ITEM 1. BUSINESS
Introduction
BEI Technologies ("Technologies" or the "Company") was incorporated in Delaware in June 1997 and became publicly held on September 27, 1997 as a result of the distribution of shares in Technologies to all the stockholders of BEI Electronics, Inc., (since renamed BEI Medical Systems Company, Inc., ("Medical Systems") on September 24, 1997 (the "Distribution"). The principal business and continuing operations of Technologies are conducted within one business segment and are carried out by operations which design, manufacture and sell electronic devices that provide vital sensory input for the control systems of advanced machinery and automation systems. The sensors, most of which are concerned with physical motion, provide information that is essential to logical, safe and efficient operation of sophisticated machinery.
At the close of business on October 30, 2000, Technologies declared a distribution to its stockholders of approximately 42% of the outstanding securities of OpticNet, Inc. ("OpticNet"), a formerly majority-owned subsidiary of Technologies. In the distribution, each holder of record of Technologies common stock as of the close of business on October 30, 2000 received one share of OpticNet common stock for every two shares of Technologies common stock held, and cash in lieu of any fractional share of OpticNet common stock. The OpticNet common stock dividend valued at $0.04 per share of Technologies common stock resulted in a tax basis of $0.08 per OpticNet share. The total dividend was approximately $300,000, based on an appraisal of OpticNet. OpticNet's business is focused on developing fiber optic components and subsystems, such as optical switches, used in telecommunication systems. No securities of OpticNet are registered under the Securities Exchange Act of 1934. OpticNet is pursuing funding options to expand future operations.
In the quarter ending December 30, 2000, Technologies' effective ownership in OpticNet was reduced to 24%. OpticNet's net loss for the three month period from October 1, 2000 through December 30, 2000 of $176,000 is included in the consolidated results of Technologies. Beginning December 31, 2000, the Company accounted for its investment in OpticNet under the equity method and, as of September 29, 2001, reduced its initial $1.0 million investment in OpticNet by $160,000, reflecting the Company's share of OpticNet losses for the nine months from December 31, 2000 to September 29, 2001. In addition, Technologies had a note receivable totaling $1.1 million from OpticNet as of September 29, 2001.
The Board of Directors of Technologies also declared a one-for-one stock dividend to its stockholders, effective October 30, 2000. Immediately following the effectiveness of the distribution of the OpticNet shares, stockholders of record as of the close of business on October 30, 2000, received one additional share of the common stock of Technologies for each share held as of such date, and cash in lieu of any fractional share of Technologies common stock. The stock dividend was paid November 21, 2000.
The Company's long-term strategy is to provide, on a global basis, selected advanced intelligent sensors and sensor based subsystems utilizing proprietary technologies. Management believes that intelligent sensory input to machine control systems and computers will be increasingly crucial to the productive functioning of a modern economy. Accordingly, Technologies' goal is to maintain, develop and acquire a diverse offering of advanced sensor products, and manufacture and sell these with complementary products. The Company targets technology-based markets for subsystems and end products in which its traditional sensors, micromachined sensors and complementary products play an enabling role. The Company's near term initiatives include: (a) increased global penetration of the quartz "yaw" sensor for the automotive industry (as described below); (b) development and commercialization of other internally developed technologies that have broad industrial and commercial applications for motion control, pressure, rate and position sensing; and (c) expansion of product lines through synergistic acquisitions of complementary technologies.
A key feature of the Company's strategy is to be recognized worldwide as the most capable source for the sensor categories it has selected. The Company's traditional emphasis has been on producing highly engineered sensing components and assemblies. The Company believes it differentiates itself by offering (a) superior technology to solve a customer problem (including innovative proprietary technology); (b) quality service; and (c) engineering expertise in recommending and prescribing technical solutions for its customers' applications. The Company's products are not sold as commodities. Its strategy is to provide technical solutions and customer service that, together with the products themselves, create value and give the customer confidence that the product has been expertly prescribed and applied.
By way of more specific examples, the Company's engineers regularly address the following illustrative machine control requirements of customers:
(1) Many automobiles now have computer-controlled stability enhancement systems to assist drivers in maintaining control of the vehicle in slippery conditions. In some of these systems, one of the Company's sensors tells the computer system the present direction and angle of the steering wheel, while another of the Company's sensors instantly measures and reports the presence of yaw forces which if not corrected could cause the vehicle to spin out or fishtail. The automation system relies on these sensors to compare the driver's indicated directions with the actual result and can then take corrective action automatically. To this end the Company provides special GyroChip quartz sensors.
(2) During normal operation, an elevator system needs to know exactly where each car is. (Is the car between floors or not? Are the doors open or closed?) In both the foregoing examples, the Company's encoders could measure speed, exact location or door position.
