporation,
Tenant.
Premises: Part of 100 Hollister Road
Teterboro, New Jersey
<PAGE>
TABLE OF CONTENTS
1. LEASED PREMISES 1
2. TERM 1
3. RENT 2
4. TAXES 3
5. UTILITIES 4
6. INSURANCE 4
7. DESTRUCTION 4
8. INSURANCE 5
9. REPAIRS 6
10. COMMON EXPENSES 6
11. ESTIMATED EXPENSE DISBURSEMENTS 8
12. EMINENT DOMAIN 9
13. LANDLORD'S CONSTRUCTION AND POSSESSION 9
14. QUIET ENJOYMENT 11
15. TENANT'S DEFAULT 11
16. ASSIGNMENT OR SUBLET 12
17. BROKERAGE COMMISSIONS 13
18. ALTERATIONS AND IMPROVEMENTS 13
19. TENANT'S ASSUMPTION OF RISK 14
20. LANDLORD NOT LIABLE 14
21. INDEMNIFICATION 15
22. MORTGAGE SUBORDINATION AND ATTORNMENT 15
23. SERVICES INTERRUPTED 16
24. LANDLORD'S ACCESS-REPAIRS 16
25. LANDLORD'S ACCESS-SHOW PREMISES 16
26. SIGNS 16
27. ABANDONMENT OF PROPERTY 17
28. STRICT PERFORMANCE 17
29. LAWS AND REGULATIONS 17
30. LANDLORD CURE 17
31. LIMITING LANDLORD'S LIABILITY 17
i
<PAGE>
32. ESTOPPEL CERTIFICATE 18
33. WAIVER OF SUBROGATION 18
34. INDUSTRIAL SITE RECOVERY ACT AND ENVIRONMENTAL LAWS. 18
35. HOLDOVER 22
36. NON-INTERFERENCE 22
37. SECURITY DEPOSIT 22
38. TENANT'S REIMBURSEMENT 23
39. NOTICES 23
40. NO SETOFF 23
41. FINANCIAL STATEMENTS 23
42. MORTGAGEE PROTECTION CLAUSE 23
43. MODIFICATIONS REQUESTED BY MORTGAGEE 23
44. LANDLORD'S CONSENT 23
45. FORCE MAJEURE 24
46. MODIFICATION AND PARTIAL INVALIDITY 24
47. BINDING EFFECT 24
ii
<PAGE>
THIS LEASE AGREEMENT, made and entered into this day of , 1998, by and
between HOLLISTER '97, L.L.C., a New Jersey limited liability company, with
offices located at Suite 100, 235 Moore Street, Hackensack, New Jersey 07601, as
Landlord, and BEI MEDICAL SYSTEMS COMPANY, INC., a Delaware corporation, with
its about to be office at 100 Hollister Road, Teterboro, New Jersey 07608, as
Tenant.
W I T N E S S E T H:
FOR VALUE RECEIVED, it is hereby agreed that:
1. LEASED PREMISES. The Landlord by these presents does hereby lease and
rent to the Tenant, and said Tenant hereby agrees to lease and take upon the
terms and conditions set forth herein 24,412 square feet (the "leased premises")
in a building located at 100 Hollister Road, Teterboro, Bergen County, New
Jersey (said leased premises being shown in red outlining on the plan attached
hereto and marked Exhibit "A"). Tenant's right to use parking facilities shall
be restricted to ninety (90) spaces for use by passenger automobiles by its
employees and visitors and Tenant's service and delivery trucks, and parking
shall be in the areas designated on Exhibit "A" as permitted parking areas.
During the term of this lease after fifteen (15) days prior written notice to
Tenant, Landlord shall have the right to change the area or areas designated for
permitted parking by the Tenant, but Landlord shall not exercise this right
unless reasonably necessary to do so and in no event shall Landlord provide less
than ninety (90) spaces for Tenant's use which shall be in reasonable proximity
to the leased premises. Tenant shall not park abandoned vehicles in the parking
lot.
The leased premises is to be used and occupied by Tenant and such other
entities which are controlled by, controlling and/or common control of Tenant
for light assembly and manufacturing, distribution, warehouse and related office
uses, subject to such uses being permitted by federal, state and local laws,
ordinances, rules and regulations; however, (i) hazardous wastes, as defined in
ISRA from time to time (ISRA is defined in Section 34 hereof), shall not be
generated in the leased premises, except Tenant may be a small quantity
generator as defined in the New Jersey environmental laws, and (ii) Tenant will
not have a Standard Industrial Classification Code as a chemical manufacturer
nor will hazardous substances, as defined in ISRA from time to time, be stored
or manufactured in the leased premises as a major product or as a major
component of a product manufactured in the leased premises.
2. TERM. a. The term of this lease shall be for a period of approximately
six (6) years and three months, commencing on the date (the "Commencement Date")
on which Landlord properly notifies Tenant that it has substantially completed
the work to be performed pursuant to Section 13 hereof
iii
<PAGE>
and a temporary certificate of occupancy or certificate of occupancy, if
required by the Borough of Teterboro, has been issued for the leased premises by
the Borough of Teterboro, but in no event earlier than March 1, 1998 nor later
than the date provided in Section 13 hereof, and terminating on the last day of
the month which occurs six (6) years and three (3) months later plus the
remainder of the calendar month in which such date occurs. "Substantial
completion" and "substantially completed" shall be deemed to have occurred when
the only items remaining to be performed are minor and insubstantial details of
construction, mechanical adjustment or decoration, the non-completion of which
does not materially interfere with Tenant's use of the leased premises.
b. Upon expiration of the term of the lease as set forth in
Article 1, Tenant shall have the right and option to extend the term of the
lease for one period of five (5) years. The right and option to extend the term
of the lease shall be subject to and contingent upon each and every of the
conditions set forth hereinafter. Tenant's right and option to extend the term
of the lease shall be exercisable by Tenant giving written notice of the
exercise of the right and option to Landlord at least nine (9) months prior to
the expiration of the original term. In the event Tenant fails to give written
notice of its intention to exercise its right and option as provided above
within the stated time periods, Tenant's right and option to extend the term of
the lease shall (upon the date by which written notice should have been received
by Landlord) be deemed to have been waived by Tenant and shall be of no further
force or effect. In the event Tenant exercises its right and option in
accordance with the provisions hereof the term of the lease shall be extended
accordingly, and all references contained in the lease to the term shall be
construed to refer to the original term of the lease, as extended, whether or
not specific reference is made thereto in the lease. Unless otherwise expressly
provided to the contrary, the extended term of the lease shall be upon the same
terms, conditions and covenants as set forth in the lease except that there
shall be no further right or option to extend the term of the lease. It is
important to Landlord that it know whether or not the options are exercised by
Tenant so that it may seek a replacement tenant to avoid loss of rent, and,
therefore, the time within which the option and acceptance of the rent must be
exercised is hereby made of the essence. The right and option to extend the term
of the lease shall be subject to and contingent upon each and every one of the
following conditions:
(i) The lease is in full force and effect;
(ii) There shall not then exist and be continuing an event of
default by Tenant under any of the terms, provisions, covenants and
conditions of the lease as provided in Section 15 of this lease; and
(iii) In lieu of the sums set forth in Section 3a. of this lease,
the monthly installments of rent to be paid by Tenant monthly during the
option period shall be $28,073.80.
3. RENT. a. Beginning with the Commencement Date (the "Rent Commencement
Date"), Tenant agrees to pay Landlord a fixed minimum annual rental, payable in
equal monthly installments in the following amounts, in advance on the first day
of every month:
Monthly
Period Installments
------ ------------
First two (2) years $20,711.18
Next one (1) year 22,745.52
Next one (1) year 22,377.67
Remainder of the term 24,412.00
2
<PAGE>
Rent shall be prorated for partial months. Rent shall be abated for the first
ninety (90) days after the Commencement Date subject, however, to the provisions
of Paragraph 13. Simultaneously with the execution of this lease, Tenant has
paid to Landlord rent in the amount of $20,711.18, which will be applied to the
first rent accruing after the abatement period.
b. Said rental payments together with all other payments
required hereunder shall be payable to Landlord at:
c\o Marcus Associates Property Management, Inc.
235 Moore Street
Hackensack, New Jersey 07601
until further notice from Landlord.
c. In the event that installments of rent or any other
payments of money which may be due under this Lease are not received by Landlord
within eight (8) days after the applicable due date, there shall be added to
such payment, and simultaneously due and owing, a late charge equal to five (5%)
percent of the amount of each payment so in arrears, and if not paid within
thirty days after due, interest shall accrue on the amount of such payment and
be payable at a rate equal to five (5%) percent above the prime rate then
charged by Chase Manhattan Bank, N.A. to its most favored borrower and commonly
known as the "prime rate", as it is changed from time to time, adjusted on the
same day as the effective date of changes in the prime rate. The late payment
charge and interest are not intended as a penalty but are intended to compensate
Landlord, partially, for loss of interest on funds which it is to receive and/or
may advance to cure Tenant's default and for administrative and other expenses
it may incur to give Tenant notice of its default and to pursue various
remedies. The late charges and interest shall be paid to Landlord as additional
rent.
4. TAXES.
a. In addition to the fixed minimum rental set forth in Section 3
above and as additional rent, Tenant agrees to pay, as additional rent, as
provided in Section 11 hereof, Tenant's pro rata share of the annual taxes
levied against the entire building and land of which the leased premises are a
part. Tenant's pro rata share is 13.91%. Landlord shall furnish Tenant with a
photocopy of the then current tax bill or bills. If Landlord appeals the taxes,
Tenant's pro rata share of the reasonable expenses and fees incurred shall be
added to Tenant's adjusted payment, but in no event shall Tenant's share of such
expenses exceed Tenant's share of such tax refund. If Landlord receives a rebate
or reduction of taxes as a result of an appeal, Landlord will promptly rebate to
Tenant its pro rata share thereof, after deduction for Tenant's pro rata share
of the reasonable expenses and fees incurred not previously paid by Tenant under
this Section 4a. Such payment of taxes shall be proportionately adjusted for the
fraction of the calendar year involved at the beginning and end of the term of
this lease. Landlord represents that the monthly amount currently due from
Tenant under this Section 4 based upon the estimated real estate taxes for the
first half of 1998 are $958.63.
b. The term "taxes" shall mean and include all taxes, assessments
and other governmental charges, general and special, ordinary and extraordinary,
of any kind and nature whatsoever, applicable to the property in which the
leased premises is situated, including but not limited to assessments for public
improvements or benefits which shall, during the term hereof, be laid, assessed,
levied, imposed upon, or become due and payable and a lien upon the premises or
any part thereof, but excluding franchise, estate, inheritance, succession,
capital, levy, transfer, income or excess profits tax imposed upon Landlord;
provided, if, at the time during the term of this lease, under the laws of the
State of New Jersey or any political subdivision thereof in which the premises
are or may be situated, a tax or excise on rents or other tax, however
described, is levied or assessed by the State of New Jersey or any political
subdivision against Landlord on account of the rent expressly reserved
hereunder, as a substitute in whole or in part
3
<PAGE>
for taxes assessed or imposed by the State of New Jersey or any political
subdivision on land and buildings, or on land or buildings, or if a direct tax
on rents is levied or assessed by the State of New Jersey or any political
subdivision on the rent, whether or not it is in substitution in whole or part
for real estate taxes, such tax or excise on rents or other tax shall be
included within the definition of "taxes." All such substitute taxes, other than
a tax on rents, shall be included in "taxes" but only to the extent of the
amount thereof which is lawfully assessed or imposed upon Landlord and which was
so assessed or imposed as a direct result of Landlord's ownership of this lease,
or of the rent accruing under this lease. If any assessments for public
improvements or benefits are payable by law in installments, said assessments
shall be deemed payable not for the period in which the same are assessed but in
installments over the longest period in which installments thereof may be
payable by law, and only those installments which would fall due within the term
of this lease shall be included as taxes.
5. UTILITIES. Tenant shall also be responsible for the cost of any and all
utilities, including electricity, water, and gas consumed at the leased
premises, all of which are separately metered for the leased premises, and
Tenant shall make payments directly to the utility companies in accordance with
bills rendered by those utility companies to Tenant.
6. INSURANCE. Landlord shall keep all buildings and improvements in which
the leased premises is located insured with a broad-form fire insurance policy,
extended coverage, in an amount equal to the full replacement cost thereof and
rent loss insurance for one year. Landlord shall periodically increase the
insurance coverage to reflect increases in full insurable value. The Tenant
shall provide and keep in full force and effect through the term of this lease
insurance coverage against breakage and replacement of plate and window glass in
the leased premises and loss from sprinkler leakage damage to the leased
premises. Landlord shall provide such other insurance and in such amounts as may
from time to time be reasonably required by Landlord against other insurable
hazards which at the time are commonly issued in the case of premises similarly
situated in the State of New Jersey. Landlord shall maintain general public
liability insurance against claims for injury or death or property damage
occurring upon, in or about the entire property in which the leased premises is
situated (excluding the leased premises which will be covered by Tenant's
policy) and the adjoining parking areas, but not the leased premises, with
limits of $2,000,000.00 for liability and $2,000,000.00 for property damage.
