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 September 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-17885
B E I M E D I C A L S Y S T E M S C O M P A N Y, I N C.
(Exact name of Registrant as specified in its charter)
DELAWARE 71-0455756
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) 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
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 11, 2000 was $10,302,941 (A). As
of December 11, 2000, 7,686,108 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on December 11, 2000,
as reported on the Nasdaq National Market System. Excludes 1,798,527 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 11, 2000.
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 2001 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.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 25
Item 3. Legal Proceedings...................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.... 25
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................ 26
Item 6. Selected Financial Data................................ 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 28
Item 7a. Qualitative and Quantitative Disclosures about
Market Risks........................................... 33
Item 8. Financial Statements and Supplementary Data............ 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant..... 55
Item 11. Executive Compensation................................. 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 55
Item 13. Certain Relationships and Related Transactions......... 55
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................ 56
Signatures ....................................................... 60
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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 constituted 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 96.8% 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, after
post closing adjustments, $10.3 million in cash. 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 provided 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.
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 menorrhagia or dysfunctional uterine bleeding.
Approval to market this system in the United States is dependent upon
authorization from the U.S. Food and Drug Administration ("FDA"). The Company
completed 12-month, post-treatment follow-up examinations in August 2000 and
submitted the results to the FDA in September 2000 as the final portion of the
modular application for Pre-Market Approval ("PMA") seeking FDA authorization to
market the HTA in the United States. The Company currently anticipates FDA
review in early calendar 2001. See "Business--Risk Factors--Future Capital Needs
and Applications".
The Distribution
Prior to September 27, 1997, the Company was known as BEI Electronics,
Inc. ("Electronics") and was engaged in businesses other than the medical device
business. On September 27, 1997, having transferred all of its non-medical
device businesses to BEI Technologies, Inc. ("Technologies"), a recently formed
wholly owned subsidiary, in exchange for all of Technologies' outstanding common
stock, Electronics distributed that stock to its stockholders
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in a tax-free spin-off of Technologies (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.
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 are expected to 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 have 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 well as a line of gastroenterology products.
As a result of the Asset Sale, the Company no longer manufactures, markets,
sells or services any of the these products, except the HTA and related
accessories.
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
dysfunctional uterine bleeding. This new product and its potential are more
fully discussed below.
The female reproductive system primarily 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 woman's body.
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,
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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 dysfunctional 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 or polyps
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 dysfunctional
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
dysfunctional 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
public attention has been focused on the frequency with which hysterectomy is
performed, suggesting that many of the procedures for benign conditions may be
addressed with minimally invasive alternatives.
Alternative Treatments
Rather than removing the uterus, alternative approaches to the
treatment of dysfunctional uterine bleeding have been attempted.
The first successful endometrial ablation procedures, utilizing laser
photovaporization of the endometrium, were published in 1981 in the Journal of
the American Association of Gynecologic Laparoscopists. By 1990, reports
appeared regarding the successful use of a urologic resectoscope to deliver
electrosurgical current as the means of coagulating the endometrium. Both of
these surgical endometrial ablation techniques require significant distention of
the uterus to create working space. A risk of excessive absorption of
non-conductive (salt free) fluid into the vessels of the uterus also exists due
to the high pressures (100-150 mmHg) used to distend the uterine cavity. When
significant amounts of this non-physiologic fluid is absorbed, the resulting
fluid overload can cause hyponatremia (dilution of body fluids resulting in
electrolyte imbalance), pulmonary edema (fluid in the lungs), cerebral edema
(swelling of the brain), and even deaths have been reported.
Both of these surgical ablation techniques require the tedious
"painting" of the entire lining of the uterus to control depth of thermal
destruction, as well as attention to safety issues (i.e., perforation or
hemorrhage) throughout the typical 30-60 minutes required to complete treatment
of the entire lining of the uterus under general anesthesia.
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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 dysfunctional uterine
bleeding are under development and in various stages of FDA clinical trials.
These devices include balloons filled with heated fluid, a balloon with
electrodes on the surface, a probe to deliver microwave energy, a probe
utilizing cryogenics to freeze tissue in the uterus, a bipolar probe
incorporating an expandable conductive mesh that utilizes a vacuum for tissue
contact, and a probe with multiple laser fibers. One such device, the
ThermaChoice balloon from Gynecare, a subsidiary of Johnson & Johnson ("J&J")
received permission from the FDA in December 1997 to market in the United
States.
The Company believes that these devices are limited in their
effectiveness due to their inability to fully conform with the convoluted
surface of the entire uterine lining, their inability to reach into narrow
cornual areas, and their inability to conform to the shape of a broad range of
uterine sizes. Further, none of these devices allow the gynecologist to
visualize the uterine cavity prior to treatment, to confirm the absence of
pathology that may be missed during screening, 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 incidents 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
Location and Large and
Type Abnormal Shaped Distension
Device Technology Employed Method of of Energy Source Uterus of the Uterine
Introduction Cavity
/ Company
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hydro ThermAblator Free circulation Direct visual Circulation to High Low Pressure,
of heated fluid control, uterus through 50 - 55 mmHg
/ BEI and hysteroscope connected to hysteroscope ,
video monitor external heater
--------------------------------------------------------------------------------------------------------------------------
ThermaChoice / J&J Balloon filled Blind insertion Heater inside Limited High Pressure,
& with heated fluid balloon, inside 170-200 mmHg
Cavaterm / uterus, external
Wallsten control unit
--------------------------------------------------------------------------------------------------------------------------
Vesta System Balloon with Blind insertion Electrodes inside Limited High Pressure,
electrodes uterus with external 180+ mmHg
/ Tyco return electrode,
external
electrosurgical
generator
--------------------------------------------------------------------------------------------------------------------------
MEA System Probe with Blind insertion Applicator within Limited Not applicable
microwave uterus, external
/ Microsulis applicator tip microwave generator
--------------------------------------------------------------------------------------------------------------------------
First Option Cryogenic probe Blind insertion Internal probe, Limited Not applicable
external cryogenic
/ CryoGen unit
--------------------------------------------------------------------------------------------------------------------------
NovaSure Probe with Blind insertion Electrodes inside Limited Vacuum
expandable mesh, uterus, external
/ Novacept bipolar electrode electrosurgical
generator
--------------------------------------------------------------------------------------------------------------------------
Gynelase Probe with Blind insertion External diode laser Limited Not applicable
multiple laser generator, laser
/ Sharplan fibers probe inside uterus
==========================================================================================================================
</TABLE>
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The Hydro ThermAblator Solution
The Company has developed the patented HTA technology as an alternative
to existing treatments for menorrhagia, or dysfunctional 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
dysfunctional uterine bleeding:
o Integral hysteroscope provides visual confirmation of uterine anatomy
and instrument position, as well as continuous observation of
treatment effect throughout the entire procedure.
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. Clinical outcome is
not dependent on user experience or variation in technique.
o Minimally invasive, short duration, low cost procedure with limited
risk.
o Hysterscopic examination provides another means for the diagnosis of
any pathology.
The Company's initial target market for the HTA is the 150,000
hysterectomies performed in the United States annually for menorrhagia or
dysfunctional 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 approach to treat dysfunctional uterine bleeding for benign causes in
an outpatient or office setting. The HTA consists of a portable treatment unit,
incorporating microprocessor control and continuous monitoring of fluid
temperature and fluid circulation. Precisely heated saline is circulated within
the patient's uterus, under the direct visual control of the gynecologist, for
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 may be difficult to treat with other devices. The use of
physiologic saline in a closed loop system reduces concerns about fluid
absorption overload, and low pressure reduces the possibility of fluid escaping
from the fallopian tubes. The incorporation of a hysteroscopic telescope
provides visual control during introduction, positive visual confirmation of the
absence of pathology that may have been overlooked during screening and of
proper placement within the uterine cavity before beginning the therapeutic
portion of the treatment, 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, initiate
circulation of room temperature saline to 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.