(3) An antenna on a moving ship needs to be actively stabilized so that the antenna will continuously point at a satellite or another ship's pencil beam laser signal. For such an application the Company might provide its proprietary GyroChip quartz rate sensor. It might also provide motor-encoders and actuators to drive the compensating action of such a system.
(4) A pick and place robot needs to know how far its elbow and wrist joints have moved in order to control the speed and position of its "hand." Factory automation customers typically use optical encoders in pick and place robots and other position control applications.
(5) Advanced control systems in tractors, trucks, automobiles and construction equipment need to know position data in order to control implements on tractors and adjust engine speed and other automated functions. The Company's potentiometers provide the necessary data for steering, throttle and seat position as well as for positioning tools on industrial or off-road equipment.
(6) Semiconductor production equipment requires extremely fast yet accurate control of start-move-stop action on x-y-z positioners and tools. The Company's magnetic actuators provide the energizing force for such tasks and, by incorporating a linear encoder, can measure travel and location.
(7) Various medical systems require compact, high reliability, air flow and pressure regulation. The Company provides motors for blower assemblies and/or magnetic actuators for fast acting pressure regulating valves.
Customers and Markets
The foregoing examples illustrate a few of the thousands of machine control situations for which the products of the Company are used. Customers who buy the Company's products are makers and users of many different kinds of machinery and systems used in diverse markets and industries. Important market categories include factory automation, process control, transportation (including cars, trucks, mass transit, construction and farm equipment), health care and scientific equipment, and military, aviation, space and telecommunications applications.
The Company considers its large number of customers and the vast scope of existing and potential applications for its products to be a source of the Company's existing business strength and an opportunity for continued long-term growth.
The Company's brands have been well established in North America for many years and were distributed during the past fiscal year through Technologies' direct sales force to more than 8,700 different commercial customers, principally in the United States. These customers include both end users and original equipment manufacturers. The Company ships 92% of sales to commercial customers, with approximately 63% to the automotive market and 37% to other industrial markets. The value of individual orders from industrial customers is typically less than $100,000.
Sales from continuing operations to the U.S. Government (or prime contractors who manage government funded projects) represented approximately 8% of the Company's net sales in fiscal 2001, 9% in fiscal 2000 and 12% in fiscal 1999. One customer, Continental Teves AG & Co. ("Continental Teves"), accounted for approximately 49%, 37% and 20% of net sales in fiscal year 2001, 2000 and 1999, respectively. In fiscal 2001, approximately 56% of the Company's sales occurred in foreign markets with approximately 3% sold in foreign currency.
The Company also seeks to use its proprietary sensor capabilities to create value-added subsystems or products. The goal is to make such high margin products, enabled by the Company's proprietary technology, a growing part of the Company's business. For example, the Company can provide position feedback inside a magnetic actuator creating a "smart" actuator.
Products and Proprietary Systems
The Company's main product groups may be categorized as follows;
1. Traditional sensors and complementary products;
2. Micromachined sensors; and
3. Engineered subsystems (such as inertial measurement units, scanner assemblies, electronic servo control systems and trackballs).
A more detailed description of the products and systems designed, manufactured and sold by the Company follows below.
Traditional Sensors and Complementary Products
Optical Shaft Encoders. Optical shaft encoders translate the motion of rotating shafts directly into digitally coded electronic signals. These digitally coded signals facilitate interpretation of the sensed motion by microcomputer processors that are used to control the operation of machinery and equipment. The Company offers a wide array of optical shaft encoders to serve a variety of applications. The most common applications are for factory automation, office automation and transportation equipment, but specialized versions are also used for military and space hardware. Value-added assemblies that employ optical shaft encoders include servo motors and servo drive electronic control systems.
Position Sensors. Similar in basic function to encoders, position sensors are potentiometric devices that measure motion by analog (not digital) changes in electrical potential. These changes may sometimes be subsequently translated into digital code. Position sensors are used as economical motion sensing devices for throttle, steering, suspension, and seat and mirror position controls in automobiles and in some heavy equipment, such as earth movers, construction equipment and farm machinery. They are also used to measure position in such applications as actuators on molding presses, saw mills and numerous other types of industrial equipment and in oil well logging calipers. Combining the Company's position sensor technology with its proprietary optical shaft encoder technology has resulted in a highly engineered steering wheel position sensor used for intelligent stability control systems for automobiles and steer-by-wire off-road transportation programs.
Magnetic Actuators. Magnetic actuators are used in place of cams or motors to achieve precise control of short stroke linear or limited rotary motion. Actuators using very high-energy magnets are also produced for specialized applications requiring intense force, torque or acceleration relative to the size of the device.
Brushless DC Motors. Brushless DC Motors give high performance and efficiency in compact, lightweight packages and ease of interface with microprocessors. These motors, which feature high-energy magnets, are characterized by long life and low acoustic and electrical noise. They are well suited to high speed, high reliability applications, such as in respiration therapy equipment where there is a long life requirement, the risk of dust from a brush motor could be troublesome or where electrical noise could disrupt computers or computer-controlled equipment.