Landlord will attempt to have its liability insurance policy state that it has
primary coverage, notwithstanding any secondary liability coverage which Tenant
may maintain, and, if Landlord cannot obtain such statement, it is agreed that
Landlord's coverage will be primary and Tenant's coverage secondary. Tenant
shall reimburse Landlord as additional rent for its pro rata share, 13.91%, of
the cost of insurance for the entire building as provided in Section 11 hereof.
7. DESTRUCTION.
a. If the leased premises shall be partially damaged by fire or
other cause the damage shall be repaired by and at the expense of Landlord and
the fixed minimum rent and additional rent until such repairs shall be made
shall be apportioned according to the part of the leased premises which is
usable by Tenant. No penalty shall accrue for any delay which may arise by
reason of adjustment of insurance on the part of Landlord and for any delay on
account of "labor troubles" or any other cause, similar or dissimilar, beyond
Landlord's control. Tenant shall give immediate notice to Landlord in case of
fire in the leased premises. If the leased premises are totally or substantially
damaged or are rendered wholly or substantially untenantable by fire or other
cause, and if Landlord shall decide not to restore or not to rebuild the same,
or if the building shall be substantially damaged so that Landlord shall decide
to demolish it or to rebuild it or to remodel it (whether or not the leased
premises have been damaged), then or in any of such events Landlord may, within
ninety (90) days after such fire or other cause, give Tenant a notice in writing
of such decision, and thereupon the term of this lease shall expire by lapse of
time upon the third day after such notice is given, and
4
<PAGE>
Tenant shall vacate the leased premises and surrender the same to Landlord. If
the leased premises are not restored or rebuilt and substantially completed
within one hundredfifty days after the occurrence of the casualty, Tenant shall
have the right to terminate this lease within a period of thirty (30) days
thereafter, in the same manner as if Landlord had exercised its decision not to
rebuild or restore. If there shall not then exist and be continuing an event of
default of Tenant under Section 15 this lease, then, upon the termination of
this lease, under the conditions provided for in the sentence immediately
preceding, Tenant's liability for rent shall cease as of the day following the
casualty and any security or other money on deposit with Landlord and any
unearned rent or additional rent shall be paid to Tenant.
b. No damages, compensation or claims shall be payable by Landlord
or Tenant for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the leased premises or of the building
except for rent abatement as provided in paragraph a of this Section 7.
8. INSURANCE. The Tenant, at its sole cost, shall maintain, in addition to
the insurance provided by Landlord under Section 6 above:
a. General public liability insurance against claims for injury or
death or property damage occurring upon, in or about the leased premises in such
limits as Landlord may reasonably require for personal injury to any one person
and to any number of persons arising out of one accident and for property
damage. General public liability insurance limit of $2,000,000.00 and property
damage insurance limits of $500,000.00 are deemed reasonable as of the date
hereof.
b. At Tenant's option, the Tenant shall provide and keep in full
force and effect through the term of this lease insurance coverage against loss
to its personal property from sprinkler leakage damage, at Tenant's expense.
c. Such other insurance and in such amounts as may from time to time
be reasonably required by Landlord against other insurable hazards which at the
time are commonly issued in the case of premises similarly situated in the State
of New Jersey, unless necessitated by another tenant.
d. All insurance shall be effected under policies issued by insurers
of recognized responsibility authorized to do business in the State of New
Jersey and shall name Landlord and Tenant and any mortgagee, as their interest
may appear, as the insured. Upon the execution of this lease Tenant shall
deliver to Landlord a binder evidencing the required coverage and payment of
premiums and shall deliver an original policy or certificate of insurance where
appropriate and called for by the lease on the Commencement Date, and thereafter
not less than ten (10) days prior to the expiration dates of expiring policies,
originals of the policies or certificates evidencing the same bearing notations
evidencing the payment of premiums shall be delivered by Tenant to Landlord
except that whenever the leased premises shall be mortgaged by the Landlord,
such policies of insurance shall be lodged with the holder of the mortgage lien
and certified copies shall be delivered to the Landlord. Each such policy shall,
to the extent obtainable, contain a provision that such policy shall not be
cancelled or modified without at least ten (10) days prior written notice to the
Landlord and to any mortgagee named therein and contain a provision for waiver
of subrogation consistent with Section 33 hereof.
e. Upon the default of the Tenant in effecting any such insurance or
procuring or delivering the policies therefor as directed by the Landlord, or in
paying the premiums therefor and any and all charges incidental thereto when the
same become payable, or in procuring the delivering to the Landlord renewals of
expired policies as provided above, the Landlord may procure any such insurance
and/or pay the premiums and other charges incidental thereto, and any and all
amounts so paid by Landlord, shall be additional rent hereunder to be added to
the next installment of rent thereafter to become due and the Landlord shall
have all rights and remedies including summary
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proceedings, with respect to the same as with respect to rent.
9. REPAIRS. Throughout the term of this lease, Landlord, at Landlord's
expense, shall be responsible to make all repairs and replacements to the
structure (including foundation, utility lines and equipment and exterior walls)
and roof (including decking and coverings) and shall be responsible to maintain
the exterior of the building in which the leased premises is located, including
landscaped and parking areas and entrance way and adjacent steps, in good
condition and repair, subject to reimbursement by Tenant as provided in Section
10 hereof. During the first twelve (12) months after the Commencement Date,
Landlord, at Landlord's expense, shall be responsible to make all repairs and
replacements to the HVAC system, without reimbursement by Tenant as provided in
Section 10 hereof. Tenant agrees, throughout the term of this lease, to take
good care of the leased premises and fixtures and the appurtenances therein and
shall make, at its own expense, repairs and replacements required to keep the
leased premises, HVAC systems servicing the leased premises exclusively (subject
to Landlord's obligation during the first twelve (12) months of the term
hereof), fixtures, plumbing and electrical systems and related fixtures and
equipment in good working order and condition, and Tenant will be responsible
for all glass breakage and damage due to sprinkler leakage. Landlord at
Landlord's expense, will maintain the lawn and all landscaping in good condition
and will remove all snow and ice from all parking areas, driveways, steps,
walkways and sidewalks, including sidewalks and driveways adjacent to the leased
premises and all of the common areas. Landlord shall assign to Tenant all
warranties and guarantees relating to the leased premises. Tenant shall
maintain, at Tenant's expense, from and after the Commencement Date, an annual
maintenance contract for the HVAC system with a reputable contractor reasonably
satisfactory to Landlord, and Tenant will furnish Landlord, prior to the
commencement date of the contract or prior to its annual renewal date, a copy of
the maintenance contract and evidence of payment of the annual charge. However,
Tenant will have no obligation to repair, replace, service or maintain those
HVAC units which are intended to service the leased premises exclusively but
which units Tenant elects not to use. Tenant shall maintain, at its own expense,
all light bulbs, fluorescent tubes and lighting fixtures in the leased premises,
including all component parts such as starters, ballasts, and lenses or grills.
All repairs made by Tenant shall be at least equal in quality to the original
work. Tenant shall make such alterations, additions or improvements as may be
permitted pursuant to Section 18 of this lease and all repairs only between such
hours and by such contractors or mechanics as may be approved in writing by
Landlord, which approval shall not be unreasonably withheld or delayed.
10. COMMON EXPENSES.
a. Throughout the term of this lease, Tenant shall pay to Landlord,
in the manner herein set forth as additional rent, as provided in Section 11
hereof, a charge equal to Tenant's pro rata share, 13.91%, of the total cost
(the "maintenance") of maintaining, operating, repairing and replacing (except
to the extent of recourse pursuant to third party warranties or proceeds of, and
deductibles or loss-sharing co-payments or shortfalls under, insurance or
condemnation awards are available therefor) the entire building and land
including the Common Area (the "Property") in which the leased premises is
located, other than those costs which Tenant is obligated to pay pursuant to
Sections 8 and 9 hereof.
b. The maintenance cost of the Property shall mean all reasonable
costs and expenses of any kind and nature paid or incurred by Landlord in
operating, maintaining, repairing and replacing the Property, except (i) the
HVAC system during the first twelve (12) months of the term of this lease, (ii)
the foundation, (iii) the structure of the building, and (iv) the roof structure
and decking (excluding the roof covering). Excluding items of expense commonly
known as debt service, brokers' commissions, expenses relating to portions of
the Property not used by the tenants in general, or only by specific tenants in
particular, legal fees, capital improvements or repairs or replacements or
maintenance relating to a particular tenant's space, environmental remediation,
franchise taxes, income taxes, depreciation,
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amortization and wages and salaries for persons other than workmen servicing the
Common Area, the costs and expenses paid or incurred by Landlord shall include,
but shall not be limited to, the reasonable cost of management, operating,
cleaning, maintaining, repairing and replacing (except to the extent proceeds of
insurance or condemnation awards are available therefor) lighting, heating,
ventilating and air-conditioning equipment and systems, roof covering, all
parking areas, driveways, curbs, sidewalks, medians, planters, drainage and
sanitary systems, water supply lines, identification and directory signs,
utility supply systems, fire protection systems, the roof, walls, ceilings and
floors, outside sweeping, snow removal, line painting, landscaping, removal of
garbage and other refuse, providing on-and off-site traffic direction and
parking control, providing security (but only if tenants in the building do not
maintain individual security systems), providing public liability, property
damage, fire and extended coverage and such other insurance as Landlord deems
appropriate, total compensation and benefits (including premiums for workmen's
compensation and other insurance) paid to or on behalf of employees who are
hired to perform maintenance and/or repairs to the Property for the general
benefit of the Property and its tenants, personal property taxes, supplies, fire
protection and hydrant charges, water and sewer charges, utility charges,
licenses and permit fees, and administrative cost equal to six (6%) percent of
the total cost and expense of all of the foregoing items. It is clearly
understood that the above definition of the cost shall not be construed as a
representation or warranty that items of equipment, facilities or services
listed thereon or from time to time will be in existence or available at the
Property and said definition is intended only to define such items that may
exist or may be available from time to time.
c. The term "Common Area" shall mean all driveways, courts,
sidewalks, walkways, access roads, loading areas, garbage and refuse disposal
facilities, landscaped areas, maintenance and storage rooms, meter rooms, and,
without limitation, all other areas which are available for use in common by
occupants of the Property and their customers and invitees or which are used in
the maintenance and operation of the Property but not those dedicated
exclusively to Landlord, empty tenant spaces or any tenant or tenants. It is
clearly understood that the above definition of Common Area shall not be
construed as a representation or warrant that any such areas are or from time to
time will be available at the Property and said definition is intended only to
define such areas which may be available from time to time.
d. In the event Landlord must make repairs or replacements to the
Property which are usually considered as capital improvements, then the
reasonable cost of such capital improvements shall be amortized over their
useful life, and only the cost of that portion of the useful life which falls
within the term of this lease shall be included in maintenance. "Useful life"
shall be determined in accordance with normally recognized accounting methods
and principles, consistent with the Internal Revenue Code as it may then apply.
11. ESTIMATED EXPENSE DISBURSEMENTS.
a. Beginning on the Rent Commencement Date, Tenant covenants and
agrees to pay Landlord, as additional rent, the sum of 1/12th of estimated
annual maintenance costs, taxes and insurance (to the extent billed separately
and not included in maintenance), in advance, on the first day of each calendar
month of the lease. Landlord intends to give Tenant written notice once a year
of the amount of estimated monthly payments for maintenance, taxes and
insurance, and Tenant will pay these amounts monthly without further notice or
billing. In the event that such annual costs of the Property for any calendar
year during the term hereof shall exceed the estimated sum, Tenant shall pay its
pro rata share of any such excess within thirty (30) days from written notice by
Landlord to Tenant. In the event the total estimated payments for the year
exceed Tenant's share of the actual costs, Landlord shall credit such excess
amount against the next due payments of fixed rent and additional rent. Within
ninety (90) days after the end of each calendar year Landlord shall furnish
Tenant with a statement in reasonable detail of
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the actual costs of the Property for the preceding calendar year showing
computation of Tenant's pro rata share of the excess. Landlord has given to
Tenant schedules which show the actual real estate taxes, insurance and
maintenance expenses for the Property for 1996 and the estimated amounts for
1997. Said statement shall be rebuttable evidence of the actual amount of costs
of the Property as well as the amount, if any, due from Tenant. No further
evidence shall be required of Landlord by Tenant prerequisite to the making of
any payment to Landlord by Tenant as contemplated in this paragraph; provided,
however, the Tenant shall be provided with reasonable documentation setting
forth the costs of Landlord for same upon request thereof by Tenant. Tenant
shall have the right to inspect the applicable accounting records of Landlord at
the office of Landlord's managing agent upon reasonable prior notice. Any
payments to be made hereunder shall be made by Tenant within ten (10) days from
the date of billing from Landlord. Payments for partial year shall be prorated.
