10-Q 1 g10q-24528.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ------- ------- Commission file number 0-17885 BEI MEDICAL SYSTEMS COMPANY, INC. (Exact name of Registrant as specified in its charter) Delaware 71-0455756 ---------------------------------- ---------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 100 Hollister Road TETERBORO, NEW JERSEY 07608 (Address of principal executive offices) (201) 727-4900 (Registrant's telephone number) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock: $.001 Par Value, 7,704,774 shares as of May 1, 2001 1
INDEX PART 1. FINANCIAL INFORMATION (Unaudited) PAGE --------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets -- March 31, 2001 (unaudited) and September 30, 2000 3 Condensed Consolidated Statements of Operations -- Three Months Ended March 31, 2001 (unaudited) and April 1, 2000 (unaudited) and Six Months ended March 31, 2001 (unaudited) and April 1, 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2001 (unaudited) and April 1, 2000 (unaudited) 5 Notes to Condensed Consolidated Financial Statements -- March 31, 2001 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10 Operations PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 14 Item 4. Submission of Matters to Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 (a) Exhibits (b) Reports on Form 8-K SIGNATURES 16
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FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS BEI Medical Systems Company, Inc. and Subsidiaries (dollars in thousands) March 31, September 30, 2001 2000 (Unaudited) (See note below) ---------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $5,790 $4,228 Restricted cash 158 157 Marketable securities 388 311 Trade receivables, net 85 59 Inventories 403 433 Refundable income taxes -- 367 Other current assets 126 97 ---------------------------------------------------------------------------------------------------------------- Total current assets 6,950 5,652 Plant and equipment, net 293 216 Patents, net 171 179 Other assets 68 91 ---------------------------------------------------------------------------------------------------------------- Total assets $7,482 $6,138 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Trade accounts payable $180 $304 Accrued expenses and other liabilities 1,058 1,063 Current portion of long term lease obligation 23 ---------------------------------------------------------------------------------------------------------------- Total current liabilities 1,261 1,367 Long term lease obligation, less current portion 134 -- Stockholders' equity 6,087 4,771 ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $7,482 $6,138 ================================================================================================================
See notes to condensed consolidated financial statements. Note: The balance sheet at September 30, 2000 has been derived from the audited consolidated balance sheet at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) Quarter Ended Six Months Ended (amounts in thousands except per share amounts) March 31, April 1, March 31, April 1, 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------- Revenues $40 $36 $71 $1,270 Cost of revenues 177 224 310 1,048 ------------------------------------------------------------------------------------------------------------------- Gross profit (loss) (137) (188) (239) 222 Selling, general and administrative expenses 853 1,033 1,566 2,287 Research, development and related expenses 528 309 822 727 Gain on Asset Sale -- -- -- (1,913) ------------------------------------------------------------------------------------------------------------------- 1,381 1,342 2,388 1,101 ------------------------------------------------------------------------------------------------------------------- Loss from operations (1,518) (1,530) (2,627) (879) Interest income 62 98 119 140 Interest expense -- -- (1) (50) ------------------------------------------------------------------------------------------------------------------- Loss before income taxes and (1,456) (1,432) (2,509) (789) extraordinary item Income taxes -- -- -- -- ------------------------------------------------------------------------------------------------------------------- Net loss before extraordinary item (1,456) (1,432) (2,509) (789) Extraordinary loss on extinguishment of debt -- -- -- (130) ------------------------------------------------------------------------------------------------------------------- Net loss ($1,456) ($1,432) ($2,509) ($919) =================================================================================================================== Loss per Common Share Loss before extraordinary loss per common share, basic and diluted ($0.19) ($0.19) ($0.33) ($0.10) =================================================================================================================== Extraordinary loss on extinguishment of debt, basic and diluted -- -- -- ($0.02) =================================================================================================================== Net loss per common share, basic and diluted ($0.19) ($0.19) ($0.33) ($0.12) =================================================================================================================== Weighted average shares outstanding 7,660 7,612 7,648 7,605 =================================================================================================================== See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) Six Months Ended ----------------------------------------- (dollars in thousands) March 31, April 1, 2001 2000 ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities ($2,055) ($2,310) Cash flows from investing activities: Purchases of equipment (10) (9) Purchases of marketable securities (97) (162) Reduction in long-term security deposit 23 -- Net proceeds from Asset Sale -- 6,958 ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (84) 6,831 Cash flows from financing activities: Net proceeds from issuance of Series A Convertible Preferred Stock 3,701 -- Proceeds from revolving credit note -- 500 Payments on long-term debt and revolving credit note -- (1,500) ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing 3,701 (1,000) activities ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 1,562 5,552 Cash and cash equivalents at beginning of period 4,228 1,654 ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $5,790 $7,206 ================================================================================================================== See notes to condensed consolidated financial statements.