Accelerometers. Accelerometers and rate sensors using traditional mechanical technology (e.g., a moving mass suspended by a pivot and jewel mechanism) rely on the movement of complex machined metallic parts to measure motion.
Micromachined Sensors
Rate Sensors and Accelerometers. These products provide precise and reliable measurement of minute linear and angular motion for control, guidance and instrumentation. In general, these devices operate without need for direct linkage to the driving mechanisms. Such measurements are required for heading and attitude reference instruments and flight control needs in aircraft and missiles, stabilization of satellites, stabilization control of antennae on aircraft, ships and other moving platforms, navigation of oil well drill bit assemblies, and for intelligent vehicle stability systems in the automotive industry. Technologies produces
miniature, solid state rate sensors and accelerometers based on innovative and proprietary chemical micro-machining of a single element from crystalline quartz using photolithographic methods similar to those used in the manufacture of silicon semiconductor chips. The advantages of quartz rate sensors and accelerometers over traditional mechanical units are increased reliability, reduced size, and lower production and life cycle costs.
BEI Technologies' GyroChip Sensors. The Company's family of GyroChip quartz rate sensors, developed primarily to accommodate the need for reliable and high precision yet economical gyros, have found use in such varied applications as the navigation of autonomous (robotic) guided vehicles, ocean buoy and sea-state monitoring, and stabilization of pointing systems for antennas and optical systems. The most frequent use of GyroChip units (the automotive quartz rate sensor or "AQRS") is as yaw sensors in stability control or spinout prevention systems for automobiles. GyroChip sensors provide performance suitable for commercial applications while offering ruggedness, longer life and smaller size at a lower cost than military versions of quartz rate sensors.
Pressure Sensors. Pressure sensors measure absolute, gage or differential pressure from vacuum to 10,000 psi. Various sensing technologies are used including silicon micromachined systems used for commercial and industrial markets. The Company provides standard products as well as application specific solutions to pressure measurement requirements.
Micro-Electromechanical Systems ("MEMS"). MEMS are a new category of ultra small devices, usually micro-machined from crystalline materials such as quartz or silicon. The GyroChip sensors and other quartz devices discussed above are examples of MEMS currently being sold by Technologies. Management expects the Company's MEMS research and development programs to lead to new devices for sensing motion, pressure and other physical parameters.
Engineered Subsystems:
Inertial Measurement Units ("IMU"). These subsystems are a fundamental element of virtually all inertial navigation and position or attitude reporting systems. Even systems that rely on the Global Positioning Satellite ("GPS") network frequently must have an IMU built in to ensure a back up in case the GPS signal is interrupted. Technologies' quartz rate sensors have made new breakthroughs in size, reliability and cost for it's proprietary IMU subsystems.
Scanner Assemblies. Scanner assemblies are an integral subsystem of the optics in military night vision systems that guide the infrared image to the focal plane sensor array. These subsystems consist of spinning or reciprocating mirrors, a motor and an encoder in a precision servo loop. The Company's motion control know-how helps ensure that the scanner delivers jitter-free, well-resolved images.
Servo Systems. Servo Systems are closed-loop electronic systems that control the position and/or velocity of rotating shafts, linear assemblies or other moving parts by noting a desired rate of movement and position (usually input from computers or control panels), monitoring the actual position and rate of movement (using an appropriate encoder or other sensor) and constantly providing feedback that indicates whether further action is required to achieve or maintain the desired performance.
Trackballs. BEI trackballs have flexible and rugged designs that allow them to be an integral part of a keyboard as well as stand-alone cursor positioners. They are used in ultra-sound scanning machines, factory automation and defense applications. The flexibility is provided by the interface electronics design that accommodates various standard and customized interfaces and rugged performance is provided by a proprietary ball sealing technique that allows operation in harsh environments.
Backlog
Backlog figures for the Company at September 29, 2001 and at September 30, 2000, were $76,272,000 and $83,269,000, respectively.
The Company's commercial operations typically ship standard products within 30 to 90 days after receipt of a purchase authorization. Management of the Company believes that its competitive position depends in part on minimizing the time that elapses between receipt and shipment of an order. Products that require special analysis, design or testing, such as those produced for customers in the aviation or space technology markets, are generally shipped from six to eighteen months after receipt of the purchase authorization.
In the case of U.S. Government contracts, backlog includes only the applicable portion of contracts that are fully funded by a procuring Government agency. All U.S. Government contracts and subcontracts are subject to termination by the U.S. Government at-will, traditionally with compensation for work completed and costs incurred.