However, Landlord will have the right to bill Tenant for its pro rata share of
repairs and/or replacements when incurred if they exceed the estimated annual
budget for that category, and the budget and monthly estimated payments shall be
adjusted accordingly, if necessary. At the end of the term of this lease, and as
soon as the actual expense amounts have been determined, Tenant's pro rata share
of taxes, insurance and maintenance will be pro rated as of the termination date
and any overpayment or underpayment of Tenant's share resulting from estimated
payments will be paid to the other party promptly.
b. Tenant shall have the right, at any reasonable time upon ten (10)
days' prior written notice to Landlord, to have its representative audit and
examine Landlord's books and records at the office of Landlord's managing agent
in New Jersey relating to maintenance costs, taxes, insurance costs and water
charges within one year after Tenant has received the annual statement of such
actual charges. All these costs shall be audited and examined at the same time.
If such audit shall disclose a liability of Landlord to reimburse Tenant for
overcharges of five (5%) percent or more of the total original charge, Landlord
shall promptly pay to Tenant the reasonable cost of such audit and the amount of
the deficiency plus interest from the date such excess shall have been refunded
to Tenant at the same rate of interest as provided in Section 3 of this lease.
If the overcharge is less than five (5%) percent, Landlord will credit the
amount of the overcharge against its next due installments of fixed minimum rent
and additional rent. After one year from the date Tenant has received the annual
statement of such annual charges, Tenant shall be deemed, automatically and
conclusively, to have approved and accepted such charges unless Tenant has
conducted an audit and has notified Landlord in writing, within the one-year
period, that it contests the charges and sets forth specific items and the
amount which it contends is incorrect.
c. Tenant's pro rata share of 13.91% was calculated using the ratio
of 24,412 square feet to 175,500 square feet.
12. EMINENT DOMAIN.
a. In the event the entire building in which the leased premises are
located shall be appropriated or taken under the power of eminent domain by any
public or quasi-public authority, this agreement shall terminate and expire as
of the date of such taking and Tenant shall thereupon be released from any
further liability hereunder, and all money on deposit with Landlord and all
unearned rent and additional rent shall be promptly paid to Tenant.
b. In the event that either a portion of the leased premises or the
building of which the premises are a part is condemned or taken by eminent
domain proceedings so as to render the leased premises substantially unusable,
then in such event Tenant shall have the right to cancel and terminate this
agreement as of the date of such taking upon giving to Landlord notice in
writing of such election within 30 days after the receipt by Tenant from
Landlord of written notice of such appropriation or taking. Landlord agrees that
it will give written notice to Tenant immediately upon appropriation or taking
hereunder. Any taking or appropriation by eminent domain proceedings shall be
deemed to render the leased premises substantially
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unusable hereunder if such appropriation or taking results in Tenant's inability
to use the leased premises in the manner in which and for the purposes for which
it has been used or can be used under this agreement. In the event of such
cancellation, Tenant shall thereupon be released from any further liability
under this lease agreement. In the event of a partial condemnation or taking
which does not result in termination of this lease, the rent, including
additional rent, shall be reduced proportionate to the loss of interior space of
the leased premises.
c. If this lease agreement is terminated in either manner
hereinabove provided, the fixed monthly advance rental for the last month of
Tenant's occupancy shall be prorated and Landlord agrees to refund to Tenant any
such fixed rental paid in advance. Unless local law shall permit the payment of
a damage award to be made directly to Tenant for loss of its interest, then the
entire damage award of the condemnation proceedings shall be paid to Landlord;
however, Tenant shall be entitled to seek the value of its loss of interest
directly from the condemning authority.
13. LANDLORD'S CONSTRUCTION AND POSSESSION.
A. The Landlord agrees to perform all the work described in Exhibit
"B" which is attached to this lease, and complete such work so as to make the
leased premises ready for occupancy by Tenant on or after March 1, 1998 but, in
no event, later than May 1, 1998, for which the Landlord agrees to pay the cost
thereof up to $150,000.00, including architectural and engineering fees, and
Tenant will pay a maximum amount of $50,000.00 in excess thereof. The ninety
(90) day rent abatement period shall be reduced, automatically, by a number of
days equal to the number of days transpiring between (a) the later of (i)
January 15, 1998 or (ii) three (3) days (including weekends and holidays) after
the date on which Landlord has given Tenant final architectural plans for
Landlord's Work, and (b) the date on which Tenant has given Landlord its
approval of the plans and specifications for Landlord's Work. Within two (2)
weeks after Tenant has approved the architectural plans, Landlord will obtain
and furnish Tenant with the contractor's, architect's and engineer's costs to
perform the work. If the total cost exceeds $200,000.00, the parties will
attempt to agree on changes which will reduce the total cost to $200,000.00 or,
without any obligation to do so, agree in writing to bear the cost in excess of
$200,000.00, in which event this lease will be deemed to have been amended by
such writing. If the parties do not agree on work changes or assumption of the
additional cost within seven (7) days after receipt of the contracts, this lease
will terminate, automatically. If the total cost is less than $200,000.00,
Tenant's obligation will be reduced by the amount of such reduced cost. If the
leased premises is not ready for occupancy by May 1, 1998, Tenant will have the
option, to be exercised by written notice received by Landlord on or before May
5, 1998, to (i) terminate this lease or (ii) take possession of the leased
premises as of May 1, 1998 and finish the work and offset the reasonable cost of
such work against the next due rent and additional rent. If Tenant does not
exercise its option or if Tenant elects to terminate this lease, then this lease
will terminate, automatically. Tenant's share of the costs will be paid to
Landlord as additional rent as follows: (i) 50% on the Commencement Date and
(ii) the balance in thirty-six (36) equal monthly installments (including
interest on the unpaid balance at the rate of ten (10%) percent per year) on the
first day of each month commencing on the day rent first becomes due and payable
after the rent abatement period. Landlord shall furnish Tenant with such
reasonable proof of the actual costs as Tenant may reasonable request. In the
event this lease terminates as provided in this Section 13A, neither party will
have any right or recourse against the other except for the immediate payment to
Tenant of all rent and Security Deposit received by Landlord.
B. Tenant shall take actual possession of the leased premises on the
Commencement Date. In the event Tenant determines within thirty (30) days after
the Commencement Date that there are defects, Tenant shall provide Landlord with
a punch list of items remaining to be completed, which items shall be completed
within twenty (20) business days. Except to the extent
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specifically provided in the punch list, Tenant's occupation of the leased
premises shall be conclusively presumed to operate to terminate all of
Landlord's obligations relating to the initial condition of the leased premises.
Tenant shall provide Landlord with a letter accepting the leased premises, in
form and substance satisfactory to comply with any requirements for same
contained in any mortgage constituting a lien on the premises of which the
leased premises are a part.
C. Landlord represents and warrants the following, as of the
Commencement Date and for the following twelve (12) months:
(i) Air conditioning in the entire leased premises will
maintain a temperature of 75(degrees)F plus or minus 5% if the
outside temperature reaches 95(degrees)F to 100(degrees)F; and
(ii) Heating in the entire leased premises will maintain a
temperature of 75(degrees)F plus or minus 5% if the outside
temperature falls below 25(degrees)F.
D. Landlord represents and warrants the following during the entire
term of this lease:
(i) Electrical service will be at least 800 amps at 480 volts.
E. Tenant, at its own expense, will provide and install all window
treatments and locker room equipment including lockers which Tenant desires to
install in the leased premises.
14. QUIET ENJOYMENT. The Landlord covenants that the Tenant, upon payment
of the rent and additional rent above reserved, upon the due performance of the
covenants and agreements herein contained, shall and may at all times during the
term hereby granted peaceably and quietly have, hold and enjoy the leased
premises for the term of this lease, subject to the mortgage subordination
provisions of this lease. This covenant shall not be personal but shall run with
the land and be binding upon any transferee, successor or assignee of the
Landlord.
15. TENANT'S DEFAULT. The following events shall be considered events of
default by Tenant hereunder:
a. Tenant shall fail to pay any installments of rent hereby reserved
and such failure shall continue for a period of ten (10) days after written
notice thereof to Tenant that such installment of rent is due pursuant hereto.
b. Tenant shall fail to comply with any term, provision or covenant
of this lease, other than the payment of rent, and shall not cure such failure
within thirty (30) days after written notice thereof to Tenant; provided,
however, if the reasonable time to cure such failure shall be longer than thirty
(30) days, Tenant shall have as long as reasonably necessary to complete the
same if it commences to cure within the thirty (30) day period and diligently
continues thereafter to completion.
c. Tenant files a voluntary petition in bankruptcy.
d. A receiver or trustee shall be appointed for all or substantially
all of Tenant's assets and such receiver or trustee has not been discharged
within thirty (30) days.
Upon the occurrence of any of such events of default, Landlord shall
have the option to pursue any one or more of the following remedies without
notice or demand whatsoever:
(a) Terminate this lease, in which event Tenant shall immediately
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surrender the leased premises to Landlord, and if Tenant fails so to do,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent or rent for the remainder of the lease term,
enter upon and take possession of the leased premises and expel or remove Tenant
and any other person who may be occupying said premises or any part thereof, by
all lawful means, without being liable for prosecution or any claim of damages
therefor, except those resulting from the gross negligence or willful misconduct
of Landlord or its employees, agents or contractors; and Tenant agrees to pay to
Landlord on demand the amount of all loss and damage which Landlord may suffer
by reason of such termination, whether through inability to relet the leased
premises on satisfactory terms or otherwise.
(b) Enter upon and take possession of the leased premises and expel
or remove Tenant and any other person who may be occupying said premises or any
part thereof, by all lawful means, without being liable for prosecution or any
claim for damages therefor, except those resulting from the gross negligence or
willful misconduct of Landlord or its employees, agents or contractors, and
relet the leased premises and receive the rent therefor; and Tenant agrees to
pay to Landlord on demand any deficiency that may arise by reason of such
reletting.
(c) Enter upon the leased premises by all lawful means without being
liable for prosecution or any claim for damages therefor, except those resulting
from the gross negligence or willful misconduct of Landlord or its employees,
agents or contractors, and do whatever Tenant is obligated to do under the terms
of this lease, and Tenant agrees to reimburse Landlord on demand for any
reasonable expenses which Landlord may incur in thus effecting compliance with
Tenant's obligations under this lease, and Tenant further agrees that Landlord
shall not be liable for any damage resulting to the Tenant from such action
provided the same is not caused by the gross negligence or wilful misconduct of
Landlord or its agents, employees or contractors or otherwise.
Pursuit of any of the foregoing remedies shall not preclude pursuit
of any of the other remedies provided for herein or any other remedies provided
by law, all of which may be enforced cumulatively, nor shall pursuit of any
remedy provided for herein constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages accruing to Landlord by reason of the
violation of any of the terms, provisions and covenants herein contained. Tenant
shall remain obligated to pay all rent, additional rent and other reimbursements
to Landlord on the dates when due as provided in this lease. Failure by Landlord
to enforce one or more of the remedies herein provided upon any event of default
shall not be deemed or construed to constitute a waiver of such default, or of
any other violation or breach of any of the terms, provisions and covenants
herein contained.
16. ASSIGNMENT OR SUBLET. The Tenant may not assign this lease or let or
sublet the whole or any part of the leased premises without obtaining in advance
the written consent of Landlord, which consent shall not be unreasonably
withheld or delayed; however, Landlord may arbitrarily refuse such consent if
occupancy by the assignee or subtenant will cause the leased premises to become
subject to ISRA (hereinafter defined), except as a small quantity generator as
defined under New Jersey laws and other than the use specifically permitted in
Section 1 hereof. Except as provided in the third paragraph of this Section 16,
in the event Tenant desires to assign this lease or let or sublet the whole or
any part of the leased premises, Tenant shall give written notice in advance of
its intention to do so to Landlord together with (i) a copy of the proposed
agreement of assignment or sublease wherein the proposed assignee assumes all of
the obligations of Tenant hereunder and containing the name and address of the
proposed assignee, (ii) the names and addresses of the principals of the
proposed assignee or subtenant, (iii) financial statements and bank and other
financial and business references of the proposed assignee or subtenant
reasonably sufficient to enable Landlord to ascertain the financial
responsibility of the proposed assignee or subtenant, and (iv) the federal
Standard Industrial Classification number of the proposed
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assignee or subtenant in the form of an Environmental Affidavit and all other
information required pursuant to Paragraph 34 m of this lease. Within thirty
(30) days after its receipt of said notice, Landlord, at its option, may either
(i) terminate this lease upon the later of thirty (30) days' written notice to
Tenant or the date on which Tenant was to vacate the leased premises under the
terms of the proposed sublease or assignment and recover the leased premises (in
which event Tenant shall be released from all of its obligations and
responsibilities under this lease), or (ii) consent to the assignment or
subletting, in which event the rent due to Landlord under this lease shall
automatically be increased by seventy-five (75%) percent of the amount, if any,
which all rent or other consideration received by Tenant from such assignee or
subtenant (prorated on a square-foot basis for less than the entire leased
premises) exceeds the rent then due to Landlord pursuant to this lease less the
amount of real estate brokerage commissions and other expenses reasonably
related to the assignment or sublease (all prorated over the term of the
assignment or sublease) paid to unrelated third parties. Any such assignment or
subletting shall not relieve Tenant from all of its obligations and
responsibilities under this lease for the entire leased premises.