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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. To the best of the
Company's knowledge the HTA is the only minimally invasive technique for the
treatment of dysfunctional uterine bleeding currently under PMA review by the
FDA that incorporates hysteroscopic visualization.
In the past most therapeutic procedures for the treatment of
dysfunctional 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, instrumentation that requires manipulation 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 and avoid general anesthesia, (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.
The Company anticipates that treatment of dysfunctional uterine
bleeding utilizing the HTA will be an attractive alternative to third party
payors of healthcare services. As an office based, safe, quick and efficient
alternative, HTA treatment can avoid hospitalization and the cost of
hysterectomy and / or the cost associated with long term medical /
pharmaceutical therapy. The Company believes that, if the HTA receives FDA
approval, healthcare providers will be able to use existing reimbursement codes
and procedures currently available for traditional methods of endometrial
ablation, such as laser or electrosurgical resection, to obtain reimbursement
for HTA treatments, and that third party healthcare payors will pay for HTA
treatment and the single use procedure kit when documented as medically
necessary and appropriate for a specific patient. However, 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.
See "Risk Factors - Uncertainty Relating to Third-Party Reimbursement and
Healthcare Reform".
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.
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 dysfunctional 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
dysfunctional 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, and the Company submitted this data to the FDA in September 2000
after review and analysis by its contract research organization (Quintiles). As
announced in September 2000, the HTA produced an average 84.8% reduction in
uterine bleeding among the 167 women treated with the HTA and followed for 12
months, with 40% of the patients having their menstrual bleeding completely
eliminated by the HTA treatment. The average HTA treatment time was 26.4
minutes, which was less than required for roller-ball treatments in the study.
Management is currently working with the FDA as required to facilitate the
review of the PMA application. The Company believes that the clinical trial
results submitted to the FDA demonstrate that the HTA is both safe and effective
and provides substantial evidence that the HTA therapy has equivalent safety and
efficacy as compared to the roller-ball technique in the treatment of
menorrhagia from benign causes. However, there can be no assurance that the data
obtained from the Phase III trial will lead to approval of the PMA application.
Failure of the data to support the safety and effectiveness of the HTA
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or failure of the FDA to issue the PMA 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. In fiscal year 2000,
shipments primarily of procedure kits were made to Australia, Austria, Canada,
China, Finland, Italy, Germany, Portugal, Spain, Switzerland, Taiwan and the
United Kingdom. Over 1,500 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 in some cases now
exceeds 36 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 in early calendar 2001. There can be no
assurance that the Company will be successful in obtaining FDA approval on a
timely basis, or at all. Internationally, the Company has limited distribution
of the HTA utilizing distributors in 12 countries. The Company intends to rely
on these distributors to assist it in obtaining reimbursement approvals from
both government and private insurers in certain international markets as
required. The Company does not currently have distributors in a number of
significant international markets and would need to establish additional
international distribution relationships in order to sell the HTA in those
markets and the Company is limiting its efforts to expand into additional
international markets at this time.
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 the United States to
private healthcare service end-users with revenues in fiscal year 2000
increasingly reflecting shipments of disposable procedure kits. During fiscal
years 2000 and 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. As a result, during fiscal year 2000
international clinical investigators delivered papers at least five major
international conventions detailing their experiences with the HTA. 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 continue 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, 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 minimally invasive 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
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Gynecare, Inc. for approximately $80,000,000 in August 1997. Shortly thereafter,
in December 1997, Gynecare received FDA approval to market its ThermaChoice
uterine balloon therapy for dysfunctional uterine bleeding in the United States.
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 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 products of principal competitors that the Company believes are
currently undergoing clinical trials in the United States, include: First
Option, a product of CryoGen, which is a cryogenic probe that creates an iceball
within the uterus; NovaSure, a product of Novacept which utilizes a bipolar
electrosurgical probe that incorporates an expandable conductive mesh that is
brought into contact with the lining of the uterus through the application of
suction; and the Microsulis PLC, MEA device which employs a hand-held applicator
to apply low power microwaves to the uterine cavity. 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, which
utilizes a balloon with electrodes inside the uterus and an external
electrosurgical generator, in order to obtain FDA approval in the United States.
The Company believes that this trial was not conducted and the Vesta System is
currently not for sale in the United States. Other competitive technologies that
are being sold internationally but not domestically include: Cavaterm, a product
of Wallsten Medical SA, which is hand held balloon containing heated fluid, and
the Gynelase product, which is a laser intrauterine thermal therapy device
distributed by Sharplan.
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.
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, during fiscal year 2000 the Company transferred
production of the HTA control unit to a third party contract manufacturer and
reduced the size of its manufacturing facility in Teterboro, New Jersey. Company
engineers are continuing to work with the third party contract manufacturers to
reduce the cost of the HTA disposable kit and the HTA control unit 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 limited experience in managing the manufacture and
assembly of the HTA in commercial quantities with its third party contract
manufacturers. However, 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 facility in Teterboro, New Jersey was in August 2000.
The audit report did not include any negative observations or identify any areas
of noncompliance. Our current ISO 9001 certification is valid until
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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 facility in Teterboro,
New Jersey and the Company's primary contract manufacturers in October 2000 for
compliance with the QSR. The outcome of this pre-approval inspection audit for
the HTA was received by the Company in a letter dated November 24, 2000, from
the FDA's New Jersey District Office. The FDA stated it is prepared to endorse
applicable pending PMA application or an Export Certificate for products
manufactured at the Company's facility, including the Company's primary contract
manufacturers, that were specifically inspected. 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
Since October 1999, the Company's principal development effort has
focused on the HTA. The Company's internally funded research and development
expenditures were $1,661,000, $3,184,000 and $2,866,000 for the fiscal years
2000, 1999 and 1998, respectively. The Company's spending on research and
development over the next 12 months will be devoted to supporting the PMA
application and gaining FDA approval of the product, as well as supporting
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.
The Company has a portfolio of four patents related to the development
of the HTA and one patent related to a fluid management systems for
hysteroscopy. 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. In the United States, the
patents were issued for either a seventeen year period from date of issue or a
twenty year period from date of filing, whichever is longer, and will expire
from 2011 through 2016. 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.
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An adverse determination in a judicial or administrative proceeding or
failure to obtain necessary license could prevent the Company from manufacturing
and selling 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 PMA process, which requires the manufacturer to prove the
safety and effectiveness of the device to the FDA's satisfaction. A PMA
application must provide extensive preclinical and clinical trial data and
information about the device and its components regarding, among other things,
manufacturing, labeling and promotion. As part of the PMA review, the FDA will
inspect the manufacturer's facilities for compliance with the QSR, which
includes elaborate testing, control, documentation and other quality assurance
procedures.
Upon submission, the FDA determines if the PMA application is
sufficiently complete to permit a substantive review and, if so, the application
is accepted for filing. The FDA then commences an in-depth review of the PMA
application, which the Company believes typically takes approximately 180 days,
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. However, not all PMA applications require a
panel review. In discussions that the Company has had with the FDA
representatives in the Obstetrics and Gynecology division, the Company has been
advised it is not likely that the Company will be required to undergo panel
review. Should the FDA reverse this position there could be a delay in the
timeframe for the approval 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
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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 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 September 30, 2000, BEI had 22 full-time employees, including 8
in research, development and engineering, 3 in marketing and sales, 4 in
operations and 7 in administration. There are no unions representing the
Company's employees. The Company believes that its relations with its employees
are good.
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Risk Factors
Limited Operating History; History of Losses and Expected 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 two to three 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".
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 dysfunctional 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 introduced by 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".