5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) March 31, 2001 Note 1 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending September 29, 2001. For further information, refer to the consolidated financial statements and footnotes thereto in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. THE 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 first fiscal quarter ended January 1, 2000, approximately 95.9% 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, approximately $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. 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: (Dollars in thousands) Proceeds $10,257 Less: transaction costs (1,292) ------------------ Net proceeds 8,965 Less: net assets sold (7,052) ------------------ Gain on Asset Sale $1,913 ================== The following unaudited pro forma statement of operations data for the six months ended April 1, 2000 has been prepared assuming the Asset Sale was completed as of October 2, 1999. 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. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) March 31, 2001 Statement of Operations Data (in thousands, except per share amounts)
SIX MONTHS ENDED APRIL 1, 2000 ------------------------------ Historical Pro Forma Pro Forma ---------- Adjustments as ----------- Adjusted ---------- Revenues..................................................... $1,270 $1,184 (1) $86 Cost of revenues............................................. 1,048 642 (1) 406 --------------------------------------------- Gross profit (loss)...................................... 222 542 (1) (320)(4) Selling, general and administrative expenses................. 2,287 434 (1) 1,853 Research, development and related expenses................... 727 -- 727 Gain on Asset Sale........................................... (1,913) (1,913)(2) -- --------------------------------------------- 1,101 (1,479) 2,580 --------------------------------------------- Income (loss) from operations............................ (879) 2,021 (2,900) Interest income.............................................. 140 -- 140 Interest expense............................................. (50) (50)(3) -- --------------------------------------------- Income (loss) before income taxes and extraordinary item (789) 1,971 (2,760) Income tax benefit........................................... -- -- -- --------------------------------------------- Income (loss) before extraordinary item.................. (789) 1,971 (2,760) Extraordinary loss on extinguishment of debt................. (130) (130)(3) -- --------------------------------------------- Net income (loss) ....................................... ($919) $1,841 ($2,760) ============================================= Loss per Common Share: Loss before extraordinary loss per common share, basic and diluted................................................... ($0.10) ($0.36) ================================================ Extraordinary loss on extinguishment of debt, basic and diluted ($0.02) -- ================================================ Net loss per common share, basic and diluted................. ($0.12) ($0.36) ================================================ Weighted average shares outstanding.......................... 7,605 7,605 ================================================
------------------ (1) To give retroactive effect to the decrease in revenues and operating expenses estimated by the Company to be 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. (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 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) March 31, 2001 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 six months ended April 1, 2000, of $320,000, reflects direct product costs and fixed manufacturing costs for the HTA business of $95,000, as well as pro forma allocation of $311,000 of fixed manufacturing overhead costs prior to the Asset Sale, which were projected to continue following the Asset Sale. Note 2 Inventories March 31, September 30, (dollars in thousands) 2001 2000 ------------------------------------------------------------------------------- Finished products 401 $143 Work in process 2 212 Materials -- 78 ------------------------------------------------------------------------------- Inventories $403 $433 =============================================================================== Note 3 Series A Convertible Preferred Stock On February 14, 2001, the Company completed a private placement of 1,114,485 shares of its Series A Convertible Preferred Stock ("Series A Preferred") resulting in gross cash proceeds to the Company of $4,179,000. Shares of Series A Preferred are convertible at any time into an aggregate of 2,228,970 shares of Common Stock of the Company at an initial conversion price of $1.875 per common share. The initial conversion price will be adjusted for stock splits, combinations, certain dividends and distributions and other similar events and could also be adjusted on a weighted average basis in the event the Company issues additional securities at a per share price below $1.875. The holders of the Preferred Shares are entitled to receive dividends, payable when and if they are declared by the Board of Directors of the Company in an amount equal per share (on an as-if-converted to Common Stock basis) to the amount paid for each Common Share of the Company. The shares have voting rights equal to the shares of Common Stock and not as a separate class except in the event of any Asset Transfer or Acquisition wherein the minimum prices per share are below a formula ranging from 2 times to 4 times the original purchase price, and actions that would change the Company bylaws. In the event of liquidation, Series A Preferred shareholders shall be entitled to be paid out of the assets of the Company, an amount per share of Series A Preferred equal to the Original Issue Price for the Series A Preferred plus any declared but unpaid dividends on the Series A Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series A Preferred held by them. As part of the private placement, the Company has expanded its Board of Directors from five members to six and provided that the holders of the Series A Preferred, voting as a separate class, will have the right to elect one director. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued BEI Medical Systems Company, Inc. and Subsidiaries (Unaudited) March 31, 2001 Note 4 Loss Per Share As a result of the net loss for all periods presented, weighted average shares used in the calculation of basic and diluted loss per share are the same. Weighted shares exclude unvested restricted stock, which amounted to 31,000 and 73,000 shares in March 31, 2001 and April 1, 2000, respectively. Common stock equivalents are excluded from the loss per share for all periods presented because the effect would be anti-dilutive. Note 5 Subsequent Events The United States Food and Drug Administration ("FDA"), on April 20, 2001, issued its approval to market in the United States the Hydro ThermAblator(R) ("HTA(R)") endometrial ablation system to ablate the endometrial lining of the uterus in pre-menopausal women with menorrhagia (dysfunctional uterine bleeding) due to benign causes for whom child bearing is complete. The approval is subject to standard FDA conditions, including labeling and advertising requirements, expiration dating of the procedure sets, use by physicians having received training in diagnostic hysteroscopy, and three-year follow-up of pivotal trial study patients. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, and those discussed in the Company's Form 10-K for the year ended September 30, 2000. The following discussion and analysis of the financial condition and results of operations as it relates to the six month period ended April 1, 2000, 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 Food and Drug Administration ("FDA") Phase III clinical trials and commercialization of the Hydro ThermAblator(R), or HTA(R) technology. The United States Food and Drug Administration ("FDA"), on April 20, 2001, issued its approval to market in the United States the Hydro ThermAblator(R) ("HTA(R)") endometrial ablation system to ablate the endometrial lining of the uterus in pre-menopausal women with menorrhagia (dysfunctional uterine bleeding) due to benign causes for whom child bearing is complete. The approval is subject to standard FDA conditions, including labeling and advertising requirements, expiration dating of the procedure sets, use by physicians having received training in diagnostic hysteroscopy, and three-year follow-up of pivotal trial study patients. Three Months Ended March 31, 2001 and April 1, 2000 Revenues for the three months ended March 31, 2001, were $40,000 compared to $36,000 for the three-month period ended April 1, 2000. The higher revenue reflects increased revenue from HTA disposable sterile procedure sets to international distributors. The negative gross profit of $137,000 in the three-month period ended March 31, 2001 compared to $188,000 in the second quarter of fiscal 2000 reflects the reduction of fixed overhead expenditures. Overhead expenditures during the three-month period ended April 1, 2000 reflected costs associated with the transition period following the Asset Sale in December 1999. Overhead expenses for the second quarter of fiscal 2001 were approximately $132,000, compared to $186,000 in the same period of fiscal 2000. Selling, general and administrative expenses declined $180,000 to $853,000 for the three months ended March 31, 2001 compared to $1,033,000 for the comparable period in fiscal 2000. The decline in expenses principally reflects lower administrative expenses of $190,000, resulting from reduced spending on outside services and other professional fees. Research, development and related expenses were $528,000 in the second quarter of fiscal 2001, an increase of $219,000 or 70.9% from the comparable period of fiscal 2000. The higher expenses reflects a one-time non-cash charge of $143,000 related to an amendment to the Company's existing HTA royalty agreement to reduce future royalty payments on certain of its HTA disposable treatment components in exchange for warrants to purchase the Company's common stock. The fair market value of the warrants was charged to product development during the second quarter of fiscal 2001. In addition, the increased current year expenses reflect cost increases for outside services related to the Company's program to reduce the 10 manufacturing cost of its HTA sterile disposable set and complete the final commercial design of the HTA control unit. Interest income decreased to $62,000 in the three month period ended March 31, 2001 compared to $98,000 in the three month period ended April 1, 2000, as a result of lower average cash balances on hand during the quarter. The Company recognized no income tax benefit for the three-month periods ended March 31, 2001 and April 1, 2000. The net cumulative operating losses as of March 31, 2001 were approximately $8.3 million. The Company projects losses to continue in fiscal year 2001. These losses remain available to the Company on a carryforward basis to offset any future earnings, but they have been fully offset by a valuation allowance in the financial statements, as their future realization is uncertain. There is no remaining