The transfer of a majority of the issued and outstanding capital
stock of any corporate Tenant or a transfer of the total proprietary interest of
any partnership Tenant, however the same may be accomplished, and whether in
single transaction or in a series of related or unrelated transactions, shall be
deemed to be an assignment of this lease. Likewise, an increase in the number of
issued and/or outstanding shares of the capital stock of any corporate Tenant
and/or the creation of one or more additional classes of capital stock of any
corporate Tenant, however accomplished and whether in a single transaction or a
series of related or unrelated transactions, with the result that at least
fifty-one (51%) percent of the beneficial interest and record ownership in and
to such Tenant shall no longer be held by the beneficial and record owners of
the capital stock of such corporate Tenant as of the date hereof, or the date on
which such corporation shall become the Tenant hereunder (whichever is later),
shall be deemed to be an assignment of this lease.
Notwithstanding any provision of this Section 16 to the contrary,
Landlord's consent shall not be required nor shall Landlord have the right to
terminate this lease and recover the leased premises nor shall the rent be
increased in the event Tenant (i) merges or consolidates with another entity, or
(ii) transfers substantially all of its assets or common stock to another
entity, or (iii) assigns this lease or sublets the leased premises to another
entity which is controlled by Tenant or is under common control of Tenant and
another entity, all provided that the entity to which this lease is assigned has
a net worth (excluding goodwill and similar intangible assets) at the time of
the assignment not less than fifty one (51%) percent of the net worth (excluding
goodwill and similar intangible assets) of Tenant on the date of signing of this
lease. However, if any of said events should occur, Tenant shall give prompt
written notice of the event to Landlord and shall furnish Landlord with the
information provided for in (i), (ii), (iii) and (iv) of the first paragraph of
this Paragraph 16 together with a current financial statement of the new entity
and a financial statement of the assignor as of the date provided in the next
preceding sentence.
17. BROKERAGE COMMISSIONS. Landlord and Tenant represent that they have
not dealt with any real estate broker or other party who may claim or be
entitled to a commission in connection with this lease, except Colliers Houston
& Co., Marcus Associates, L.L.C. and James E. Hanson, Inc., whose fees and
commissions Landlord shall pay pursuant to a separate agreement. Each party
agrees to indemnify and hold harmless the other from any and all claims for any
such brokerage commissions, finder's fees or the like made by any other broker
or entity. It is agreed that if any claims for brokerage commissions or fees are
ever made against Landlord or Tenant in connection with this lease, all such
claims shall be handled and paid by the party whose actions or alleged
commitments form the basis of such claim, and the party whose actions or alleged
commitments form the basis of such claim shall indemnify and hold harmless the
other from and against any and all such claims
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and demands, including reasonable attorneys' fees incurred in defending the
same, with respect to any brokerage fees or agent's commissions or other
compensation asserted by any person, firm or corporation in connection with this
lease.
18. ALTERATIONS AND IMPROVEMENTS. The Tenant may make alterations,
additions or improvements to the leased premises without the consent of the
Landlord only if such alterations, additions or improvements do not require
structural changes in the leased premises, or do not lessen the value of the
leased premises. Tenant will furnish Landlord with plans and specifications for
all improvements and alterations, whether or not Landlord's consent is required,
at least twenty (20) days before the commencement of any work. In the event any
alterations, additions or improvements to be made require structural changes,
the same shall only be made upon the Tenant obtaining the prior written consent
of the Landlord, which consent the Landlord shall not unreasonably withhold,
provided the same do not lessen the value of the leased premises or does not
change the basic design and/or utility of the building. All such alterations,
additions or improvements shall be (i) only in conformity with applicable
governmental and insurance company requirements and regulations applicable to
the leased premises, (ii) all work will be performed by reputable contractors in
a manner and using materials substantially similar to those used in construction
of the building of which the leased premises are a part and fully paid by Tenant
so that the leased premises will be lien free, (iii) all work will be performed
in a continuous manner to completion without unreasonable delay, and (iv) Tenant
will furnish Landlord with written evidence that the appropriate governmental
agencies have approved the work. Tenant shall hold and save Landlord harmless
and indemnify Landlord against any claim for damages or injury in connection
with any of the foregoing work which Tenant may make as hereinabove provided.
All alterations, decorations, installations, additions or
improvements upon the leased premises made by either party (including but not
limited to paneling, interior walls, railings and the like), except Tenant's
movable trade fixtures, equipment and furniture, shall, unless Landlord elects
otherwise (by notice in writing to Tenant given not less than thirty (30) days
prior to the expiration or other termination of this lease or of any renewal or
extension thereof) become the property of Landlord and shall remain upon, and be
surrendered with, said leased premises, as a part thereof, at the end of said
term or renewal term, as the case may be. If Landlord shall elect otherwise at
the time Tenant requests Landlord's consent, or if no such consent is required
or requested, then if requested by Landlord at least thirty (30) days prior to
the end of the term of this lease, Tenant shall remove at its expense such
alterations, installations, additions or improvements made by Tenant (including
the improvements set forth on Exhibit "B" attached hereto) upon the leased
premises as Landlord shall so elect, and Tenant shall repair and restore the
leased premises to original condition at its sole expense prior to the
expiration of the term.
At the expiration or other termination of this lease, Tenant shall
remove all personal property not owned by Landlord and all debris and shall
leave the leased premises in a "broom clean" condition.
Nothing herein contained shall be construed as a consent on the part
of the Landlord to subject the estate of the Landlord to liability under the
mechanic's lien law of the State of New Jersey, it being expressly understood
that the Landlord's estate shall not be subject to such liability.
19. TENANT'S ASSUMPTION OF RISK. It is agreed that the Tenant shall assume
all risk of damage to its property, equipment and fixtures occurring in or about
the leased premises, whatever the cause of such damage or casualty, and that, in
any event, the Landlord shall not be liable for any damage or injury to property
or person as provided in Paragraph 20 of this lease.
20. LANDLORD NOT LIABLE. Neither the Landlord nor its agents shall be
liable for any damage to property of the Tenant entrusted to employees of the
building, nor to any property, goods, or things contained in the leased
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premises or stored in any part of the building, or in the parking areas, unless
such injury or damage is due to affirmative acts of negligence (acts of
commission) on the part of the Landlord or its employees, servants or agents but
there shall be no liability for acts of omission unless such acts of omission
themselves are a breach of Landlord's obligations at law or under this lease.
Except also as the same may be attributable solely to the affirmative acts of
negligence of the Landlord, its employees, servants or agents, the Landlord
shall not be liable for any injury or damage to persons or property in the
building of which the leased premises forms a part, or to the business of the
Tenant, or any interruption thereof, resulting from theft, burglary, explosion,
wind or accident, falling plaster, steam, gas, electricity, water, rain or snow,
leakage from any part of the building or from pipes, appliances, or plumbing
works in the building or from the street or subsurface thereof or from any other
source, or from dampness, or from damage occasioned by workmen engaged in making
repairs or alterations in or upon the building or land on which it is located,
or from damage by other Tenants or persons in the building, or for interference
with the light or other incorporeal hereditaments, or caused by operations in
the construction of any public or quasi-public work, or for any other cause of
whatsoever nature, unless such acts of omission themselves are a breach of
Landlord's obligations at law or under this lease.
21. INDEMNIFICATION. The Tenant shall indemnify and save harmless the
Landlord from, and shall reimburse the Landlord as additional rent for all
expenses, damages, or fines incurred or suffered by the Landlord by reason of
any breach, violation, or non-performance by the Tenant, or the Tenant's
servants, employees or agents, of any covenant or provision of this lease, or by
reason of damage or injury to persons or property caused by the Tenant's moving
property in or out of the building, or by the installation or removal of
furniture or other property of the Tenant, or arising out of the occupancy or
use by the Tenant of the leased premises or the building of which they form a
part, or from any other cause due to the carelessness, negligence or improper
conduct of the Tenant or the Tenant's servants or agents, but excluding expenses
and/or damages for which there is insurance and to which the wavier of
subrogation applies. Tenant shall have no obligation to Landlord for Tenant's
acts of omission unless such acts of omission themselves are a breach of
Tenant's obligations at law or under this lease.
22. MORTGAGE SUBORDINATION AND ATTORNMENT. This lease is and shall be
subject and subordinated to the lien of the mortgage now affecting the leased
premises, at the date hereof, and to any mortgage or mortgages hereafter made
affecting the leased premises, and to all renewals, modifications,
consolidations, replacements, or extensions thereof, irrespective of the time of
recording such mortgage, provided that such mortgagees agree in a written
document, in a form attached hereto as Exhibit "B" with regard to the presently
existing mortgage and substantially the same substantive provisions with regard
to future mortgages, that Tenant's occupancy and all rights pursuant to this
lease shall not be disturbed nor terminated so long as Tenant is not in default
of its obligations hereunder beyond any cure periods. With regard to presently
existing mortgage, Landlord shall use its best efforts to obtain the consent of
the mortgagee to this lease and the subordination, attornment and
non-disturbance agreement, which agreement shall be executed by Tenant. Any fees
charged by the mortgagee will be paid by Tenant. In the event Landlord does not
obtain such consent and agreement within twenty (20) days after the date hereof,
this lease shall terminate. In the event of such termination, neither party
shall have any further right or recourse against the other except for the
immediate return to Tenant of any advance rent payments made to Landlord. Tenant
and Landlord shall execute and deliver such further instruments as may be
reasonable to effectuate such future subordination, attornment and
non-disturbance agreements.
In the absence of a subordination, attornment and non-disturbance
agreement and in the event that any holder of any mortgage or anyone claiming
from or through any such holder or any purchaser of holder's estate in any
foreclosure sale shall enter into and lawfully become possessed of the leased
premises or shall otherwise succeed to the rights of Landlord under this lease,
either through foreclosure of any mortgage or the acquisition of the
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estate of Landlord thereby mortgaged, Tenant agrees to attorn to such successor
landlord and recognize successor landlord as its landlord under this lease and
to execute, upon request of such successor landlord, an attornment agreement.
Such an attornment provision will also be included in any subordination,
attornment and non-disturbance agreement entered into with a mortgagee.
23. SERVICES INTERRUPTED. This lease and the obligation of the Tenant to
pay rent hereunder and perform all of the other covenants and agreements
hereunder on the part of the Tenant to be performed shall in nowise be affected,
impaired or excused because the Landlord is unable to supply or is delayed in
supplying any service expressly or impliedly to be supplied or is unable to
make, or is delayed in making any repairs, additions, alterations or decorations
or is unable to supply or is delayed in supplying equipment or fixtures if the
Landlord is prevented or delayed from so doing by reason of governmental
preemption in connection with a National Emergency declared by the President of
the United States or in connection with any rule, order or regulation of any
department or subdivision thereof of any governmental agency or by reason of the
conditions of supply and demand which have been or are affected by war, strike
or other emergency.
24. LANDLORD'S ACCESS-REPAIRS. The Tenant agrees that the Landlord, and
its agents and other representatives, shall have the right to enter into and
upon the leased premises, or any part thereof, upon reasonable prior notice and
without disrupting Tenant's business, at all reasonable hours for the purpose of
examining same, or making such repairs or alterations therein as may be
necessary for the safety and preservation thereof; provided, however, Landlord's
right to enter the leased premises shall be exercised only upon reasonable
notice to Tenant and shall be carried out in a manner and fashion which will not
unduly interfere with Tenant's use and enjoyment of the leased premises and
shall not extend to areas where governmental security clearance is required.
25. LANDLORD'S ACCESS-SHOW PREMISES. The Tenant also agrees to permit the
Landlord, or its agents, or other representatives to show the leased premises to
persons wishing to lease, mortgage or purchase the same; provided, however,
Landlord's right to enter the leased premises shall be exercised only upon
reasonable notice to Tenant and shall be carried out in a manner and fashion
which will not unduly interfere with Tenant's use and enjoyment of the premises
and shall not extend to areas where governmental security clearance is required.