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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
production and product revenues, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals,
and criminal prosecution. The FDA has the authority to require repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
The process of complying with FDA regulations with respect to new and
existing products can be costly and time-consuming. FDA requirements for the
Company's HTA require obtaining FDA premarket approval. The first stage of the
PMA process is submission of an application for an IDE. The IDE permits clinical
evaluations of products on human subjects under controlled experimental
conditions by designated qualified medical institutions. 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. The Company submitted
twelve-month follow-up data to the FDA after review and analysis by its contract
research organization in September 2000. The Company believes that the data
submitted from the Phase III trial supports the safety and effectiveness of the
HTA and meets both the primary and secondary endpoints criteria. If the FDA does
not agree that the data supports the safety and effectiveness of the HTA, there
would be a material adverse effect on the Company's business, financial
condition and results of operations.
The PMA application is a comprehensive report of data and information
obtained by the applicant throughout the product's development and
testing, including 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 approval 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, issue a PMA approval, 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 be successful in obtaining a PMA approval for the HTA in a timely manner,
or at all, which is necessary to market the Company's HTA commercially in the
United States. Delays in obtaining marketing approvals and clearances in the
United States or failure to obtain such authorization, could have material
adverse effects on the Company and its operations. The Company was inspected in
October 2000 with respect to its current facility and the Company's primary
contract manufacturers for compliance of its operations with the QSR. Although
it has been determined that the Company's operations at its current facility and
the Company's primary contract manufacturers sufficiently conform with the FDA's
current QSR to support PMA approval, withdrawal of QSR compliance status would
have a material adverse effect on the Company's business, financial condition
and results of operations. 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, or at all, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is subject to certain FDA regulations governing defective
products and complaints about its products. The Company's products are subject
to recall at any time by the FDA or the Company if it appears that use of the
products could result in, among other things, unwarranted health risks. The FDA
has authority to inspect the Company's facilities to ensure compliance with the
FDC Act and regulations thereunder. Failure to comply with these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The FDA regulates the export of medical devices that have not been
approved or cleared for marketing in the United States. The Company exports 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. Based upon the most recent inspection
in October 2000, these approvals would be granted. However, there can be no
assurance that such required approvals will continue be granted in the future.
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 Company believes that existing cash
balances will provide adequate funding to meet the Company's minimum capital
requirements for the next twelve months. However, this plan does not provide for
the investment in sales and marketing activities that the Company believes will
be required to successfully commercialize the HTA. The Company is considering
options to secure additional financing at this time. There can be no assurance
that such additional financing 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.
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 obtain the
additional capital necessary to commercialize the HTA or does not receive FDA
approval for the HTA in a timely manner, or at all, the Board of Directors is
evaluating various strategic
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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 and management.
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.
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
The Company has ceased all manufacturing and has transferred its
manufacturing activities for the HTA system and disposable components to third
party vendors. Additionally, a number of significant components, such as
thermistors and heater rods, are fabricated to the Company's specifications by
single source suppliers. Establishing other sources of supply for these
components would require additional development efforts by alternate vendors,
resulting in time consuming responses, in addition to re-verification and
re-validation requirements for these replacement parts. 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 been limited to marketing of the HTA internationally
with a group of specialty distributors in selected international markets. The
Company has no direct international or domestic field sales force, and has only
a limited number of 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 financial and human resources. There can be no assurance that the
Company will be able to recruit and retain additional qualified marketing or
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.
18
<PAGE>
Risks Associated with International Sales
All of the Company's sales to date of the HTA have been made
internationally through a limited 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 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 limited the resources directed at supporting
international sales, it has only limited sell-through 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.
19
<PAGE>
The Company's disposable HTA procedure kit and the HTA system are
manufactured by third party vendors, who are responsible for registering and
maintaining their own facility 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 dysfunctional
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.
20
<PAGE>
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, was cleared to be marketed in the
United States by the FDA in December 1997. Other products of principal
competitors that the Company believes are currently undergoing clinical trials
in the United States include: First Option, a product of CryoGen, which is a
cryogenic probe that creates an iceball within the uterus; NovaSure, a product
of Novacept, which utilizes a bipolar electrosurgical probe that incorporates an
expandable conductive mesh that is brought into contact with the lining of the
uterus through the application of suction; and the Microsulis PLC MEA device
which employs a hand-held applicator to apply low power microwaves to the
uterine cavity. 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, which utilizes a balloon with electrodes inside
the uterus and an external electrosurgical generator, in order to obtain FDA
approval in the United States. The Company believes that this trial was not
conducted and the Vesta System is currently not for sale in the United States.
Other competitive technologies that are being sold internationally but not
domestically include: Cavaterm, a product of Wallsten Medical SA, which is a
hand held balloon similar to that of J&J's ThermaChoice balloon, and the
Gynelase product, which is a laser intrauterine thermal therapy device
distributed by Sharplan.
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 dysfunctional 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.
Control by Existing Stockholders and Management
The Company's directors, officers and their affiliates beneficially own
approximately 28.2% of the outstanding Common Stock (assuming exercise of vested
stock options) as of September 30, 2000. As a result of such Common Stock
ownership, the Company's directors, officers and their affiliates, if they voted
together, would be able to
21
<PAGE>
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 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.
22
<PAGE>
Executive Officers and Directors of the Company
The directors, executive officers and key employees of the Company and
their ages and titles as of December 11, 2000 are as follows:
NAME AGE TITLE
---- --- -----
Charles Crocker 61 Chairman of the Board of Directors
Richard W. Turner 54 President and Chief Executive Officer &
Director
Samuel Dickstein 60 Vice President, New Business Development
and Technology
Thomas W. Fry 56 Vice President, Finance and
Administration, Secretary and
Treasurer
Dr. Ralph M. Richart (1) 66 Director
Dr. Lawrence A. Wan (2) 62 Director
Gary D. Wrench (1) (2) 67 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
September 1997. Mr. Crocker is Chairman and Chief Executive Officer of BEI
Technologies, Inc. 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 and Pope & Talbot, Inc. 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, an M.B.A.
from Pepperdine University and a Ph.D. from Berne 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 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.
23
<PAGE>
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. He is also Chairman of the Board of OpticNet,
Inc., which was spun off from BEI Technologies, Inc. in November 2000. 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 and of
OpticNet, Inc. 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 Class I
directors to expire at the 2001 annual meeting of stockholders, the term of
office of the Class II directors to expire at the 2002 annual meeting of
stockholders and the term of office of the Class III directors to expire at the
2003 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.
24
<PAGE>
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.
ITEM 2. PROPERTIES
The Company's principal executive office is located in a leased 10,926
square foot, engineering, and administrative facility in Teterboro, New Jersey.
The lease agreement for the Teterboro facility expires on June 30, 2004. The
monthly base rent through March 2001 is approximately $10,179, plus the
Company's pro rata share of maintenance expenses and real estate taxes with
minor rent increases thereafter through the end of the lease term.
The Company leases one other facility in Chatsworth, California, which
is currently vacant. The lease agreement for the Chatsworth facility expires on
May 31, 2001. The monthly base rent is approximately $4,484, plus the Company's
pro rata share of certain operating expenses and real estate taxes.
Management believes that the Teterboro, New Jersey facility is adequate
and suitable for the current operations of the Company.
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 its
business. The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<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". Since October 7, 1997, the Company's common stock has traded under the
Nasdaq symbol "BMED".
The closing price of the Company's common stock was $1.75 on December
11, 2000.
Set forth below are the high and low closing sale prices on the
National Market System for the periods indicated. Such quotations do not reflect
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
2000 Fiscal Year (ended 9/30/00)
High Low
<S> <C> <C>
Fourth Quarter $2.38 $1.00
Third Quarter $1.88 $1.00
Second Quarter $3.47 $1.06
First Quarter $1.75 $0.63
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
</TABLE>
As of December 11, 2000, there were approximately 314 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 all earnings, if any, 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.