Backlog figures for the Company include aggregate contract revenues remaining to be earned by the Company, principally over the next twelve months, for scheduled deliveries under existing contracts. Some contracts undertaken by Technologies extend beyond one year. Accordingly, portions of certain contracts are carried forward from one year to the next as part of backlog. All orders considered backlog for the Company as of September 29, 2001 are scheduled for shipment during fiscal 2002. There can be no assurance that all existing contract backlog will eventually result in revenue and, accordingly, the amount of backlog at any date is not necessarily a reliable indicator of future revenue or profitability trends.
Competition
Competitors for various products offered by the Company are found among certain divisions or product lines of large, diversified companies such as Bosch, Danaher Corp., Litton, Panasonic, Rockwell International and Sumitomo. There are smaller or product-specific companies, some of whose products compete with those of the Company, including CTS Corp., Heidenhain, Kulite Semiconductor, Servo Magnetics Corp., Bourns, Inc., Kavlico Corp., BI Technologies Corp. and Druck Holdings, P.L.C.
In its principal markets, the Company believes that competition is based primarily on design, performance, reliability, price, delivery, service and support. The Company believes that it competes favorably with respect to these factors.
Manufacturing
The Company's manufacturing operations provide a mix of standard products and custom products designed to meet the specialized requirements of a particular customer. The Company's products, whether standard or custom, are normally manufactured in response to customers' orders and are in general not held as finished goods. Most are assembled from parts or subassemblies that are proprietary to the Company. The Company relies on various sources for its raw material components. See "Business--Risk Factors--Dependence Upon Key Suppliers."
Specialized or proprietary equipment is often used to produce the Company's products. For example, a code pattern generator designed by and proprietary to the Company is used to produce some shaft encoder parts. Specialized quartz micromachining equipment is used for the production of GyroChip units. High throughput automated or semi-automated equipment is used for the production of GyroChip assemblies, brushless motors and potentiometers. Some parts are fabricated under clean room conditions.
The Company's production of automotive yaw sensors required scaling-up its production to the quantities demanded by the automobile market. The Company is continuing to refine production engineering measures to support the fabrication, assembly, and testing of new sensors in the appropriate quantities. There can be no assurance that the Company will be able to produce the required quantities on time or in sufficient amounts to satisfy demand. Failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Risk Factors--Manufacturing Experience Risk; Scale-Up Risk; Product Recall Risk."
Research and Development
The Company's research and development focus has included improving performance and yield of existing products, with special emphasis on the quartz sensors used in high accuracy IMU's and high volume yaw rate sensors for the automotive industry. Substantial effort has also been devoted to the development of efficient manufacturing methods necessary for competitive pricing of the Company's products while maintaining the required quality for the automotive market. The Company has begun transition to the next generation quartz fork sensor. Value engineering reduced the size and thickness of this next generation fork enabling faster etch time and nearly doubling the forks per wafer from prior generation 16 forks per wafer to current configuration 30 forks per wafer. Several patent applications for this configuration were filed and issued.
During the 2001 fiscal year, the Company continued development and commercialization of a new non-contacting angular position sensor referred to as NCAPS. The development was driven by the Company's perception of market demand for a technology usable in high volume applications (e.g., steering sensors, medium resolution absolute angular position measurement sensors), that would overcome the limitations of contacting sensors as well as the limitations of currently available non-contacting sensors. The design and architecture of the NCAPS (essentially a digitally processed proprietary transceiver sensor unit),
when combined with the Company's existing manufacturing expertise, may lend itself to high volume production. The Company believes applications for this technology may cover a wide spectrum within the automotive and industrial market sectors. The Company also developed and introduced a dual output hall effect angular position sensor for use in heavy duty off road and military applications.
Also enhancing our core position sensing technology, the Company introduced the Linear Gap Displacement Transducer (LGDT) for short stroke, high precision applications. This reflective fiber optic technology offers measurement resolution as low as 100 nanometers.
Management of the Company believes that its future success will depend in part on its ability to continue to enhance its existing products, and to develop and introduce new products that maintain technological leadership, meet a wider range of customer needs and achieve market acceptance. Accordingly, the Company's internally funded research, development and related engineering expenditures were approximately $8.8 million, $8.9 million and $6.6 million in fiscal 2001, 2000 and 1999, respectively. In addition, customer-funded research and development expenditures charged to cost of sales were $0.2 million, $0.6 million and $0.4 million, respectively, for the same periods. Development of the Company's portfolio of rate sensors, including the NCAPS, comprised most of the prior years' customer-funded research and development expenditures. As these sensors have moved from the development stage to production, there has been a corresponding decrease in customer-funded research and development expenditures.
Employees
As of September 29, 2001, the business units comprising Technologies had 1,118 employees, including 142 in research, development and engineering, 195 in administration, 56 in marketing and sales, and 725 in operations. The Company believes that its continued success depends on its ability to attract and retain highly qualified personnel. The Company's employees are not covered by collective bargaining agreements. The Company has not experienced any work stoppages and considers its relationship with its employees to be good.