26. SIGNS. The Tenant shall neither place, nor cause, nor allow to be
placed, any sign or signs of any kind whatsoever at, in or about the entrance to
the leased premises nor any other part of same except in or at such place or
places as may be indicated by the Landlord and consented to by the Landlord in
writing, as to design, color, size and location, which consent shall not be
unreasonably withheld or delayed. Landlord hereby consents to the installation,
by Tenant and at Tenant's expense, of one (1) sign on the canopy above the
entrance to the leased premises with a sign two feet by six feet and matching
the signs of other tenants in the building and one (1) sign with a size of one
foot by one foot above the loading bay. Tenant may install a sign on the
directory for the entire building near Hollister Road using the same size and
type as the other tenants. In case the Landlord or its agents or other
representatives shall deem it necessary to remove any such sign or signs in
order to paint or make any other repairs, alterations or improvements in or upon
the leased premises or the building wherein same is situated or any part
thereof, the Landlord shall have the right to do so, providing the same be
removed and replaced at the Landlord's expense whenever the said repairs,
alterations or improvements shall have been completed. If Landlord notifies
Tenant that any such signs must be removed at the end of the lease, Tenant will
cause them to be removed and any damage to the leased premises repaired, all at
Tenant's expense.
27. ABANDONMENT OF PROPERTY. If after default in payment of rent or
violation of any other provisions of this lease, the Tenant moves out or is
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dispossessed and fails to remove any trade fixtures or other property prior to
such said default, removal, or the issuance of the final order or execution of
the warrant, then and in that event, the said fixtures and property shall be
deemed abandoned by the Tenant and shall become the property of the Landlord.
Upon expiration of the term of this lease Tenant shall have thirty days within
which to remove its property prior to same being abandoned pursuant to this
section.
28. STRICT PERFORMANCE. The failure of the Landlord or Tenant to insist
upon strict performance of any of the terms, covenants or conditions of this
lease or to exercise any option herein conferred in any one or more instances,
shall not be construed as a waiver or relinquishment for the future of any such
covenants, conditions or options, but the same shall be and remain in full force
and effect.
29. LAWS AND REGULATIONS. The Tenant, during the term of this lease, shall
promptly execute and comply with all statutes, ordinances, regulations and
requirements of the federal, state and local governments and all of their
departments, bureaus and agencies applicable to said leased premises, for the
correction, prevention, and abatement of nuisances, violations or other
grievances, in, upon or connected with the leased premises during the term of
this lease; and Tenant shall also comply at its own cost and expense with and
execute all rules, orders and regulations of the Board of Fire Underwriters, or
any other similar body, for the prevention of fires in the leased premises;
provided, however that Tenant shall have no liability to make any structural
repairs, replacements or new construction under any of the foregoing which are
not related to Tenant's specific use of the leased premises and shall not be
responsible to remediate any environmental condition not caused by Tenant, as to
which Landlord shall be solely liable and at Landlord's expense.
30. LANDLORD CURE. In case the Tenant, within thirty (30) days (or such
shorter period if required under the circumstances) after receiving notice to
comply, shall fail or neglect to comply with the aforesaid statutes, ordinances,
rules, orders, regulations and requirements or any of them, or in case the
Tenant shall fail or neglect to make any necessary repairs, then the Landlord or
its agents may enter said leased premises and make said repairs and comply with
any and all of the said statutes, ordinances, rules, orders, regulations or
requirements, at the cost and expense of the Tenant and in case of the Tenant's
failure to pay therefor, the said cost and expense shall be added to the next
month's rent and be due and payable as such, or the Landlord may deduct the same
from the balance of any security deposit in the Landlord's hands. This provision
is in addition to the right of the Landlord to terminate this lease by reason of
any default on the part of the Tenant.
31. LIMITING LANDLORD'S LIABILITY. Anything in this lease to the contrary
notwithstanding, Tenant agrees that Tenant shall look solely to the estate and
property of Landlord in the property in which the leased premises is located,
and subject to the prior rights of any Mortgagee of the property, for the
collection of any judgment (or other judicial process) requiring the payment of
money by Landlord in the event of any default or breach by Landlord with respect
to any of the terms, covenants and conditions of this lease to be observed
and/or performed by Landlord, and no other assets of Landlord nor its partners,
members, managers, trustees, officers, directors, stockholders or beneficiaries
shall be subject to levy, execution or other enforcement procedure for the
satisfaction of Tenant's remedies.
32. ESTOPPEL CERTIFICATE. Tenant agrees at any time and from time to time
upon not less than ten (10) days' prior notice by Landlord or any Mortgagee to
execute, acknowledge and deliver to Landlord or such Mortgagee, as the case may
be, or any other party specified by Landlord or such Mortgagee, a statement in
writing certifying that this lease is unmodified and in full force and effect
(or if there have been modifications, that the same is in full force and effect
as modified and stating the modifications) and the dates to which the Rent and
other charges have been paid in advance, if any, and stating whether or not to
the best knowledge of the signer of such certificate Tenant or Landlord is in
default in performance of any covenant,
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agreement or condition contained in this lease, and, if so, specifying each such
default of which the signer may have knowledge, it being intended that any such
statement delivered pursuant to this paragraph may be relied upon by any
prospective purchaser of the fee or any mortgagee thereof or any assignee of any
Mortgage.
33. WAIVER OF SUBROGATION. Each party hereto does hereby remise, release
and discharge the other party hereto and any officer, agent, employee, or
representative of such party, of and from any liability whatsoever hereafter
arising from loss, damage, or injury caused by fire or other casualty normally
covered by extended coverage policy for which insurance (permitting waiver of
liability and containing a waiver of subrogation) is carried by the injured
party at the time of such loss, damage or injury to the extent of any recovery
by the injured party under such insurance. Whenever (a) any loss, cost, damage
or expense resulting from fire, explosion or any other casualty or occurrence is
incurred by either of the parties to this lease in connection with the leased
premises or the building in which the leased premises is located, and (b) such
party is then covered, in whole or in part, by insurance with respect to such
loss, cost, damage or expense, then, the party so insured hereby releases the
other party from any liability it may have on account of such loss, cost, damage
or expense to the extent of any amount recovered by reason of such insurance,
and waives any right of subrogation which might otherwise exist in or accrue to
any person on account thereof, provided that such release of liability and
waiver of the right of subrogation shall not be operative in any case where the
effect thereof is to invalidate such insurance coverage or increase the cost
thereof (provided that in the case of increased cost, the other party shall have
the right, within thirty (30) days following written notice, to pay such
increased cost, thereupon keeping such release and waiver in full force and
effect).
34. INDUSTRIAL SITE RECOVERY ACT AND ENVIRONMENTAL LAWS.
a. Tenant shall, at Tenant's own expense, comply with all federal,
state and local laws, rules and regulations relating to environmental matters
affecting the leased premises and the Industrial Site Recovery Act, N.J.S.A.
13:1K-6 et seq. and the regulations promulgated thereunder ("ISRA") for which
Tenant is obligated pursuant to this lease. Tenant shall, at Tenant's own
expense, make all submissions to, provide all information to, and comply with
all requirements of, the New Jersey Department of Environmental Protection or
its replacement or similar department, agency, bureau or division ("NJDEP") with
regard to its use and occupancy of the leased premises and with regard to any
spills or discharges of hazardous waste or substance caused by Tenant or the
employees, agents, contractors or invitees (together the "Tenant's
Responsibility"). Should any division of NJDEP determine under ISRA that a
remediation action work plan be prepared and that a remediation be undertaken
because of any spills or discharges of hazardous substances or wastes at the
building or land in or on which the leased premises is located (the "Property")
which occur during the term of this lease which are Tenant's Responsibility,
then Tenant shall, at Tenant's own expense, prepare and submit the required
plans and financial assurances, and carry out the approved plans. Tenant's
obligations under this paragraph shall arise if there is any closing,
terminating or transferring of operations of an industrial establishment at the
Property or a sale or transfer of title of the Property by Landlord, all
pursuant to ISRA. Notwithstanding the foregoing, if the Property is being sold
or transferred by Landlord, Landlord shall bear the expense of such applications
and submissions, but as to any spills or discharges which are Tenant's
Responsibility, Tenant shall prepare and file, at Tenant's expense, all
applications, tests, reports and remediation required by the NJDEP pertaining to
such. At no expense to Landlord, Tenant shall promptly provide all information
requested by Landlord for preparation of documents supporting an application for
a determination by the NJDEP of non-applicability of ISRA to Tenant or
submission of an application for a de minimis exception or a no-further-action
letter to the NJDEP and shall promptly sign and submit such documents when
requested by Landlord. Landlord shall indemnify, defend and save harmless Tenant
from all fines, suits, procedures, claims and actions of any kind arising out of
or in any way connected
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with any spills or discharges of hazardous substances or wastes at the Property
which are not Tenant's Responsibility and from all reasonable expenses incurred
for legal, engineering and expert fees, and from all fines, suits, procedures,
claims and actions of any kind arising out of Landlord's failure to provide all
information, make all submissions and take all actions required by the ISRA or
any division of NJDEP concerning ISRA or any other environmental law. Tenant
shall indemnify, defend and save harmless Landlord from all fines, suits,
procedures, claims and actions of any kind arising out of or in any way
connected with any spills or discharges of hazardous substances or wastes at the
Property which are Tenant's Responsibility and from all reasonable expenses
incurred for legal, engineering and expert fees, and from all fines, suits,
procedures, claims and actions of any kind arising out of Tenant's failure to
provide all information, make all submissions and take all actions required by
ISRA or any division of NJDEP concerning ISRA or any other environmental law.
Tenant shall furnish a surety bond or other financial security which will
guarantee the implementation of the remediation action work plan for Tenant's
Responsibility if same is required under ISRA. Tenant's obligations and
liabilities under this paragraph shall continue so long as Landlord remains
obligated for compliance with ISRA regarding any spills or discharges of
hazardous substances or wastes at the Property which are Tenant's
Responsibility. Either Landlord's or Tenant's failure to abide by the terms of
this paragraph shall be restrainable by injunction.
b. Notwithstanding anything to the contrary contained above, Tenant
will have no obligation pursuant to this Section 34 and all other provisions of
this lease with regard to environmental matters resulting from any environmental
condition which occurs at anytime which is not Tenant's Responsibility.
c. Each of Landlord and Tenant shall promptly supply to the other
all reports and notices made by Tenant pursuant to the Hazardous Substance
Discharge--Reports and Notices Act, N.J.S.A. 13:1K-15 et seq. and the
regulations promulgated thereunder ("Reports and Notices Act").
d. Each of Landlord and Tenant shall promptly supply the other with
any notices, correspondence and submissions made by Tenant to NJDEP, the United
States Environmental Protection Agency (EPA), the United States Occupational
Safety and Health Administration (OSHA), or any other local, state or federal
authority which requires submission of any information concerning environmental
matters or hazardous wastes or substances.
e. Each of Landlord and Tenant shall promptly comply with all
requirements of the Spill Compensation and Control Act (N.J.S.A. 58:10-23.11 as
amended) and supply the other with copies of all notices, reports, tests or
filings in relation thereto whether received from any governmental agency or
promulgated by Tenant.
f. Each of Landlord and Tenant shall promptly comply with all
requirements of the Hazardous and Solid Waste Amendment of 1984 Pub. L98-616 (42
U.S.C. 699) and adopted by New Jersey for registration of underground storage
tanks pursuant to N.J.S.A. 58:10A-21, et seq., and supply to the other copies of
all notices, reports, questionnaires, registration statements, tests, or filings
in relation thereto whether received from any governmental agency or promulgated
by either. In connection herewith, Tenant shall not install or remove any
underground or above-ground storage tanks without first obtaining the express
written consent of Landlord.
g. Each of Landlord and Tenant shall promptly furnish to the other
true and complete copies of all documents, submissions and correspondence
provided by each of Landlord and Tenant to the NJDEP and all documents, reports,
directives and correspondence provided by the NJDEP to each of Landlord and
Tenant. Each of Landlord and Tenant shall also promptly furnish to the other
true and complete copies of all sampling and test results obtained from samples
and tests taken at and around the Property.
h. Within thirty (30) days prior to the termination of this
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lease, Tenant will furnish Landlord with (i) evidence that Tenant has
satisfactorily complied with ISRA for the cessation of its operations, or (ii) a
letter of non-applicability to ISRA issued by the NJDEP. Tenant shall also
furnish Landlord, without expense to Landlord, copies of all applications,
tests, submissions and correspondence to and from NJDEP and others relating to
these matters.
i. Tenant further agrees to implement and execute all of the
provisions of this paragraph in a timely manner so as to coincide with the
termination of this lease or to coincide with the vacating of the leased
premises by the Tenant at any time during the term of this lease.