loss carryback available to the Company. Six Months Ended March 31, 2001 and April 1, 2000 Revenues for the six months ended March 31, 2001 were $71,000, a decrease of $1,199,000 from the comparable six-month period of fiscal 2000. The lower revenue reflects the impact of the Asset Sale on December 8, 1999. Approximately 93.29% of the Company's revenues for the six months ended April 1, 2000 were derived from products that were included in the Base Business sold to CSAC. The comparable six-month period of fiscal year 2001 did not include revenues from the Base Business. International revenues from shipments to distributors of the Company's Hydro ThermAblator ("HTA") system for endometrial ablation were $69,000 in the six months ended March 31, 2001 versus $85,000 in the comparable six-month period of fiscal 2000 reflecting reduced shipments of HTA control units, partially offset by higher shipments of disposable sterile procedure sets. The negative gross profit of $239,000 in the six-month period ended March 31, 2001 compared to the gross profit of $222,000 in the comparable six-month period of fiscal 2000 reflects the impact of the Asset Sale and the resulting absorption of fixed overhead expenditures over the significantly lower revenue base. Overhead expenses for the first six-month period of fiscal 2001 were approximately $232,000, compared to $451,000 in the same period of fiscal 2000. Overhead expenses in the six-month period ended April 1, 2000 included approximately $125,000 of costs allocated to the products included in the Asset Sale on a proforma basis. Selling, general and administrative expenses declined $721,000 to $1,566,000 for the six-month period ended March 31, 2001 compared to $2,287,000 for the comparable six-month period in fiscal 2000. The decline in expenses reflects lower sales and marketing costs of $285,000, representing a 36.2% decline; lower administrative expenses of $227,000, reflecting a 17.7% decline; plus reduced amortization of intangible assets of $61,000. Following the Asset Sale, the Company reduced personnel and related employee benefit costs, incurred lower sales commissions, reduced marketing expenditures and had lower amortization of intangible assets reflecting the reduction in these assets as a result of the Asset Sale. In addition, the fiscal 2000 expenses included a one-time charge of $139,000 for the write-down of certain fixed assets and accounts receivable to net realizable value as a result of the Asset Sale. Research, development and related expenses were $822,000 in the first six months of fiscal 2001, an increase of $95,000 or 13.1% from the comparable period of fiscal 2000. The higher expenses reflects a one-time, non-cash charge of $143,000 related to an amendment to the Company's existing HTA royalty agreement to reduce future royalty payments on certain of its HTA disposable treatment components in exchange for warrants to purchase the Company's common stock. The fair market value of the warrants was charged to product development 11 during the second quarter of fiscal 2001. Partially offsetting the above were reduced expenses resulted from the completion of the twelve-month post treatment follow-up examination portion of the HTA Phase III clinical trial in the United States in August 2000 and completion of the premarket approval ("PMA") application to the FDA in September 2000. As a result, the rate of spending required to support the clinical trial declined from the levels that were required during fiscal 2000. The gain on Asset Sale in fiscal 2000 reflects the closing of the Asset Sale on December 8, 1999. See Note 1 to the Condensed Consolidated Financial Statements for further information on the Asset Sale. Interest income decreased to $119,000 in the six-month period ended March 31, 2001, compared to $140,000 in the six-month period ended April 1, 2000, as a result of lower average cash balances on hand during the period. Interest of $50,000 for the six-month period ended April 1, 2000 reflects interest on borrowings under the term note and related credit facility with Transamerica Business Credit Corporation ("TBCC"), which were repaid by the Company in full on December 8, 1999, utilizing a portion of the proceeds of the Asset Sale. The Company recognized no income tax benefit for the six-month periods ended March 31, 2001 and April 1, 2000. The net cumulative operating losses as of March 31, 2001 were approximately $8.3 million. The Company projects losses to continue in fiscal year 2001. These losses remain available to the Company on a carryforward basis to offset any future earnings, but they have been fully offset by a valuation allowance in the financial statements, as their future realization is uncertain. There is no remaining loss carryback available to the Company. The extraordinary loss on extinguishment of debt incurred in fiscal 2000 resulted from repayment of borrowings from TBCC on December 8, 1999 when the Asset Sale closed. Cancellation fees aggregating $85,000 were incurred in connection with such prepayment. Such fees, as well as the $45,000 unamortized portion of the deferred financing fees for the debt, were reflected as an extraordinary loss in the accompanying condensed consolidated statement of operations. Liquidity and Capital Resources BEI has incurred significant operating losses and the Company expects losses to continue for at least the next one to two 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 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 HTA. The Company's capital requirements to complete the commercialization of the HTA depend on numerous factors, including the resources required to initiate commercialization of the