Intellectual Property
The Company relies primarily upon trade secrets and know-how to develop and maintain its competitive position. In addition, the Company and its subsidiaries have been issued 88 U.S. patents and 69 foreign patents with expiration dates ranging from March 2002 to October 2018. Because many of these patents relate to technology that is important to certain of the Company's products, the Company considers these patents to be significant to its business.
While management believes that the Company's intellectual property rights are important, management also believes that because of the rapid pace of technological change in the industries in which the Company competes, factors such as innovative skills, technical expertise, the ability to adapt quickly to technological change and evolving customer requirements, product support and customer relations are of equal competitive significance.
Environmental Matters
The Company uses certain controlled or hazardous materials in its research and manufacturing operations and, as a result, is subject to federal, state and local regulations governing the storage, use and disposal of such materials. Management of the Company believes that it is currently in compliance with such laws and regulations, and that the cost of such compliance has not had a material effect on the Company's capital expenditures, earnings or competitive position, and is not expected to have a material adverse effect in the foreseeable future.
Government Regulation
The Company is subject to significant regulation by the U.S. Government with respect to a variety of matters affecting its business, including the matters set forth below and as discussed in the "Risk Factors--Government Regulation" and "Risk Factors--Contracting with the U.S. Government" below.
Facility Security Clearance
The Company has several facility security clearances from the U.S. Government. A portion of the Company's net sales in
fiscal 2001, 2000 and 1999 was derived from work for which this clearance was required. Continuation of this clearance requires that the Company remain free from foreign ownership, control or influence (FOCI). In addition, the Company is required to comply with the regulations promulgated by the Defense Investigative Service (DIS), which relate, in large part, to the Company's control of classified documents and other information. Management does not believe that there is presently any substantial risk of FOCI or DIS noncompliance that would cause any of its security clearances to be revoked.
Regulation of Foreign Sales
Certain of Technologies' exports are subject to restrictions contained in the U.S. Department of State's International Traffic in Arms Regulations and require export licenses in order to be sold abroad. Non-defense related foreign sales are generally governed by the Bureau of Export Administration of the U.S. Commerce Department, which also frequently requires export licenses. The Company's net sales to foreign customers constituted approximately 56%, 45% and 28% of revenues for fiscal 2001, 2000 and 1999, respectively. To date, the Company has not experienced any significant difficulties in obtaining the requisite licenses. In addition, the Company is subject to the Foreign Corrupt Practices Act, which prohibits payments or offers of payments to foreign officials for the purpose of influencing an act or decision by a foreign government, politician or political party in order to assist in obtaining, retaining or directing business to any person.
RISK FACTORS
Stockholders or investors considering the purchase of shares of the Company's Common Stock should carefully consider the following risk factors, in addition to other information contained in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial could also impair the Company's business operations.
Competition
The principal competitive factors affecting the market for the Company's products include product functionality, performance, quality, reliability, price, compatibility and conformance with industry standards, and changing customer systems requiring product customization. Several of the Company's existing and potential competitors, including those noted above under "Business - - Competition", have substantially greater financial, engineering, manufacturing and marketing resources than does the Company. Further, the technologies offered by the Company may compete for customer acceptance with technologies offered by other manufacturers, such as resolvers, inductosyns, laser and fiber optic gyros and magnetic encoders. There can be no assurance that other companies will not develop more sophisticated, more cost-effective or otherwise superior products which could have a material adverse effect on the Company's business, financial condition and results of operations.
Rapid Technological Change; Research and Development Efforts
The market for the Company's products is affected by rapidly changing technology and evolving industry standards and the emergence of new technologies and protocols. The Company believes that its future success will depend upon its ability to enhance its existing products and to further develop and introduce new products that meet a wide range of evolving customer needs and can achieve market acceptance. There can be no assurance that the Company will be successful in these efforts. The Company has incurred, and the Company expects to continue to incur, substantial expenses associated with the introduction and promotion of new products. There can be no assurance that the expenses incurred will not exceed research and development cost estimates or that new products will achieve market acceptance and generate sales sufficient to offset development costs. In order to develop new products successfully, the Company is dependent upon key management and technical personnel who continuously contribute ideas to develop new products and enhancements of the Company's existing products. There can be no assurance that products or technologies developed by others will not render the Company's products non-competitive or obsolete.
Risks from Manufacturing and Design Defects; Ability to Meet Customers' Performance Criteria
The Company has experienced manufacturing quality problems in the past and could experience similar problems in the future. Certain of the Company's products are designed for use in critical safety and mission critical systems. During the Company's continuing efforts to increase manufacturing and production capabilities to meet market demand, high quality standards for the Company's products must be maintained, or risk customer dissatisfaction, damage to the Company's reputation, or significant liability claims if the Company's products contain undetected errors or inaccuracies. The Company attempts to contractually limit exposure to liability claims by customers, but this may be insufficient in the face of very large claims and does
not preclude all potential claims. As a result, product recalls or significant liability claims, whether or not successful, could harm the Company's reputation and business.