j. With regard to Tenant's Responsibility pursuant to this Section
34, in the event that Landlord shall seek to sell or transfer title to the
Property or engage in any other transaction which initiates the obligation to
comply with ISRA and Landlord applies to the NJDEP for a remediation agreement
("RA"), Tenant agrees that it shall furnish a surety bond, Letter of Credit or
such other financial security which would guarantee the implementation of any
potential remediation at the leased premises, as required by the NJDEP to the
extent of Tenant's Responsibility and to execute any and all documents and
furnish such information as may be reasonably necessary in connection with
Landlord's application. As with all other aspects of any ISRA application by
Tenant respecting Tenant's use and occupancy of the leased premises, to the
extent of Tenant's Responsibility, Tenant shall bear all costs in connection
with same, and perform all other acts necessary or required by the NJDEP in
order to obtain an RA.
k. In the event the Tenant shall have failed to comply in any
respect with the terms and conditions of this Section 34, including failing to
obtain such final ISRA clearance of the Property as of the date of expiration of
this lease as ISRA may require, then upon such failure to comply, it shall be
deemed the Tenant has remained in possession of the leased premises, and shall
be considered as a holdover tenant as provided in Section 35 hereof. These
rights are in addition to any other rights and remedies the Landlord may have
under law.
l. As a condition precedent to Tenant's right to sublease the leased
premises or to assign the lease, Tenant shall have received from the NJDEP
either (i) no-further-action letter, (ii) a de minimis exception, or (iii) a
non-applicability letter, for which Tenant shall promptly apply pursuant to
ISRA. If this condition shall not be satisfied, then Landlord shall have the
right to withhold consent to sublease or assignment.
m. Simultaneously with execution of this lease, Tenant shall supply
to Landlord an affidavit of an officer of Tenant ("Environmental Affidavit"),
setting forth Tenant's federal Standard Industrial Classification number and a
detailed description of the operation and processes Tenant will undertake at the
leased premises, organized in the form of a narrative report, including a
description and quantification of hazardous substances and wastes generated,
manufactured, refined, transported, treated, stored, handled or disposed of at
the leased premises. During the lease term, Tenant shall notify Landlord by way
of Environmental Affidavit as to any changes in Tenant's operation, federal
Standard Industrial Classification number or use and generation of hazardous
substances and wastes, by way of a supplemental Environmental Affidavit. Tenant
shall also supplement and update Environmental Affidavit upon each January 1st
of the lease term. Nothing herein shall be construed as permitting Tenant to use
the leased premises for any purpose other than as originally intended and set
forth in Section 1.
n. If Landlord has reasonable cause to believe that a spill or
discharge has occurred which is Tenant's Responsibility and Landlord makes
written demand to Tenant sitting forth the basis of its cause, Tenant will
obtain, at its own expense, and furnish to Landlord, without charge, within
thirty (30) days after receipt of Landlord's demand a Phase I environmental
report prepared by a recognized environmental engineer which will show the
status of the leased premises with regard to all environmental conditions. In
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the event that the report shows or indicates the presence or possibility of the
presence of any environmental condition which violates the laws, rules,
regulations or ordinances of the State of New Jersey which is Tenant's
Responsibility, then Tenant will obtain such additional inspections, reports and
tests as may be required to determine the nature and scope of the environmental
condition which is Tenant's Responsibility and what will be required to remedy
the condition and the cost thereof. Tenant, at its expense, will remediate the
environmental condition to the satisfaction of all governmental agencies, etc.
and to the reasonable satisfaction of Landlord. If the Phase I or later report
confirms that the condition is not Tenant's Responsibility, Landlord shall
reimburse Tenant for its reasonable costs of compliance with this paragraph.
o. Provided that the use of the Property is not adversely affected,
Landlord and Tenant may use restricted remediation standards (non-residential
standards) in the remediation of the Property and engineering or institutional
controls, and each will cooperate with such remediation and execute
institutional controls as required.
p. The obligations of Landlord pursuant to paragraphs c, d, e, f and
g of this Section 34 to furnish Tenant with copies of documents will apply only
to events and occurrences relating to the leased premises and the Common Area
(as defined in Section 10 hereof).
q. Landlord represents that, to the best of its knowledge,a there is
only one (1) underground storage tank on the Property, which tank services the
backup generator used by AT & T and which tank is located under one of the
parking spaces in front of the AT & T space located between Kinetic Concepts and
Spring in the rear wing of the building.
35. HOLDOVER. If Tenant remains in possession of the leased premises after
the expiration of the original term of this lease or of any option term, except
pursuant to an exercise of an option to extend, or after Tenant's right of
occupancy has been properly terminated by Landlord, such possession shall be
considered as a tenant at sufferance of Landlord, and the possession may be
terminated Landlord at any time upon three days' prior written notice to Tenant.
During such period of occupancy as a tenant at sufferance of Landlord, rent
shall be payable on the first day of every month, in advance, at a rate equal to
two times the rent for the last month of the term in addition to the additional
rent for expense reimbursement which shall continue to be payable as provided in
this lease. The increased rent is not intended to be a penalty but is intended
to be an agreed amount in order to avoid a controversy over the determination of
fair market rent or similar phrase, nor shall the acceptance of rent by Landlord
be construed as consent to continued occupancy.
36. NON-INTERFERENCE. Landlord may improve the land and building in which
the leased premises is located. Although Landlord will attempt to have the work
performed in such a manner as not to inconvenience Tenant or interfere with its
use and occupancy of the leased premises, Tenant understands that there may be
temporary interferences with Tenant's use and occupancy. Such interferences
shall not be cause for Tenant to terminate this lease nor receive a reduction or
abatement of rent. Landlord shall not permit major interruptions or
interferences with Tenant's use and occupancy of the leased premises.
37. SECURITY DEPOSIT. The Tenant has deposited with the Landlord the sum
of $137,000.00 simultaneously with the execution and delivery of this lease,
said deposit to be security for the full and faithful performance by Tenant of
all the terms, covenants and conditions of this lease on the part of the Tenant
to be performed. The unreturned or unapplied balance of the security deposit
shall bear interest at the rate of two and one-half (2-1/2%) percent per year
(not compounded), and Landlord shall not be required to maintain the deposit in
a separate account, but Landlord may commingle it with
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its own funds. Provided that Tenant is not then in default of its obligations
pursuant to this lease, Landlord will return to Tenant out of the security the
amount of $22,833.33 on March 1, 2000, March 1, 2001 and March 1, 2002. The said
balance of security and all earned interest shall be returned to the Tenant by
the Landlord after the expiration of the term of this lease, provided Tenant has
fully and faithfully performed all of the terms, covenants and conditions of
this lease on its part to be performed. In the event of a bona fide sale of the
leased premises, subject to this lease, the Landlord shall have the right to
transfer the security and earned interest to its vendee for the benefit of the
Tenant, and the Landlord shall be considered released by the Tenant from all
liability for the return of such security and interest; and the Tenant agrees to
look to the new landlord solely for the return of such security and interest and
the parties hereto agree that the foregoing shall apply to every transfer or
assignment made of the security and interest to a new landlord. Tenant shall not
be entitled to any interest on said security deposited except as specifically
provided in this Section. Landlord may use, apply or return the whole or any
part of the security deposit and interest to the extent required for the payment
of any rent, additional rent or any other sums which Tenant may owe as a result
of its default in the provisions of this lease. In the event Landlord applies
all or any portion of the security deposit and interest in payment of Tenant's
obligations hereunder because of Tenant's partial or total default, Tenant shall
restore the security deposit to its original amount within ten (10) days after
receipt of written notice from Landlord stating the amount of security deposit
which Landlord applied in payment of Tenant's obligations.
38. TENANT'S REIMBURSEMENT. Tenant shall reimburse Landlord for the
actual, reasonable attorneys' fees incurred by Landlord in connection with each
review of any requested consent for subletting or assignment, and for the
preparation or review of any documents or instruments pertaining to the same,
and for any action to enforce Tenant's obligation pursuant to this lease,
including, but not limited to, collection of rent and/or additional rent,
dispossess actions and distraint.
39. NOTICES. All notices, demands and requests required under this lease
shall be in writing. All such notices, demands and requests shall be deemed to
have been properly given if sent by United States certified mail, return receipt
requested, postage prepaid or by public courier with charges prepaid, addressed
to the addressees shown on the first page of this lease. Notices shall be
effective upon receipt by the addressee or refusal to accept delivery or the
unavailability of anyone at the address to accept or refuse delivery during
normal business hours. Landlord or Tenant may from time to time change the
address for receipt of notice by giving notice thereof to the other in
accordance with the provisions of this paragraph.
40. NO SETOFF. Tenant shall not be entitled to assert any claim, credit or
right of setoff against Landlord in any action to dispossess Tenant for
non-payment of rent or other default hereunder, and Tenant's sole remedy shall
be to pursue such claims in a separate lawsuit against Landlord. The rent due
hereunder, whether fixed or additional, and all money to become due and owing to
Landlord, shall be paid without credit or setoff, except for such amount as may
be due and owing by Landlord to Tenant pursuant to a judgment entered in a court
of competent jurisdiction.
41. FINANCIAL STATEMENTS. Tenant shall, if requested by Landlord or
Landlord's mortgagee or any future mortgagee, or prospective mortgagee or
prospective purchaser, submit to Landlord, any prospective mortgagee or
purchaser, without cost to Landlord, a copy of Tenant's financial statement
which shall be considered "confidential" by the recipient. Tenant shall also,
without cost to Landlord, submit to any prospective mortgagee or purchaser such
prior statements as it may have, as and when required by Landlord or Landlord's
mortgagee or prospective mortgagee or prospective purchaser.
42. MORTGAGEE PROTECTION CLAUSE. Tenant agrees to give all mortgagees, by
certified mail, a copy of any notice of default served on Landlord, provided
that prior to such notice Tenant has been notified, in writing (by
21
<PAGE>
way of notice of assignment of rents and leases or otherwise), of the name and
address of such mortgagees. The mortgagees shall have the same time within which
to cure such default as is given to Landlord under this Lease.
43. MODIFICATIONS REQUESTED BY MORTGAGEE. In the event that a prospective
mortgagee of the leased premises or the property of which it is a part shall
request a change in the language of the terms of this lease, or the execution of
any document in connection therewith, Tenant agrees to make such change or
execute such document provided the same shall not increase Tenant's obligations
or liabilities under this lease.
44. LANDLORD'S CONSENT. If in this lease it is provided that Landlord's
consent or approval as to any matter will not be unreasonably withheld, and it
is established by a court or body having final jurisdiction thereover that
Landlord has been unreasonable, the only effect of such finding shall be that
Landlord shall be deemed to have given its consent or approval.
45. FORCE MAJEURE. Neither Landlord nor Tenant shall be required to
perform any term, condition, or covenant in this lease so long as such
performance is delayed or prevented by force majeure, which shall mean acts of
God, strikes, lockouts, material or labor restrictions by any governmental
authority, civil riot, floods, and any other cause not reasonably within the
control of Landlord or Tenant and which by the exercise of due diligence
Landlord or Tenant is unable, wholly or in part, to prevent or overcome.
46. MODIFICATION AND PARTIAL INVALIDITY. This lease contains the entire
agreement between the parties and shall not be modified in any manner except by
an instrument in writing executed by the parties. If any term or provision of
this lease, or the application thereof, to any person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each term and provision of this lease shall be valid and be enforced
to the fullest extent permitted by law.
47. BINDING EFFECT. This lease shall be binding upon and inure to the
benefit of the Landlord and Tenant and their respective successors and proper
assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and year first above written to this lease agreement.
WITNESS: Hollister '97, L.L.C.
By: Lyndhurst Properties Associates
L.P., its Manager
______________________ By:_________________________________
Stanley H. Marcus, its
General Partner
WITNESS: BEI Medical Systems Company, Inc.
______________________ By:_________________________________
22
<PAGE>
EXHIBIT "B"
Landlord's Work
1. All walls will be made "paint ready".
2. In production area, strip and re-wax vinyl flooring which is in good
condition; replace with new matching vinyl flooring all areas that cannot be
reasonably restored.
3. Replace all worn ceiling tiles.
4. Fix bathroom flooring.
5. The following in accordance with plans and specifications as agreed
between Landlord and Tenant:
(a) Distribution of electrical power and lighting to work areas and
drops to benches.
(b) Installation of a cafeteria, including plumbing and counter
tops.
(c) Install venting equipment.
(d) Demolition and reconstruction as required.
6. Repair and/or replace, with similar, the flooring in the lobby area.
7. Furnish and install (2) sinks in the production area and the plumbing
to connect them.