HTA in the United States and the extent to which 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 into the fourth calendar quarter of 2001. However, this plan does not provide for all of the investment in sales and marketing activities that the Company believes will be required to successfully commercialize the HTA. The Company is currently exploring options to fund operations beyond that period,. There can be no assurance that additional financing will be available on terms attractive to the Company, or at all. Any 12 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 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 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. During the first six-months of fiscal 2001 cash used in operating activities was $2,055,000 reflecting the net loss of $2,509,000 which was partially offset by the receipt of $367,000 of refundable income taxes less decreases in accounts payable and accrued liabilities of $129,000, plus $253,000 of adjustments to reconcile the net loss to net cash used in operating activities for depreciation and amortization of $56,000, costs associated with the issuance of common stock warrants of $143,000 and other non cash expense of $50,000. Cash used in investing activities during the first six months of fiscal 2001 was $84,000 reflecting purchases of plant and equipment of $10,000 and increases in marketable securities of $97,000 partially offset by a reduction in a long-term security deposit of $23,000. Cash received from financing activities was $3,701,000 reflecting gross proceeds from the Series A Preferred of $4,179,000 less transaction costs of $478,000. In addition, in November 2000 the Company entered into a long-term lease for $157,0000 with IBM Credit Corp to finance the purchase of a computer enterprise resource planning system including installation and implementation support. The agreement calls for 60 monthly payments of $3,396 beginning June 2001. The Company had no other material capital or other commitments as of March 31, 2001. Effects of Inflation Management believes that, for the periods presented, inflation has not had a material effect on the Company's operations. 13 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds A full description of the Series A Convertible Preferred Stock issued on February 14, 2001 is included in Note 3 to the Condensed Consolidated Financial Statements on page 8 of this quarterly report. Item 4. Submission of Matters to Vote of Security Holders 1. The Annual Meeting of Stockholders of the Company (the "Meeting") was held on February 27, 2001. At the meeting, Lawrence A. Wan was elected as director of the Company for a three-year term expiring at the Company's 2004 Annual Meeting. He was elected by a vote of 6,900,093 votes in favor and 264,275 votes withheld. In addition, the following directors continued in office: Charles Crocker and Ralph M. Richart (until the Company's 2002 Annual Meeting), Richard W. Turner, Gary D. Wrench and Jordan Davis (until the Company's 2003 Annual Meeting). 2. The other matters presented at the Meeting and the votes of the stockholders with respect thereto are as follows: The selection of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending September 29, 2001 was ratified with 7,086,634 votes in favor, 20,990 against and 56,744 abstentions. Item 5. Other Information On January 29, 2001, the Company entered into Amendment No. 1 to Product Royalty Agreement with Milton H. Goldrath, M.D. (the, "Amendment"), amending certain provisions of the Product Royalty Agreement entered into as of December 28, 1993, between the Company and Dr. Goldrath (together with the Amendment, the "Agreements"). The Agreements provide for the payment of royalties by the Company for the use of certain technologies acquired from Dr. Goldrath that are used in the production of the HTA. The royalties payable to Dr. Goldrath are based on sales of certain component parts of the HTA. The Agreements are attached as Exhibits 10.1 and 10.2 to this quarterly report. In connection with the execution of the Amendment, the Company issued a warrant dated January 29, 2001 to Dr. Goldrath. The warrant entitles Dr. Goldrath to purchase 150,000 shares of common stock of the Company at a price of $1.875 per share within ten years of the date of the warrant. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 14 10.1 *Product Royalty Agreement by and between the Company and Milton H. Goldrath, M.D. dated December 28, 1993. 10.2 *Amendment No. 1 to Product Royalty Agreement by and between the Company and Milton H. Goldrath, M.D. dated January 29, 2001. (b) Reports on Form 8-K (i) Registrant filed a Form 8-K Report dated February 20, 2001, which consisted of Item 5, reporting on the private placement of 1,114,485 shares of its Series A Convertible Preferred Stock and Item 7, Exhibit 3.1 - Certificate of Designations, Preferences and Rights of the Series A Preferred Stock. * Certain portions have been deleted pursuant to confidential treatment request 15 SIGNATURES Pursuant to the requirements 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 on May 15, 2001. BEI Medical Systems Company, Inc. By: /s/ THOMAS W. FRY ------------------------------------ Thomas W. Fry Vice President of Finance and Administration, Secretary and Treasurer (Chief Financial Officer) 16 INDEX TO EXHIBITS Exhibit Number ------ 10.1 *Product Royalty Agreement by and between the Company and Milton H. Goldrath, M.D. dated December 28, 1993. 10.2 *Amendment No. 1 to Product Royalty Agreement by and between the Company and Milton H. Goldrath, M.D. dated January 29, 2001. * Certain portions have been deleted pursuant to confidential treatment request 17