26
<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. In addition, on December 8, 1999, the Company completed
the sale of a substantial portion of its assets to CSAC. The Asset Sale had a
significant impact on the financial condition and results of operations of the
Company, as both revenues and revenue generating assets were significantly
reduced. For further information, see Note 1 to the Consolidated Financial
Statements, the Company's Proxy Statement for Special Meeting of Stockholders,
(File No. 0000929624-99-001921) and 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
-----------------------------------------------------------------------
September October 2, October 3, September 27, September 28,
30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue $ 1,375 $ 8,419 $ 9,651 $ 10,005 $ 9,357
Loss from continuing operations (2,947) (6,909) (4,971) (4,348) (2,682)
Income from discontinued operations -- -- -- 4,583 4,571
Net income (loss) (2,947) (6,909) (4,971) 235 1,889
Loss from continuing operations per common
share, basic and diluted ($0.39) ($0.92) ($0.68) ($0.64) ($0.40)
Earnings from discontinued operations per
common share, basic and diluted -- -- -- 0.67 0.68
Earnings (loss) per common share, basic and
diluted ($0.39) ($0.92) ($0.68) $0.03 $ 0.28
Cash dividends per common share -- -- -- $0.08 $ 0.08
Weighted average shares outstanding 7,615 7,503 7,354 6,817 6,737
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,228 $ 1,397 $ 3,355 $ 9,122 $ 9,128
Working capital 4,285 6,905 8,284 11,085 38,102(1)
Total assets 6,138 10,962 17,388 22,584 115,011(1)
Long-term debt -- -- -- 22 212
Stockholders' equity 4,771 7,699 14,440 17,660 55,972(1)
</TABLE>
(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for fiscal year 1996.
27
<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 principally reflects historical results prior to the Asset
Sale. The Asset Sale had a significant impact upon the financial condition and
results of operations of the Company, as both revenues and revenue generating
assets were significantly reduced (see "Financial Statements and Supplementary
Data"). The Company's product focus became 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 were and are being utilized by BEI: (i) to pay expenses associated
with the Asset Sale in the amount of $1,292,000, including professional fees
($524,000), employee bonuses related to completion of the Asset Sale ($185,000),
severance and other payments ($308,000) plus the cost of products and services
associated with the Transition Agreement 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 Company believes that existing cash
balances will provide adequate funding to meet the Company's minimum capital
requirements for the next twelve months. However, this plan does not provide for
the investment in sales and marketing activities that the Company believes will
be required to commercialize the HTA. The Company is considering options to
secure additional financing at this time. There can be no assurance that such
additional financing 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.
Revenue
Fiscal years 2000, 1999 and 1998
Revenues for the fiscal year ended September 30, 2000, were $1,375,000,
a decrease of $7,044,000 from the fiscal year ended October 2, 1999. The lower
revenue reflects the impact of the Asset Sale on December 8, 1999. Approximately
96.8% of the Company's revenues for fiscal year 1999 were derived from products
that were included in the Base Business sold to CSAC. Fiscal year 2000 included
revenues from the Base Business for approximately nine weeks compared to all of
fiscal year 1999. International revenues from shipments to distributors of the
Company's HTA products for endometrial ablation declined to $191,000 in fiscal
year 2000 from $269,000 in fiscal year 1999. The higher revenue in fiscal year
1999 reflects shipments to international distributors of instrumentation
primarily for use in clinical demonstrations and symposia and represents limited
commercial shipments to private health care services and end-users that were not
repeated in fiscal year 2000, while shipments in fiscal year 2000 were primarily
disposable kits which are used each time the procedure is performed.
In fiscal year 1999, the Company's revenues decreased 12.8% to
$8,419,000 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 reflected 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
28
<PAGE>
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.
The Company's revenues from international customers were approximately
25.3%, 17.2% and 15.5% of the Company's revenue for fiscal years 2000, 1999 and
1998, respectively. Currently, all of the Company's revenues are from
international customers since the HTA is not approved for sale in the Untied
States. International revenues can vary significantly depending on the timing of
shipments and size of orders.
Cost of Revenues and Gross Profit (Loss)
The negative gross profit of $89,000 in fiscal year 2000 compared to
the gross profit of $3,237,000 in fiscal year 1999 reflects the impact of the
Asset Sale and the resulting absorption of fixed overhead expenditures over a
significantly lower revenue base. Overhead expenses for the fiscal year 2000
were approximately $607,000, excluding costs allocated to the products included
in the Asset Sale in the first fiscal quarter of fiscal 2000.
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 to a write-down of the bipolar product line of approximately $173,000 to
reflect negotiated concessions related to the 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 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses declined $3,540,000 to
$3,810,000 for the fiscal year ended September 30, 2000 compared to $7,350,000
in fiscal year 1999. The decline in expenses for fiscal year 2000 reflects
reduced sales and marketing costs of $2,277,000, representing a 64.2% decline.
As a result of the Asset Sale, the Company had a reduction in revenue related
expenditures for personnel, employee benefits, commissions and other marketing
costs; reduced administrative expenses of $1,016,000, representing a 30.9%
decline; reduced amortization of intangible assets of $351,000, representing a
74.7% decline; and reduced foreign exchange losses of $35,000. These decreases
were partially offset by the write down of the carrying value of certain fixed
assets and accounts receivable to their estimated net realizable value following
the Asset Sale of $139,000. The increase in the selling, general and
administrative expenses as a percentage of revenue for fiscal year 2000 compared
to the fiscal year 1999 reflects the impact of the Asset Sale and the lower
revenue on the fixed portion of selling, general and administrative
expenditures.
In fiscal year 1999, selling, general and administrative expenses
decreased $1,338,000 to $7,350,000 compared to $8,688,000 for fiscal year 1998.
The decline in expenses reflected 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 reflected the absence in fiscal year 1999 of a
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
29
<PAGE>
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.
Research, Development and Related Expenses
Research, development and related expenses were $1,661,000 in fiscal
year 2000 compared to $3,184,000 in fiscal year 1999. The reduced spending of
$1,523,000 or 47.8% resulted from the completion of the patient treatment
portion of the HTA Phase III clinical trial in the United States in early August
1999, therefore the rate of spending required to support the clinical trial in
fiscal year 2000 declined significantly from the levels that were required
during the patient treatment phase in fiscal year 1999.
Research, development and related expenses were $3,184,000 for fiscal
year 1999 compared to $2,866,000 for fiscal year 1998. The increased spending
reflected expenses associated with recruiting and treating patients as part of
the HTA Phase III clinical trial 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 trial in July 1998 and in September 1998 began
to treat patients under the approved protocol. As of August 6, 1999, all of the
patients in the clinical trial were treated.
Gain on Asset Sale
The gain on asset sale reflects the closing of the Asset Sale on
December 8, 1999. See Note 1 to the Consolidated Financial Statements for
further information on the Asset Sale.
Interest Income
Interest income in fiscal years 2000, 1999 and 1998 was comprised of
interest income earned on highly liquid investments. Interest income increased
to $299,000 in the fiscal year ended September 30, 2000 compared to $105,000 in
the fiscal year ended October 2, 1999, as a result of higher average cash
balances on hand during the fiscal year, reflecting the investment of cash
received from the Asset Sale.
Interest income declined to $105,000 in fiscal year 1999 compared to
$312,000 in fiscal year 1998, as a result of lower average cash balances during
the period.
Interest Expense
Interest expense declined to $49,000 in fiscal year 2000 compared to
$96,000 for the comparable period of fiscal year 1999. The decrease reflects the
payment in full on December 8, 1999 of the borrowings under the credit facility
with TBCC, utilizing a portion of the proceeds of the Asset Sale.
Interest expense increased to $96,000 in fiscal year 1999 compared to
$21,000 in fiscal year 1998 as a result of the Company's credit facility, with
TBCC, which the Company entered into in May 1999.