Manufacturing Experience Risk; Scale-Up Risk; Product Recall Risk
Technologies is continuing the process of adding production capacity for its automotive yaw rate sensors to respond to the expected future demand for quantities required by the automobile market. The Company has relatively recent experience in large-scale manufacturing. The Company manufactured approximately 1.83 million units of its automotive quartz rate sensor in the Concord, California facility, which supplied sensors to less than 10% of automobiles sold in the North American and European markets in fiscal 2001. In prior years, the Company encountered difficulties in scaling up production of the GyroChip sensors, including problems involving production yields, component supplies and shortages of qualified personnel. A failure by the Company to manufacture and deliver products in a timely fashion could harm the Company's reputation and cause the loss of potential future sales and the Company could be forced to pay penalties to customers in the event of contract breach for delivery failures. These types of manufacturing delays can occur for various reasons, including a lack of manufacturing capacity, the failure of a supplier to provide components in a timely fashion or with acceptable quality, or an inability by the Company to attract and retain qualified manufacturing personnel. There can be no assurance that future manufacturing difficulties or product recalls, either of which could have a material adverse effect on the Company's business, financial condition and results of operations, will not occur.
Manufacturing Processes and Equipment
The Company manufactures certain products such as quartz rate sensors, potentiometers and some shaft encoders using extremely complex proprietary processes and equipment. The fabrication of these products requires manufacturing efforts to occur in a highly controlled and ultra-clean environment, and accordingly these products are extremely sensitive to changes in manufacturing conditions. The Company is largely dependent on its Concord, California facility to meet the volume of manufacturing required by the automotive market. In the event of a production disruption, the possibility exists that equipment could be irrevocably damaged or that process disciplines and controls could be temporarily or permanently lost, which would cause the Company to experience problems achieving acceptable manufacturing yields. Such a disruption of production could have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence Upon Key Personnel
The Company depends to a significant degree on the continued contribution of key management and technical personnel. The loss of the services of one or more key employees could have a material adverse effect on the Company. The Company's success also depends on its ability to attract and retain additional highly qualified management and technical personnel. Skilled technical personnel in the Company's industry are in short supply, and this shortage is likely to continue for some time. As a result, competition for these people is intense and they are often subject to offers from competing employers, particularly in northern California where certain of the Company's facilities are located and there is a high concentration of technology companies. There can be no assurance that the Company will be able to retain its key employees, or that it will be able to attract or retain additional skilled personnel as needed. The Company does not currently maintain key person insurance on any employee. See "Business-Employees" and "Business-Directors and Executive Officers of the Company."
Dependence Upon Key Suppliers
Although the majority of the components used in Company products are available from multiple sources, several components are built or provided to the Company's specifications. Such components include quartz, supplied by Sawyer Research Products, Inc.; housings, supplied by Tomco Plastics, Inc.; gold pellets, supplied by Vacuum Engineering & Material Co., Inc.; PWB/ case assemblies, supplied by Kimball Electronics Group; injection molding, supplied by L. W. Reinhold, Inc.; substrates, supplied by Aurora Circuits, LLC; two types of ASIC's, supplied by National Semiconductor Corporation and Flextronics Semiconductor, Inc.; and two types of LED's, supplied by Optek Technology, Inc. and Opto Diode Corp. The Company currently relies on single suppliers for these components. Any increase in the cost of the components used in the Company's products could make the Company's products less competitive and lower the Company's gross margin. Additionally, the Company's single source suppliers could enter into exclusive agreements with or be acquired by one of the Company's competitors, increase their prices, refuse to sell their products to the Company, discontinue products or go out of business. To the extent alternative suppliers are available to the Company, identifying them and entering into arrangements with them is difficult and time consuming, and they may not meet quality standards of the Company. Additionally, consolidations among the
Company's suppliers could result in other sole source suppliers. There can be no assurance that there will not be a significant disruption in the supply of such components in the future, or in the event of such disruption, that the Company will be able to locate alternative suppliers of the components with the same quality at an acceptable price. An interruption in the supply of components used in the manufacture of the Company's products, particularly as the Company scales up its manufacturing activities in support of commercial sales, could have a material adverse effect on the Company's business, financial condition and results of operations.