8. Repair or replace any damaged cove base in tiled areas.
9. Epoxy seal front entrance steps.
10. Replace broken plate glass window near front entrance.
[LOGO]
[LETTERHEAD OF BEI MEDICAL SYSTEMS]
Confidential
January 29, 1999
Mr. Herb Spoon
President, Chief Executive Officer
BEI Medical Systems Company, Inc.
100 Hollister Road
Teterboro, NJ 07608
Dear Herb,
I have informed you of the Board of Directors' decision to seek other leadership
for the Company. Consistent with that action, this letter will record the
Company's agreement with you regarding the terms of your separation from BEI
Medical Systems Company, Inc.
1. Effective February 1, 1999, you agree to resign and do hereby resign as
President and Chief Executive Officer of the Company.
2. You will thereafter continue as a regular employee of the Company in the
position of Senior Advisor to the Chairman and President. This assignment will
continue until October 31, 1999 unless you elect to terminate your employment at
an earlier date.
3. In consideration of your release of the Company as set forth below, the
following employment terms and special separation benefits are agreed:
a) Your base salary will continue at 100% of the present rate through
April 1999.
b) Your base salary will continue at 50% of the present rate from May
through October 1999 unless you elect to terminate your employment
earlier.
c) Your entitlement to medical and dental insurance coverage and
participation in the Company's 401(k) plan will continue during the
remainder of your employment with the Company, but additional
vacation accrual, life insurance and disability insurance will
terminate as of January 31, 1999.
d) Subject to your satisfactory service through March, 1999, your
entitlement to vesting of 25% of your incentive stock options and
restricted stock on April 1, 1999 will be unaffected by your
separation in accordance with this Agreement.
<PAGE>
Mr. Herb Spoon
January 29, 1999
Page Two
e) In addition to the above and in consideration of your assistance in
support of arrangements for new financing, the Company will pay you
a success fee of $20,000 if we are able to close a new
equity-related infusion of at least $2.0 million by May 1, 1999.
4. You will be provided with office space and secretarial support as the
Company's Teterboro facility which you may use or not as you judge best. In
response to telephone inquiries, the Company will indicate that you are a
"Senior Advisor" to the Company.
5. The terms of this separation agreement are to remain confidential.
6. You release and give up all claims and rights which you may have against BEI.
This Release applies to claims resulting from anything which has happened up to
now. You specifically release the following claims, as well as any other claims
you might have against BEI including those of which you are not aware and those
not mentioned in the Release:
a) All claims in connection with your employment and the termination of
your employment, including claims under federal and state fair
employment practice or discrimination laws, laws pertaining to
breach of employment contract or wrongful termination or any other
laws relating to your employment.
b) This does not release BEI from any obligation for benefits due you
as of the date of the termination of your employment under the
Employee Benefit Plans, such as, but not limited to, the Medical
Insurance Plan. This also does not release BEI from claims you may
have currently or in the future with respect to matters covered by
state worker's compensation laws or unemployment benefit laws.
c) You will not bring any lawsuit or file any charge or claims against
BEI in any court or before any government agency relating to your
employment or the termination of your employment.
/s/ Herb Spoon /s/ Charles Crocker
- ------------------------- ----------------------------------
Signed & Accepted Charles Crocker
Chairman of the Board of Directors
BEI Medical Systems Company, Inc.
[GRAPHIC OMITTED]
The Merrill Lynch Nonqualified Deferred
Compensation Plan Trust Agreement
(Areas highlighted in grey will be completed
by Merrill Lynch Trust.)
TRUST UNDER:
BEI Medical Systems Company, Inc.
DEFERRED COMPENSATION PLAN(1)
This Agreement made this day of 7/15, 1999, by and between BEI Medical Systems
Co., Inc. (Company)
and Merrill Lynch Trust
of ________________, a ________________ corporation (Trustee);
WHEREAS, Company has adopted the Nonqualified Deferred Compensation Plan
identified above and such other Plan(s) as are listed in Appendix A.
WHEREAS, Company has incurred or expects to incur liability under the terms of
such Plan(s) with respect to the individuals participating in such Plan(s).
WHEREAS, Company wishes to establish a trust (the "Trust") and to contribute to
the Trust assets that shall be held therein, subject to the claims of Company's
creditors in the event of the Company's insolvency, as herein defined, until
paid to Plan participants and their beneficiaries in such manner and at such
times as specified in the Plan(s);
WHEREAS, it is the intention of the parties that this Trust shall constitute an
unfunded arrangement and shall not affect the status of the Plan(s) as an
unfunded plan maintained for the purpose of providing deferred compensation for
a select group of management or highly compensated employees for purpose of
Title I of the Employee Retirement Income Security Act of 1974.
WHEREAS, it is the intention of Company to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the
Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust such cash and/or marketable
securities, if any, listed in Appendix B, which shall become the principal of
the Trust to be held, administered and disposed of by Trustee as provided in
this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon, shall be held separate
and apart from other funds of Company and shall be used exclusively for the uses
and purposes of Plan participants and general creditors as herein set forth.
Plan participants and their beneficiaries shall have no preferred claim on, or
any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan(s) and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of insolvency, as defined in
Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to time, make
additional deposits of cash or other property in trust with Trustee to augment
the principal to be field, administered and disposed of by Trustee as provided
in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary
shall have any right to compel such additional deposits.
(f) Trustee shall not be obligated to receive such cash and/or property unless
prior thereto Trustee has agreed that such cash and/or property is acceptable to
Trustee and Trustee has received such reconciliation, allocation, investment or
other information concerning, or representation with respect to, the cash and/or
property as Trustee may require. Trustee shall have no duty or authority to (a)
require any deposits to be made under the Plan or to Trustee; (b) compute any
amount to be deposited under the Plan to Trustee; or (c) determine whether
amounts received by Trustee comply with the Plan. Assets of the Trust may, in
Trustee's discretion, be held in an account with an affiliate of Trustee.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) With respect to each Plan participant, Company shall deliver to Trustee a
schedule (the "Payment Schedule") that indicates the amounts payable in respect
of the participant (and his or her beneficiaries), that provides a formula or
other instructions acceptable to Trustee for determining the amounts so payable,
the form in which such amount is to be paid (as provided for or available under
the Plan(s)), and the time of commencement for payment of such amounts. The
Payment Schedule shall be delivered to Trustee not more than 30 business days
nor fewer than 15 business days prior to the first date on which a payment is to
be made to the Plan Participant. Any change to a payment Schedule shall be
delivered to Trustee not more than 30 days nor fewer than 15 days prior to the
date on which the first payment is to be made in accordance with the changed
Payment Schedule. Except as otherwise provided herein, Trustee shall make
payments to Plan participants and their beneficiaries in accordance with such
Payment Schedule. The Trustee shall make provisions for the reporting and
withholding of any federal, state or local taxes that
(1) This trust is intended to comply with the model grantor trust requirement of
Revenue Procedure 92-64. While Merrill Lynch believes that this Trust Agreement
complies with the Revenue Procedure, it provides no assurance that modifications
to the additional terms contained herein would not be required by the Internal
Revenue Service during the review process in the event the Company were to apply
for a ruling as to the tax consequences of its plan and this trust. If the
Company desires to obtain such a ruling from the Internal Revenue Service, a
copy of this Trust Agreement with all substituted or additional language
underlined as required by the Revenue Procedure is available through your
Merrill Lynch Financial Consultant.
11-F
<PAGE>
continued
may be required to be withheld with respect to the payment of benefits pursuant
to the terms of the Plan(s) and shall pay amounts withheld to the appropriate
taxing authorities or determine that such amounts have been reported, withheld
and paid by Company, it being understood among the parties hereto that (1)
Company shall on a timely basis provide Trustee specific information as to the
amount of taxes to be withheld and (2) Company shall be obligated to receive
such withheld taxes from Trustee and properly pay and report such amounts to the
appropriate taxing authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan(s) shall be determined by Company or such party as it
shall designate under the Plan(s), and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan(s).
(c) Company may make payment of benefits directly to Plan participants or their
beneficiaries as they become due under the terms of the Plan(s). Company shall
notify Trustee of its decision to make payment of benefits directly prior to the
time amounts are payable to participants or their beneficiaries. In addition, if
the principal of the Trust, and any earnings thereon, are not sufficient to make
payments of benefits in accordance with the terms of the Plan(s), Company shall
make the balance of each payment as it falls due. Trustee shall notify Company
where principal earnings are not sufficient.
(d) Trustee shall have not responsibility to determine whether the Trust is
sufficient to meet the liabilities under the Plan(s), and shall not be liable
for payments or Plan(s) liabilities in excess of the value of the Trust's
assets.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When
Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is insolvent. Company shall be considered
"insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in Section
1(d) hereof, the principal and income of the Trust shall be subject to claims of
general creditors of Company under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Company (or,
if there is no Chief Executive Officer, the highest ranking officer) shall have
the duty to inform Trustee in writing of Company's insolvency. If a person
claiming to be a creditor of Company alleges in writing to Trustee that Company
has become insolvent, Trustee shall determine whether Company is insolvent and,
pending such determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's insolvency, or has
received notice from Company or a person claiming to be a creditor alleging that
Company is insolvent, Trustee shall have no duty to inquire whether Company is
insolvent. Trustee may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any rights
of Plan Participants or their beneficiaries to pursue their rights as general
creditors of Company with respect to benefits due under the Plan(s) or
otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or
their beneficiaries in accordance with Section 2 of this Trust Agreement only
after Trustee has determined that Company is not insolvent (or is no longer
insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants provided for hereunder during any such period of
discontinuance; provided that Company has given Trustee the information with
respect to such payments made during the period of discontinuance prior to
resumption of payments by Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, since the Trust is irrevocable in
accordance with Section 1(b) hereof, Company shall have no right or power to
direct Trustee to return to Company or to divert to others any of the Trust
assets before all payment of benefits have been made to Plan participants and
their beneficiaries pursuant to the terms of the Plan(s).
Section 5. Investment Authority.
(a) Trustee may invest in securities (including stock or rights to acquire
stock) or obligations issued by Company. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by Trustee, and
shall in no event be exercised by or rest with Plan participants, except that
voting rights with respect to Trust assets will be exercised by Company unless
an investment adviser has been appointed pursuant to Section 5(c) and voting
authority has been delegated to such investment adviser.
(b) Company shall have the right at any time, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any asset held
by the Trust. This right is exercised by Company in a nonfiduciary capacity
without the approval or consent of any person in a fiduciary capacity.
(c) Trustee may appoint one or more investment advisers who are registered as
investment advisers under the Investment Advisers Act of 1940, who may be
affiliates of Trustee, to provide investment advice on a discretionary or
nondiscretionary basis with respect to all or a specified portion of the assets
of the Trust.
(d) Trustee, or Trustee's designee, is authorized and empowered:
(1) To invest and reinvest Trust assets, together with the income
therefrom, in common stock, preferred stock, convertible preferred stock, bonds,
debentures, convertible debentures and bonds, mortgages, notes, commercial paper
and other evidences of indebtedness (including those issued by Trustee), shares
of mutual funds (which funds may be sponsored, managed or offered by an
affiliate of Trustee), guaranteed investment contracts, bank investment
contracts, other securities, policies of life insurance, annuity contracts,
options, options to buy or sell securities or other assets, and all other
property of any type (personal, real or mixed, and tangible or intangible);
(2) To deposit or invest all or any part of the assets of the Trust in
savings accounts or certificates of deposit or other deposits in a bank or
savings and loan association or other depository institution, including Trustee
or any of its affiliates, provided with respect to such deposits with Trustee or
an affiliate the deposits bear a reasonable interest rate;
12-F
<PAGE>
continued
(3) To hold, manage, improve, repair and control all property, real or
personal, forming part of the Trust; to sell, convey, transfer, exchange,
partition, lease for any term, even extending beyond the duration of this Trust,
and otherwise dispose of the same from time to time;
(4) To hold in cash, without liability for interest, such portion of the
Trust as is pending investments, or payment of expenses, or the distribution of
benefits;
(5) To take such actions as may be necessary or desirable to protect the
Trust from loss due to the default on mortgages held in the Trust including the
appointment of agents or trustees in such other jurisdictions as may seem
desirable, to transfer property to such agents or trustees, to grant to such
agents such powers as are necessary or desirable to protect the Trust, to direct
such agent or trustee, or to delegate such power to direct, and to remove such
agent or trustee;
(6) To settle, compromise or abandon all claims and demands in favor of or
against the Trust;
(7) To exercise all of the further rights, powers, options and privileges
granted, provided for, or vested in trustees generally under the laws of the
state in which Trustee is incorporated as set forth above, so that the powers
conferred upon Trustee herein shall not be in limitation out of any authority
conferred by law, but shall be in addition thereto;
(8) To borrow money from any source and to execute promissory notes,
mortgages or other obligations and to pledge or mortgage any trust assets as
security; and
(9) To maintain accounts at, execute transactions through, and lend on an
adequately secured basis stocks, bonds or other securities to, any brokerage or
other firm, including any firm that is an affiliate of Trustee.