Income Tax Benefit
The Company recognized an income tax benefit of $580,000 during fiscal
year 2000 compared to a benefit of $379,000 recognized in fiscal year 1999. The
income tax benefit in fiscal year 2000 resulted from the favorable settlement of
a disputed tax item related to the spin-off of BEI Technologies, Inc. The income
tax benefit in fiscal 1999 reflected 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 was limited to the taxes paid on earnings of the previous two fiscal
years.
On November 27, 2000 the Company received approval for the sale of
$3,986,000 of New Jersey net operating loss carryforwards, pursuant to the
Technology Business Tax Certificate Program. This program allows for the sales
of New Jersey net operating loss carryforwards to profitable New Jersey
corporations. Cash in the amount of approximately $281,000 was received from
this sale. Accordingly, the Company revised its valuation allowance by such
amount at September 30, 2000.
30
<PAGE>
The income tax benefit was $379,000 in fiscal year 1999 compared to
$2,279,000 in fiscal year 1998. The reduced tax benefit in fiscal year 1999
resulted 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 federal net operating losses from fiscal year 1999 that cannot be
carried back against prior years' earnings and the net operating loss from
fiscal year 2000 are approximately $6.1 million. The Company projects losses to
continue in fiscal year 2001. These losses would remain available to the Company
on a carryforward basis to offset any future earnings, however, deferred income
tax assets attributable to these net operating losses have been fully offset by
a valuation allowance in the financial statements, as their future realization
is uncertain.
Extraordinary Loss on Extinguishment of Debt
The extraordinary loss on extinguishment of debt reflects that as a
result of the Asset Sale, both the Term Loan and the Revolving Loan were repaid
in full on December 8, 1999 (see Note 4 to the Consolidated Financial
Statements). Cancellation fees aggregating $85,000 were incurred in connection
with such termination. Such fees, as well as the unamortized portion of the
deferred financing fees for the debt of $45,000, have been reflected as an
extraordinary loss in the accompanying consolidated statement of operations.
Liquidity and Capital Resources
Historically, BEI has incurred significant operating losses and expects
losses to continue for at least the next two to three years. The Company is
dependent on a single product, the HTA, to achieve commercial success and
generate sufficient future revenues and profits to fulfill capital needs. 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, receipt of FDA approval to
market the HTA and its ability to cost effectively commercialize the HTA. 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 Company believes that existing cash balances will provide adequate
funding to meet the Company's minimum capital requirements for the next twelve
months. However, this plan does not provide for the investment in sales and
marketing activities that the Company believes will be required to successfully
commercialize the HTA. The Company is considering options to secure additional
financing at this time. There can be no assurance that additional financing 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.
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 obtain the
additional capital necessary to commercialize the HTA or does not receive FDA
approval for the HTA in a timely manner, or at all, the Board of Directors is
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 and management.
There can be no assurance that the HTA will receive FDA approval or, if
such approval is received that the Company will successfully commercialize the
HTA or that the Company will achieve significant revenue 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. The accompanying financial statements have been prepared on a going
concern basis and do not include any adjustments relating to recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
31
<PAGE>
During fiscal year 2000, cash used by operations was $4,837,000
principally due to the net loss for the year of $2,947,000 and the add back of
the gain on the Asset Sale of $1,913,000 for presentation purposes in the cash
flows statement. Cash provided by investing activities during fiscal year 2000
of $8,667,000 was generated by the Asset Sale net proceeds of $8,965,000. Cash
used in financing activities was $999,000 reflecting repayment in full of all of
the Company's debt under its credit facility with TBCC.
The Company had no material capital or other commitments as of
September 30, 2000.
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.
32
<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 the Company has no outstanding debt. Accordingly, the
Company believes its market risk exposures are not significant.
33
<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 September 30, October 2,
2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $4,228 $ 1,397
Restricted cash 157 154
Marketable securities 311 103
Trade receivables, less allowance for doubtful accounts
(2000--$34; 1999--$93) 59 338
Inventories 433 339
Refundable income taxes 367 487
Other current assets 97 68
Net assets held for sale -- 7,282
----------------------------------------------------------------------------------------------------------------------
Total current assets 5,652 10,168
Property and equipment
Equipment 534 1,125
Leasehold improvements 71 32
----------------------------------------------------------------------------------------------------------------------
605 1,157
Less accumulated depreciation and amortization (389) (734)
----------------------------------------------------------------------------------------------------------------------
Net property and equipment 216 423
Other assets
Patents, less accumulated amortization
(2000--$102; 1999--$48) 179 234
Other 91 137
----------------------------------------------------------------------------------------------------------------------
Total other assets 270 371
----------------------------------------------------------------------------------------------------------------------
Total assets $6,138 $10,962
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
dollars in thousands except share amounts September 30, October 2,
2000 1999
----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Trade accounts payable $304 $536
Accrued expenses and other liabilities 1,063 1,727
Notes payable -- 1,000
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,367 3,263
Stockholders' equity
Preferred stock
($.001 par value; authorized 2,000,000 shares; none issued) -- --
Common stock
($.001 par value; authorized 20,000,000 shares; issued and
outstanding; 2000--7,865,922 shares; 1999--7,685,707 shares) 10 10
Additional paid-in capital 16,175 16,174
Accumulated deficit (11,381) (8,434)
Unrealized loss on investments (33) --
Unearned restricted stock -- (51)
----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,771 7,699
----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,138 $10,962
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Year Ended
-------------------------------------------------------------------------------------------------------------------
dollars in thousands except share and September 30, October 2, October 3,
per share amounts 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $1,375 $8,419 $9,651
Cost of sales 1,464 5,182 5,638
-------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (89) 3,237 4,013
Selling, general and administrative expenses 3,810 7,350 8,688
Research, development and related expenses 1,661 3,184 2,866
Gain on Asset Sale (1,913) -- --
-------------------------------------------------------------------------------------------------------------------
3,558 10,534 11,554
-------------------------------------------------------------------------------------------------------------------
Loss from operations (3,647) (7,297) (7,541)
Interest income 299 105 312
Interest expense (49) (96) (21)
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (3,397) (7,288) (7,250)
Income tax benefit (580) (379) (2,279)
-------------------------------------------------------------------------------------------------------------------
Loss before extraordinary item (2,817) (6,909) (4,971)
Extraordinary loss on extinguishment of debt (130) -- --
-------------------------------------------------------------------------------------------------------------------
Net loss ($2,947) ($6,909) ($4,971)
===================================================================================================================
Loss before extraordinary loss per common share, basic
and diluted ($0.37) ($0.92) ($0.68)
Extraordinary loss on extinguishment of debt, basic and
diluted ($0.02) -- --
-------------------------------------------------------------------------------------------------------------------
Net loss per common share, basic and diluted ($0.39) ($0.92) ($0.68)
===================================================================================================================
Weighted average shares outstanding 7,614,847 7,503,463 7,354,416
===================================================================================================================
See notes to consolidated financial statements.