Dependence Upon Key Customers
Approximately 49% of the net sales of the Company in fiscal 2001 were to Continental Teves for the automotive quartz rate sensor product used in automobile stability control systems. Continental Teves integrates the Company's sensor product into independently developed products and markets the integrated systems to various customers in the automobile industry. This concentration of sales is expected to expand in fiscal 2003 and beyond. In fiscal year 2002, the Company is transitioning to its next generation automotive quartz yaw rate sensor product, a multi-sensor cluster configuration. The Company expects to continue to increase production of the GyroChip sensors (see "Business--Risk Factors--Manufacturing Experience Risk; Scale-Up Risk; Product Recall Risk") to meet the requirements of its contracts with Continental Teves in FY 2003 and beyond. In addition, the Company is in discussion with Continental Teves and other automotive customers that could lead to extensions of existing contracts and to new contracts. There can be no assurance that the Company will be able to retain or extend its contracts with Continental Teves or other automotive customers, or obtain new contracts on favorable terms, or that the product will continue to achieve continuing growth beyond the end of the current contracts, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Government Regulation
Certain aspects of the industry in which the Company's products are sold are regulated both in the United States and in foreign countries. Imposition of public carrier tariffs, foreign taxation and the necessity of incurring substantial costs and the expenditure of managerial resources to obtain regulatory approvals, particularly in foreign countries where safety standards differ from those in the United States, or the inability to obtain regulatory approvals within a reasonable period of time, could have a material, adverse effect on the Company's business, operating results and financial condition. The Company's products must comply with a variety of equipment, interface and installation standards promulgated by regulatory authorities in different countries. Changes in government policies, regulations and interface standards could require the redesign of products and result in product shipment delays which could have a material, adverse impact on the Company's business, operating results and financial condition.
Contracting with the U.S. Government
Approximately 8%, 9% and 12% of the net sales of Technologies in fiscal 2001, 2000 and 1999, respectively, were derived from contracts with the U.S. Government or under subcontract to other prime contractors to the U.S. Government. Because a significant portion of Technologies' business is derived from contracts with the Department of Defense or other agencies of the U.S. Government, the Company's business is sensitive to changes in U.S. Government spending policies that can have significant variations from year to year. At various times, the Company's results have been adversely affected by contract cutbacks and there can be no assurance that the Company's results of operations will not in the future be materially and adversely affected by changes in U.S. Government procurement policies or reductions in U.S. Government expenditures for products furnished by the Company.
Under applicable regulations, various audit agencies of the U.S. Government conduct regular audits of contractors' compliance with a variety of U.S. Government regulations. The U.S. Government also has the right to review retroactively the cost records under most U.S. Government contracts. Contract prices may be adjusted in the event the U.S. Government determines that the Company submits incomplete, inaccurate or obsolete cost or pricing data. Government contracts and subcontracts generally provide for either a fixed price, negotiated fixed price or cost-plus-fixed-fee basis for remuneration. The majority of the contracts with the U.S. Government are competitive fixed price or negotiated fixed price contracts, although cost-plus-fixed-fee contracts provided approximately 2.0% of the Company's net sales in fiscal 2001. For fixed price contracts, the Company bears the risk of cost overruns and derives the benefits from cost savings. As a result, greater risks are involved under fixed price contracts than under cost-plus contracts because failure to anticipate technical problems, estimate costs accurately or control costs during contract performance may reduce or eliminate the contemplated profit or may result in a loss.
All U.S. Government contracts contain termination clauses that allow the contract to be terminated either for contractor default or for the convenience of the U.S. Government. In the event of termination for the convenience of the Government, the clause typically provides that the contractor will receive payment for work-in-progress, including profit. To date, termination of Technologies' contracts by the U.S. Government has not had any significant effect on the Company's financial results. However, no assurance can be given that such terminations will not have a materially adverse effect on the Company's results of operations in the future.
Portions of the Company's government business are sometimes classified. As a result, the Company may be prohibited from disclosing the substance or status of such business.
Dependence on Proprietary Intellectual Property
Success for the Company depends, in part, on the Company's ability to protect its intellectual property. The Company relies on a combination of patent, copyright, trademark and trade secret laws to protect its proprietary technologies and processes. Nevertheless, such measures may not be adequate to safeguard the proprietary technology underlying its products. In addition, the Company's existing and any future patents that may be issued, could be challenged, invalidated or circumvented, and any right granted thereunder may not provide meaningful protection to the Company. The failure of any patents to provide protection to the Company's technology might make it easier for competitors to offer similar products and use similar manufacturing techniques. Despite precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, develop similar technology independently or design around those patents issued to the Company. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan. The Company may not be able to obtain any meaningful intellectual property protection in such countries and territories. Additionally, the Company may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States. Further, at the request of customers, the Company occasionally incorporates a customer's intellectual property into designs, in which case the Company will have obligations with respect to the non-use and non-disclosure of that intellectual property. However, the steps taken by the Company to prevent misappropriation or infringement of Company intellectual property or that of customers may not be successful. Moreover, costly and time intensive litigation could be necessary to enforce the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of proprietary rights of others, including customers.