Section 6. Additional Powers of Trustee.
To the extent necessary or which it deems appropriate to implement its
powers under Section 5 or otherwise to fulfill any of its duties and
responsibilities as Trustee of the Trust, Trustee shall have the following
additional powers and authority:
(a) To register securities, or any other property, in its name or in the
name of any nominee, including the name of any affiliate or the nominee name
designated by any affiliate, with or without indication of the capacity in which
property shall be held, or to hold securities in bearer form and to deposit any
securities or other property in a depository or clearing corporation;
(b) To designate and engage the services of, and to delegate powers and
responsibilities to, such agents, representatives, advisers, counsel and
accountants as Trustee considers necessary or appropriate, any of whom may be an
affiliate of Trustee or a person who renders services to such an affiliate, and,
as a part of its expenses under this Trust Agreement, to pay their reasonable
expenses and compensation;
(c) To make, execute and deliver, as Trustee, any and all deeds, leases,
mortgages, conveyances, waivers, releases or other instruments in writing
necessary or appropriate for the accomplishment of any of the powers listed in
this Trust Agreement; and
(d) Generally to do all other acts that Trustee deems necessary or appropriate
for the protection of the Trust.
Section 7. Disposition of Income.
(a) During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 8. Accounting by Trustee.
(a) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 90 days following the close out of each calendar
year and within 90 days after removal or resignation of Trustee, Trustee shall
deliver to the Company a written account of its administration of the Trust
during such year or during the period from the close of the last preceding year
to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be. Trustee may satisfy its obligation under this
Section 8 by rendering to Company monthly statements setting forth the
information required by this Section separately for the month covered by the
statement.
Section 9. Responsibility and Indemnity of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity with, the
terms of the Plan(s) and this Trust and is given in writing by Company. Trustee
shall also incur no liability to any person for any failure to act in the
absence of direction, request or approval from Company that is contemplated by,
and in conformity with, the terms of this Trust. In the event of a dispute
between Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) Company hereby indemnifies Trustee and each of its affiliates (collectively,
the "Indemnified Parties") against, and shall hold them harmless from, any and
all loss, claims, liability, and expense, including reasonable attorneys' fees,
imposed upon or incurred by any Indemnified Party as a result of any acts taken,
or any failure to act, in accordance with the directions from Company or any
designee of Company, or by reason of the Indemnified Party's good faith
execution of its duties with respect to the Trust, including, but not limited
to, its holding of assets of the Trust. Company's obligations in the foregoing
regard to be satisfied promptly by Company, provided that in the event the loss,
claim, liability or expense involved is determined by a no longer appealable
final judgment entered in a lawsuit or proceeding to have resulted from the
gross negligence our willful misconduct of Trustee, Trustee shall promptly on
request thereafter return to Company any amount previously received by Trustee
under this Section with respect to such loss, claim, liability our expense. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust without direction from
Company.
(c) Trustee may consult with legal counsel (who may also be counsel for Company
generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisers,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on Trustee by
applicable law, unless expressly provided otherwise herein, provided, however,
that if an insurance policy is held as an asset of the Trust, Trustee shall have
no power to name a beneficiary of the policy other than the Trust, to assign the
policy (as distinct from conversion of the policy to a different form) other
than to a successor Trustee, or to loan to any person the proceeds of any
borrowing against such policy.
13-F
<PAGE>
continued
(f) However, notwithstanding the provisions of Section 9(e) above, Trustee may
loan to Company the proceeds of any borrowing against an insurance policy held
as an asset of the Trust.
(g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement or to
applicable law, Trustee shall not have any power that could give this Trust the
objective of carrying on a business and dividing the gains therefrom, within the
meaning of section 301.7701-2 of the Procedure and Administrative Regulations
promulgated pursuant to the Internal Revenue Code.
Section 10. Compensation and Expenses of Trustee.
Trustee is authorized, unless otherwise agreed by Trustee, to withdraw
from the Trust without direction from Company the amount of its fees in
accordance with the fee schedule agreed to by Company and Trustee. Company shall
pay all administrative expenses, but if not so paid, the expenses shall be paid
from the Trust.
Section 11. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which shall be
effective 30 days after receipt of such notice unless Company and Trustee agree
otherwise.
(b) Trustee may be removed by Company on 30 days notice or upon shorter notice
accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The Transfer shall be completed within 60 days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit,
provided that Trustee is provided assurance by Company satisfactory to Trustee
that all fees and expenses reasonably anticipated will be paid.
(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 12 hereof, by the effective date of resignation or
removal under paragraphs(s) (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceedings shall be allowed as administrative expense of
the Trust.
(e) Upon settlement of the account and transfer of the Trust assets to the
successor Trustee, all rights and privileges under this Trust Agreement shall
vest in the successor Trustee and all responsibility and liability of Trustee
with respect to the Trust and assets thereof shall terminate subject only to the
requirement that Trustee execute all necessary documents to transfer the Trust
assets to the successor Trustee.
Section 12. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 11(a) or (b)
hereof, Company may appoint any third party, such as a bank trust department or
other party that may be granted corporate trustee powers under state law, as a
successor to replace Trustee upon resignation or removal. The appointment shall
be effective when accepted in writing by the new Trustee, who shall have all of
the rights and powers of the former Trustee, including ownership rights in the
Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor Trustee shall not be responsible for and Company
shall indemnity and defend the successor Trustee from any claim on liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.
Section 13. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s) or shall make the Trust revocable since
the Trust is irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants and
their beneficiaries are no longer entitled to benefits pursuant to the terms of
the Plan(s). Upon termination of the Trust any assets remaining in the Trust
shall be returned to Company.
(c) Upon written approval of participants or beneficiaries entitled to payment
of benefits pursuant to the terms of the Plan(s), Company may terminate this
Trust prior to the time all benefit payments under the Plan(s) have been made.
All assets in the Trust at termination shall be returned to Company.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be ineffective
to the extent of any such prohibition, without invalidating the remaining
provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance with
the laws of the state in which Trustee is incorporated as set forth above.
(d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this Agreement
shall survive termination of this Agreement.
(e) The rights, duties, responsibilities, obligations and liabilities of Trustee
are as set forth in this Trust Agreement, and no provision of the Plan(s) or any
other documents shall affect such rights, responsibilities, obligations and
liabilities. If there is a conflict between provisions of the Plan(s) and this
Trust Agreement with respect to any subject involving Trustee, including but not
limited to the responsibility, authority or powers of Trustee, the provisions of
this Trust Agreement shall be controlling.
(f) For purposes of this Trust, Change of Control shall mean: The purchase or
other acquisition by any person, entity or group of persons, entity or group of
person, within the meaning of section 13(d) or 14(d) of the Securities Exchange
Act of 1934 ("Act"), or any comparable successor provisions, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30
percent or more of either the outstanding shares of common stock or the combined
voting power of Company's then outstanding voting securities entitled to vote
generally, or the approval by the stockholders of Company of a reorganization,
merger, or consolidation, in each case, with respect to which persons who were
stockholders of Company immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than 50 percent of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated Company's then outstanding securities,
or a liquidation or dissolution of Company or of the sale of all or
substantially all of Company's assets.
Section 15. Arbitration.
o Arbitration is final and binding on the parties.
14-F
<PAGE>
continued
o The parties waive their right to seek remedies in court, including the right
to jury trial.
o Pre-arbitration discovery is generally more limited than and different from
court proceedings.
o The arbitrators' award is not required to include factual findings or level
reasoning and any party's right to appeal or seek modification of rulings by the
arbitrators is strictly limited.
o The panel of arbitrators will typically include a minority of arbitrators who
were or are affiliated with the securities industry.
Company agrees that all controversies that may arise between Company and either
or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") in connection with the Trust, including, but not limited
to, those involving any transactions, or the construction, performance, or
breach of this or any other agreement between Company and either or both the
Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date
hereof, shall be determined by arbitration. Any arbitration under this agreement
shall be conducted only before the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., or arbitration facility provided by any other exchange of
which MLPF&S is a member, the National Association of Securities Dealers, Inc.,
or the Municipal Securities Rulemaking Board, and in accordance with its
arbitration rules then in force. Company may elect in the first instance whether
arbitration shall be conducted before the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., other exchange of which MLPF&S is a member, the
National Association of Securities Dealers, Inc., or the Municipal Securities
Rulemaking Board, but if Company fails to make such election, by registered
letter or telegram addressed to Merrill Lynch Trust, Employee Benefit Trust
Operations, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, before the
expiration of five days after receipt of a written request from MLPF&S and/or
the Trustee to make such election, then MLPF&S and/or the Trustee may make such
election. Judgment upon the award of arbitrators may be entered in any court,
state or federal, having jurisdiction. No person shall bring a putative or
certified class action to arbitration, nor seek to enforce any pre-dispute
arbitration agreement against any person who has initiated in court a putative
class action; who is a member of putative class who has not opted out of the
class with respect to any claims encompassed by the putative class action until:
(i) the class certification is denied;
(ii) the class is decertified; or
(iii) the customer is excluded from the class by the court. Such forbearance to
enforce an agreement to arbitrate shall not constitute a waiver of any rights
under this agreement except to the extent stated herein.
Section 16. Effective Date.
The effective date of this Trust Agreement shall be 7/15, 1999.
IN WITNESS WHEREOF, Company and the Trustee have executed this Trust Agreement
each by action of a duly authorized person.
By signing this Agreement, the undersigned Company acknowledges (1) that,
in accordance with Section 15 of this Agreement, Company is agreeing in advance
to arbitrate any controversies that may arise with either or both the Trustee or
MLPF&S and (2) receipt of a copy of this Agreement.
- --------------------------------------------------------------------------------
BEI Medical Systems Company, Inc.
- ---------------------------------
(Company)
By /s/ Richard W. Turner
------------------------------
Name/Title: Richard W. Turner
---------------------
President & CEO
- ---------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Add second signature if required:
By: /s/ Thomas W. Fry
------------------------------
Name/Title: Thomas W. Fry
---------------------
V.P., Finance & Administration
- ---------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________
(Trustee)
By: _____________________________
(Signature)
Name/Title: _____________________
_________________________________
- --------------------------------------------------------------------------------
Appendix A
Name of Nonqualified Deferred Compensation Plan(s):
BEI Medical Systems Company, Inc. Deferred Compensation Plan
_______________________________________________________ Plan
Appendix B
Deposit of cash and/or marketable securities to the Trust:
Cash: $_________________________________________________________________________
Marketable Securities:__________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
"Company Copy"
15-F
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements Form S-8 No. 333-82867 pertaining to the Amended 1987 Stock Option
Plan and the 1992 Restricted Stock Plan and Form S-8 No. 333-80433 pertaining to
the Amended 1987 Stock Option Plan and the 1992 Restricted Stock Plan of BEI
Medical Systems Company, Inc. (formerly BEI Electronics, Inc.), of our reports
dated December 8, 1999, with respect to the consolidated financial statements
and schedule of BEI Medical Systems Company, Inc. included in this Annual Report
(Form 10-K) for the year ended October 2, 1999, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Hackensack, New Jersey
December 27, 1999
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles Crocker and Thomas W. Fry, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Charles Crocker Chairman of the Board of December 29, 1999
- -------------------------------- Directors
(Charles Crocker)
Vice President of Finance and
/s/Thomas W. Fry Administration, Secretary and December 29, 1999
- -------------------------------- Treasurer
(Thomas W. Fry) (Principal Financial and
Accounting Officer)
/s/Ralph M. Richart Director December 29, 1999
- --------------------------------
(Ralph M. Richart)
/s/Richard W. Turner President and Chief Executive December 29, 1999
- -------------------------------- Officer & Director
(Richard W. Turner)
/s/Lawrence A. Wan Director December 29, 1999
- --------------------------------
(Lawrence A. Wan)
/s/Gary D. Wrench Director December 29, 1999
- --------------------------------
(Gary D. Wrench)
</TABLE>
- --------------------------------------------------------------------------------
66
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCTOBER 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 1,654
<SECURITIES> 0
<RECEIVABLES> 431
<ALLOWANCES> (93)
<INVENTORY> 339
<CURRENT-ASSETS> 10,168
<PP&E> 1,157
<DEPRECIATION> (734)
<TOTAL-ASSETS> 10,962
<CURRENT-LIABILITIES> 3,263
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 7,689
<TOTAL-LIABILITY-AND-EQUITY> 10,962
<SALES> 8,419
<TOTAL-REVENUES> 8,419
<CGS> 5,182
<TOTAL-COSTS> 10,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (96)
<INCOME-PRETAX> (7,288)
<INCOME-TAX> (379)
<INCOME-CONTINUING> (6,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,909)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