</TABLE>
36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended
--------------------------------------------------------------------------------------------------------------------
September 30, October 2, October 3,
dollars in thousands 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($2,947) ($6,909) ($4,971)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 137 331 311
Amortization 170 639 1,115
Provision for losses on trade receivables 5 74 76
Loss (gain) on sale of assets (1,913) -- 545
Deferred income tax provision (benefit) -- 174 (233)
Write off of fixed assets 157 -- --
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
Trade receivables 480 306 (15)
Inventories (75) 921 (423)
Refundable income taxes 120 1,897 (2,374)
Other assets (6) 118 (31)
Trade accounts payable, accrued expenses and other
liabilities (965) (339) (172)
--------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,837) (2,788) (6,172)
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (77) (41) (372)
Proceeds from sale of assets 8,965 -- 975
Purchases of marketable securities (244) (108) --
Other 23 -- (24)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 8,667 (149) 579
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of warrants 500 1,000 --
Repayment of long-term debt and other (1,500) (21) (191)
Proceeds from stock option exercises 1 -- 17
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (999) 979 (174)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year 2,831 (1,958) (5,767)
1,397 3,355 9,122
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $4,228 $1,397 $3,355
====================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
37
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Medical Systems Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
dollars in thousands Un-
realized Unearned
Additional Accumu- loss on restricted
Common paid-in lated invest- stock and
Stock capital deficit ments other Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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) (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
-----------------------------------------------------------------------------------------------------------------------
Net loss for 2000 (2,947) (2,947)
Restricted Stock Plan 20 20
Deferred compensation 31 31
Stock options exercised 1 1
Unrealized loss on investment (33) (33)
-----------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2000 $10 $16,175 ($11,381) ($33) $ -- $ 4,771
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
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. and Defense Systems Company, Inc. business segments.
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 $10.3 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 dysfunctional uterine bleeding.
The cash consideration received at the closing of the Asset Sale, after
certain post-closing adjustments, was $10,257,000. The consideration received by
the Company also included the assumption of $331,000 of specified liabilities,
the assumption of liabilities under certain contracts of the Company, and the
forgiveness of royalty payments that may in the future have been owed by the
Company to an affiliate of CSAC in an amount of up to $100,000. In addition, as
a condition to the consummation of the Asset Sale, the Company entered into a
noncompetition agreement with and for the benefit of CSAC for a period of five
years.
The Company recorded a net gain on the sale of the Base Business of
$1,913,000. The key components of the gain are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
Proceeds $10,257(1)
Less: transaction costs (1,292)(2)
-----------
Net proceeds 8,965
Less: net assets sold (7,052)
-----------
Gain on Asset Sale $1,913
===========
</TABLE>
(1) Reflects proceeds from the Asset Sale received at closing of $10,538,000,
less certain post-closing adjustments of $281,000.
(2) Transaction costs of $1,292,000 include professional fees paid by BEI in
connection with the Asset Sale ($524,000), employee bonuses related to
completion of the Asset Sale ($185,000), severance
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
payments and other costs ($308,000), and the cost of products and services
provided to CSAC free of charge ($275,000) pursuant to the Transition
Agreement dated December 8, 1999 between the Company and CSAC. As of
September 30, 2000, all such costs have been paid, other than remaining
liabilities of approximately $7,000.
The net assets of the Base Business as of the closing on December 8, 1999
and as of October 2, 1999 are reflected in the table below. The net assets of
the Base Business as of October 2, 1999, which totaled $7,282,000, are included
in the accompanying condensed consolidated balance sheet as net assets held for
sale:
<TABLE>
<CAPTION>
dollars in thousands December 8, 1999 October 2, 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables, net $1,048 $1,179
Inventories 1,808 1,827
Property and equipment, net 98 107
Tradenames, patents and related assets, net 1,354 1,381
Goodwill, net 3,075 3,113
Less: trade accounts payable, accrued expenses and other
assumed liabilities (331) (325)
----------------------------------------------------------------------------------------------------------
Net assets held for sale $7,052 $7,282
==========================================================================================================
</TABLE>
The following unaudited pro forma statements 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.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
Statement of Operations Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year ended September 30, 2000 Fiscal Year ended October 2, 1999
---------------------------------------- ---------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Historical Adjustments as Adjusted Historical Adjustments as Adjusted
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,375 $1,184(1) $191 $8,419 $8,150(1) $269
Cost of revenues.............. 1,464 642(1) 822 5,182 4,236(1) 946
------------------------------------------ ------------------------------------------
Gross profit (loss)......... (89) 542(1) (631)(4) 3,237 3,914(1) (677)(4)
Selling, general and
administrative expenses 3,810 434(1) 3,376 7,350 3,248(1) 4,102
Research, development and
related expenses 1,661 -- 1,661 3,184 -- 3,184
Gain on Asset Sale............ (1,913) (1,913)(2) -- -- -- --
------------------------------------------ ------------------------------------------
3,558 (1,479) 5,037 10,534 3,248 7,286
------------------------------------------ ------------------------------------------
Loss from operations........ (3,647) 2,021 (5,668) (7,297) 666 (7,963)
Interest income................ 299 -- 299 105 105
Interest expense............... (49) (49)(3) -- (96) (96)(3) --
------------------------------------------ ------------------------------------------
Loss before income taxes
and extraordinary item...... (3,397) 1,972 (5,369) (7,288) 570 (7,858)
Income tax benefit............. (580) -- (580) (379) -- (379)
------------------------------------------ ------------------------------------------
Loss before extraordinary
item...................... (2,817) 1,972 (4,789) (6,909) 570 (7,479)
Extraordinary loss on
extinguishment of debt...... (130) (130)(3) -- -- -- --
------------------------------------------ ------------------------------------------
Net loss ................... ($2,947) $1,842 ($4,789) ($6,909) $570 ($7,479)
========================================== ==========================================
Loss per Common Share:
Loss before extraordinary
loss per common share,
basic and diluted........... ($0.37) ($0.63) ($0.92) ($1.00)
Extraordinary loss on
extinguishment of debt,
basic and diluted........... ($0.02) -- -- --
------------------------------------------ ------------------------------------------
Net loss per common share,
basic and diluted........... ($0.39) ($0.63) ($0.92) ($1.00)
========================================== ==========================================
Weighted average shares
outstanding................. 7,615 7,615 7,503 7,503
========================================== ==========================================
</TABLE>
------------
(1) To give retroactive effect to the decrease in revenues and operating
expenses attributable to cessation of substantially all operating
activities of the Company as a result of the Asset Sale, other than
that which is required to support the ongoing development of its HTA
product.
(2) To eliminate the gain on Asset Sale.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
(3) To reflect a reduction in interest expense and elimination of the
extraordinary loss on extinguishment of debt incurred related to the
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.
(4) The pro forma negative gross margin for the fiscal year ended September
30, 2000, of $631,000, reflects direct product costs and fixed
manufacturing costs for the HTA business of $697,000, as well as pro
forma allocation of $125,000 of fixed manufacturing overhead costs from
the first quarter of fiscal year 2000 prior to the Asset Sale, which
were projected to continue following the Asset Sale. The pro forma
negative gross margin for the fiscal year ended October 2, 1999, of
$677,000, reflects direct product costs for the HTA business of
$208,000, as well as pro forma allocation of $738,000 of fixed
manufacturing overhead costs, which were projected to continue
following the Asset Sale.
Operating Results and Liquidity: Historically, BEI has incurred significant
operating losses and expects losses to continue for at least the next two to
three years. The Company is dependent on a single product, the HTA, to achieve
commercial success and generate sufficient future revenues and profits to
fulfill capital needs. 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,
receipt of Food and Drug Administration ("FDA") approval to market the HTA and
its ability to cost effectively commercialize the HTA. 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 Company believes that existing cash balances will provide adequate
funding to meet the Company's minimum capital requirements for the next twelve
months. However, this plan does not provide for the investment in sales and
marketing activities that the Company believes will be required to successfully
commercialize the HTA. The Company is considering options to secure additional
financing at this time. There can be no assurance that additional financing will
be available on terms attractive to the Company, or at all.
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 obtain the
additional capital necessary to commercialize the HTA or does not receive FDA
approval for the HTA in a timely manner, or at all, the Board of Directors is
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 and management.
There can be no assurance that the HTA will receive FDA approval or, if
such approval is received that the Company will successfully commercialize the
HTA or that the Company will achieve significant revenue 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. The accompanying financial statements have been prepared on a going
concern basis and do not include any adjustments relating to recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
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
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
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, Xylog Corporation, Meditron Devices, Inc., and
BEI Medical Systems International, Inc. in Teterboro, New Jersey.
The accompanying consolidated financial statements include the historical
results of operations of the Company prior to the Asset Sale. The Asset Sale has
had 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.
Fiscal Year: The Company's fiscal year ends on the Saturday nearest
September 30. Fiscal year 1998 contained 53 weeks. Fiscal years 2000 and 1999
each contained 52 weeks.
Consolidation: The consolidated financial statements include the accounts
of the Company and its wholly 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.
Restricted Cash: Reflects funds on deposit to guarantee payment of a letter
of credit issued by the Company to the Belgium government in order to secure
payment of taxes related to the Company's prior overseas activities in that
country. The Company anticipates that the Belgium government will a issue final
tax clearance during fiscal year 2001 enabling the Company to cancel the letter
of credit and the restriction on these funds.
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.
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.
Reclassification: Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Revenue Recognition: Revenue is recognized on the HTA control units and the
disposable kits as products 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 consist 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
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
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. For the year ended September
30, 2000 as a result of the Asset Sale the Company incurred a charge of $139,000
to write-down certain assets that were no longer utilized. 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 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
71,000, 139,000 and 184,000 shares for 2000, 1999 and 1998, 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 research and product
development costs are charged to expense when incurred.
Advertising Costs: Advertising costs are charged to expense when incurred
and were approximately $252,000, $371,000 and $489,000 in fiscal years 2000,
1999 and 1998, 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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
Note 3
Inventories
<TABLE>
<CAPTION>
dollars in thousands 2000 1999
-----------------------------------------------------------------
<S> <C> <C>
Finished products $143 $87
Work in process 212 118
Materials 78 134
-----------------------------------------------------------------
Inventories $433 $339
=================================================================
</TABLE>
Note 4
Bank Credit Agreement
The Company had an agreement, dated 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 $1,000,000 (the
"Revolving Loan") and a term loan ("Term Loan") in the amount of $1,000,000,
bearing interest at a rate of 14.14%. 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.
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. Such fees, as well as the unamortized
portion of the deferred financing fees for the debt of $45,000, have been
reflected as an extraordinary loss in the accompanying consolidated statement of
operations.
Interest of approximately $43,000 was paid on the Term Loan and Revolving
Loan in fiscal year 2000. Interest of approximately $89,000 and $7,000 was paid
on long-term debt by the Company during fiscal years 1999 and 1998,
respectively. The Company also paid interest during fiscal year 1998 of
approximately $35,000 on noncompetition agreements.
Note 5
Marketable securities
Marketable securities reflects funds invested in a Nonqualified Deferred
Compensation Plan Trust (the "Trust'") and designated to be used exclusively for
the benefit of participants in the Company's Nonqualified Deferred Compensation
Plan (the "Plan"), however participants in the Plan or their beneficiaries have
no preferred claim on, or any beneficial ownership interest in, any assets of
the Trust.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
Note 6
Accrued Expenses and Other Liabilities
<TABLE>
<CAPTION>
dollars in thousands 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Professional fees $209 $522
Employee compensation 226 114
Nonqualified deferred compensation plan 311 103
Commissions 4 97
Royalties and related costs 5 74
Tax refund payable to BEI Technologies -- 420
Other 308 397
------------------------------------------------------------------------------
Accrued Expenses and Other Liabilities $1,063 $1,727
==============================================================================
</TABLE>
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 September 30, 2000 and
October 2, 1999 are as follows:
<TABLE>
<CAPTION>
dollars in thousands 2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities
Property and equipment ($20) ($68)
Deferred tax assets
Allowance for doubtful accounts 12 32
Inventory valuation 36 221
Federal tax credits 141 141
Federal net operating loss carryforwards 2,060 1,840
Intangibles -- 435
Accrued expenses and other 209 86
State net operating loss carryforwards 1,865 1,758
--------------------------------------------------------------------------
Total deferred tax assets 4,323 4,513
Valuation allowance for deferred tax assets (4,022) (4,445)
--------------------------------------------------------------------------
Net deferred tax assets $ 281 $ --
==========================================================================
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
As of September 30, 2000, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6.1 million, which expire
through 2020 and net operating loss carryforwards for state income tax purposes
of approximately $20.7 million, which expire from 2001 through 2007. As of
September 30, 2000, a valuation allowance has been established equal to the
entire net tax benefit associated with all carryforwards and temporary
differences, except as noted below, as their realization is uncertain.
On November 27, 2000, the Company received approval for the sale of
$3,986,000 of New Jersey net operating loss carryforwards, pursuant to the New
Jersey Technology Business Tax Certificate Program. This program allows for the
sales of New Jersey net operating loss carryforwards to profitable New Jersey
corporations. Cash in the amount of $281,000 was received from this sale.
Accordingly, the Company reduced its valuation allowance by such amount at
September 30, 2000.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------
dollars in thousands 2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ($299) ($553) ($2,046)
State -- -- --
----------------------------------------------------------------------------------------------------------
Total current (299) (553) (2,046)
Deferred
Federal -- 174 (233)
State (281) -- --
----------------------------------------------------------------------------------------------------------
Total deferred (281) 174 (233)
----------------------------------------------------------------------------------------------------------
Total income tax benefit ($580) ($379) ($2,279)
==========================================================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective rate is presented below.
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------
dollars in thousands 2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax benefit at the statutory rate of 34% ($1,155) ($2,478) ($2,465)
Goodwill amortization and sale 1,346 121 131
Increase (decrease) in valuation allowance (423) 2,661 --
Tax settlement (299) -- --
Other (49) 75 55
----------------------------------------------------------------------------------------------------------
Income tax benefit ($580) ($379) ($2,279)
==========================================================================================================
</TABLE>
The income tax benefit in fiscal year 2000 resulted from the favorable
settlement of a disputed tax item related to the spin-off of BEI Technologies,
Inc. 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
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
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 to designate the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices and liquidation preferences.
In connection with a 1999 credit facility, the Company provided TBCC with
seven-year warrants 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.
Note 9
Stock Option and Restricted Stock Plans
The Amended 1987 Stock Option 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 237,499
remain available for grant as of September 30, 2000. 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.
48
<PAGE>
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 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
Granted 274,000 $0.94 - $1.63 $1.23
Terminated (120,750) $0.94 - $1.94 $1.67
Exercised (401) $1.63 $1.63
-----------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 2000 1,249,854 $0.31 - $1.63 1.00
===========================================================================================================
</TABLE>
Details of the options outstanding as of September 30, 2000 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> <C>
$0.31 366,821 4.8 $0.31 366,821 $0.31
$0.54 52,403 5.3 $0.54 52,403 $0.54
$0.70 107,564 5.6 $0.70 107,564 $0.70
$0.94 10,000 9.1 $0.94 0 --
$1.16 124,000 10.0 $1.16 0 --
$1.25 111,500 9.3 $1.25 0 --
$1.44 161,000 8.5 $1.44 40,250 $1.44
$1.63 316,566 7.2 $1.63 171,294 $1.63
---------------------------------------------------------------------------------------------------------------
$0.31 - $1.63 1,249,854 6.9 $1.00 738,332 $0.69
===============================================================================================================
</TABLE>
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
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
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 September 30, 2000, 427,850 shares of the Company's common stock had
been issued pursuant to awards of restricted stock granted under the Restricted
Plan (including 285,126 shares issued to employees of Technologies prior to the
Distribution and excluding any shares that have been returned to the Restricted
Plan as a result of termination or forfeiture) and 472,150 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, 339,800 had vested. All of the
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 2000, 1999 and 1998, $20,000, $56,000 and $79,000, respectively of
compensation expense was recognized.
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 2000, 1999 and 1998:
weighted-average risk-free interest rate of 6.02%, 6.10% and 4.92%,
respectively; no dividends; volatility factors of the expected market price of
the Company's common stock of 1.087, 0.611 and 0.562, respectively and a
weighted average expected life of the options of 9.5, 9.3 and 9.3 years,
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 2000 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal years 2000, 1999 and 1998 was $1.13, $1.45 and $2.10, respectively. The
Company's pro forma net loss was $3,097,000, $7,171,000 and $5,036,000 for
fiscal years 2000, 1999 and 1998, respectively, and pro forma net loss per
common share, basic and diluted, was $0.41, $0.96 and $0.68, respectively.
The pro forma disclosures presented for fiscal years 2000 and 1999 may not
necessarily be indicative of the pro forma effect of SFAS No. 123 for future
periods in which options may be granted.
Note 10
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.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
Additional contributions are at the discretion of the Board of Directors. The
Company's contributions to the plan for fiscal year 2000, 1999 and 1998 were
approximately $51,000, $72,000 and $76,000, respectively.
On January 1, 2000, a "partial plan termination" was initiated by the
Company due to the re-organization followiing the Asset Sale. The number of
active participants in the plan was significantly decreased as to deem it
necessary to declare a partial plan termination within the meaning of Code
section 411(d) (3). As result,, all employees affected by the re-organization
after the Asset Sale became fully vested. There were 20 participants effected by
the partial plan termination who became eligible for 100% vesting. The total
additional cost to the Company for the increased vesting was approximately
$14,000.
Note 11
Lease and Other Commitments
Leases: Operating leases consist principally of leases for facilities and
equipment, which expire through 2004. In fiscal year 2000 the Company amended
its facility lease for the Teterboro, New Jersey to reduce the space utilized by
the Company and its long term lease commitments by approximately 52.5%. 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 September 30, 2000:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
------------------------------------------------------------
<S> <C>
2001 $179
2002 144
2003 142
2004 98
------------------------------------------------------------
Total minimum lease payments $563
============================================================
</TABLE>
Total rental expense attributable to property and equipment amounted to
approximately $319,000, $374,000, and $297,000 for fiscal 2000, 1999 and 1998,
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 Company had also entered into a number of other license and royalty
agreements that required 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 $37,000, $207,000, and $314,000 for
fiscal 2000, 1999 and 1998, respectively.
Note 12
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.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI MEDICAL SYSTEMS COMPANY, INC. AND SUBSIDIARIES
September 30, 2000
Note 13
Revenues
Revenue from customers in foreign countries amounted to $348,000,
$1,441,000 and $1,500,000 in fiscal 2000, 1999 and 1998, respectively. In fiscal
2000, 1999 and 1998, foreign revenue did not exceed 10% of consolidated revenue
in any individual country.
All of the Company's revenues related to HTA products were to customers in
foreign countries.
Note 14
Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for
fiscal years 2000 and 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Three months ended
----------------------------------------------------------------------------------------------------------
Jan. 1, Apr. 1, Jul. 1, Sep. 30,
2000 2000 2000 2000
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $1,234 $36 $43 $62
Gross profit (loss) $410 ($188) ($183) ($128)
Net income (loss) $513 ($1,432) ($1,301) ($727)
Net income (loss) per common share, basic and diluted
$0.06 ($0.19) ($0.17) ($0.10)
<CAPTION>
----------------------------------------------------------------------------------------------------------
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)
Net loss per common share, basic and diluted ($0.20) ($0.22) ($0.23) ($0.27)
</TABLE>
52
<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 September 30, 2000
and October 2, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 2000. 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 auditing standards generally
accepted in the United States. 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 September 30, 2000 and October 2, 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
December 1, 2000
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
<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 2001 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.
55
<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.
Form 10-K
Page Number
(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 -
September 30, 2000 and October 2, 1999 35
Consolidated Statements of Operations -
Years ended September 30, 2000, October 2, 1999 and
October 3, 1998 36
Consolidated Statements of Cash Flows -
Years ended September 30, 2000, October 2, 1999 and
October 3, 1998 37
Consolidated Statements of Stockholders' Equity -
Years ended September 30, 2000, October 2, 1999 and
October 3, 1998 38
Notes to Consolidated Financial Statements -
September 30, 2000 39
Report of Independent Auditors 53
(a)(2) Index to Financial Statement Schedule.
The following Consolidated Financial Statement
Schedule of BEI Medical Systems Company, Inc. for
each of the years ended September 30, 2000,
October 2, 1999 and October 2, 1998 is filed as
part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts S-1
Independent Auditors' Report S-2
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 September 30, 2000.
56
<PAGE>
(a)(3) Listing of Exhibits
Exhibit Numbers Description Footnote
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)
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)
10.9 Tax Allocation and Indemnity Agreement
between BEI Electronics, Inc. and BEI
Technologies, Inc. dated as of
September 26, 1997 (i)
10.10 Assumption of Liabilities and
Indemnity Agreement between BEI
Electronics, Inc. and BEI
Technologies, Inc. dated as of
September 26, 1997 (i)
10.11 Technology Transfer and License
Agreement by and between BEI
Electronics, Inc. and BEI
Technologies, Inc. dated as of
September 26, 1997 (i)
10.12 Trademark Assignment and Consent
Agreement by and between BEI
Electronics, Inc. and BEI
Technologies, Inc. dated as of
September 26, 1997 (i)
10.27 Rights Agreement dated June 30, 1997
between the Registrant and ChaseMellon
Shareholder Services, LLC (vi)
57
<PAGE>
10.28 * Consulting Agreement between the
Registrant and Ralph Richart, M.D.
dated as of March 1, 1998 (vii)
10.29 * Employment agreement between the
Registrant and Herbert H. Spoon dated
February 27, 1998 (vii)
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. (x)
10.35 Noncompetition Agreement between the
Registrant and CooperSurgical
Acquisition Corp. dated December 8,
1999. (x)
10.36 * Employment Agreement between the
Registrant and Richard W. Turner dated
October 7, 1999. (x)
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. (x)
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. (x)
10.39 * Separation letter to Herbert H. Spoon
dated January 29, 1999. (x)
10.40 Nonqualified Deferred Compensation
Plan Trust Agreement between the
Registrant and Merrill Lynch Trust,
dated July 15, 1999. (x)
10.41 First Amendment to Lease between
Registrant and Hollister '97 L.L. C
for 100 Hollister Road, Teterboro, New
Jersey facility dated May 1, 2000.
58
<PAGE>
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule (EDGAR only)
* Indicates management contracts or compensatory plans or arrangements
filed pursuant to Item 601(b)(10) of regulation S-K.
(i) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated September 27, 1997.
(ii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-29032).
(iii) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 30, 1997.
(iv) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (File No. 333-64155).
(v) Incorporated by reference. Previously filed as an exhibit to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (No.
33-29032).
(vi) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 2, 1993.
(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.
(x) Incorporated by reference. Previously filed as an exhibit to the
Registrant's Report on Form 10-K, dated October 2, 1999.
59
<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 29, 2000
60
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
10.41 First Amendment to Lease between Registrant and Hollister '97 L.L. C
for 100 Hollister Road, Teterboro, New Jersey facility dated May 1,
2000.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors (Reference is made to page 64 of the
10-K)
24.1 Power of Attorney (Reference is made to page 61 of the 10-K)
27.1 Financial Data Schedule
61
<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 to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
------------------------------------- ------------- ------------- ------------- ------------- -------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $93 $5 $-- ($64) (B) $34
Valuation allowance for deferred
tax assets 4,445 (142)(A) 4,303
------------- ------------- ------------- ------------- -------------
Total $4,538 $(137) $-- ($64) $4,337
============= ============= ============= ============= =============
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
============= ============= ============= ============= =============
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
============= ============= ============= ============= =============
</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 September 30, 2000
and October 2, 1999, and for each of the three years in the period ended
September 30, 2000, and have issued our report thereon dated December 1, 2000.
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
MetroPark, New Jersey
December 1, 2000
S-2