The industries in which the Company operates can be characterized by their vigorous protection and pursuit of intellectual property rights. In this regard, the invalidity of the Company's patents could be asserted and claims made against the Company. Furthermore, in a patent or trade secret action, the Company could be required to withdraw certain products from the market or redesign products offered for sale or under development. The Company has also entered into certain indemnification obligations in favor of customers and strategic partners that could be triggered upon an allegation or finding of infringement of other parties' proprietary rights. Irrespective of the validity or successful assertion of such claims, the Company would likely incur significant costs and diversion of resources with respect to the defense of such claims. To address any potential claims or actions asserted in opposition, the Company may seek to obtain a license under a third party's intellectual property rights. Under such circumstances, a license may not be available on commercially reasonable terms, if at all.
International Sales
Sales to customers located outside the United States accounted for approximately 56%, 45% and 28% of the Company's net sales in fiscal 2001, 2000 and 1999, respectively. Most of these sales were to Continental Teves, located in Germany. The Company expects that international sales will continue to represent a significant portion of the Company's product revenues and that the Company will be subject to the normal risks of international sales, such as export laws, currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collections and complying with a wide variety of foreign laws. Although the Company has not previously experienced significant difficulties under foreign law in exporting its products, there can be no assurance that the Company will not experience such difficulties in the future. In addition, because the Company primarily invoices its foreign sales in U.S. dollars, fluctuations in exchange rates could affect demand for the Company's products by causing its prices to be out of line with products priced in the local currency. Such difficulties could have a material adverse effect on the Company's international sales and a resulting material adverse effect on the Company's business, operating results and financial condition.
Possible Volatility of the Company's Common Stock Price
The price of the Company's Common Stock has fluctuated widely in the past. Sales of substantial amounts of the Company's Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Company's Common Stock. The management of the Company believes that such past fluctuations may have been caused by the factors identified above as well as announcements of new products, quarterly fluctuations in the results of operations and other factors, including recent volatility in stock prices for technology focused companies as a whole. These fluctuations, as well as general economic, political and market conditions and other unrelated to operating performance may adversely affect the market price of the Company's Common Stock. The Company anticipates that prices for Technologies Common Stock may continue to be volatile. Future stock price volatility for Technologies Common Stock could provoke the initiation of securities litigation which may divert substantial management resources and have an adverse effect on the Company's business, operating results and financial condition.
Voting Control by Officers, Directors and Affiliates
At September 29, 2001 the Company's officers and directors and their affiliates beneficially owned approximately 24% of the outstanding shares of the Company's Common Stock. Accordingly, together they had the ability to significantly influence the election of the Company's directors and other corporate actions requiring shareholder approval. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company.
Certain Charter Provisions
The Company's Board of Directors has authority to issue up to 2,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the shareholders. The rights of the holders of the Company's 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. The issuance of Preferred Stock, 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, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance thereof could have a material adverse effect on the market value of the Company's Common Stock.
Economic Downturn
We are currently in the midst of a general economic downturn. We cannot predict how long or severe this downturn will be or whether any actions taken or proposed by the government will be effective to bolster the economy. As a result of this uncertainty, forecasting and financial and strategic planning are more difficult than usual. If the downturn continues for an extended period or becomes more severe, our business will suffer and we may experience declines in sales and resulting losses, as our customers attempt to limit their spending. Specifically, a continued economic downturn may result in diminished factory utilization and consumer demand in the aviation, aerospace and factory automation markets, as well as lower automobile sales, resulting in lower demand for our products purchased by these industries. In addition, the adverse impact of the downturn on the capital markets could impair our ability to raise capital as needed and impede our ability to expand our business.
In addition, this economic downturn has been exacerbated by the recent terrorist attacks in New York and Washington, D.C., which caused disruption to commercial activities in the United States and internationally. The long-term impact of the terrorist attacks on the economy as a whole, the automotive industry, government related sales, and other industries to which we sell is not known at this time. Any future terrorist attacks or future outbreaks or escalation of hostilities arising out of any attacks, or concerns that attacks or hostilities may occur, could adversely affect the United States economy in general, including the capital markets, which in turn could adversely impact the worldwide economy and prolong or intensify the current downturn.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their ages as of December 1, 2001 are as follows:
Directors
Mr. Brooks began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. From 1987 until his resignation as a result of the Distribution, he served as a director of Medical Systems. He is currently an independent financial consultant, and also serves as a director of Longs Drug Store Corporation, Granite Construction, Inc. and the Western Farm Credit Bank, a private company. Mr. Brooks holds a B.S. from Yale University and an M.B.A. from the University of California, Berkeley.
Mr. Brown began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. He served as a director of Medical Systems from October 1974 until his resignation as a result of the Distribution. Mr. Brown served as President and Chief Executive Officer of Medical Systems from October 1974 until July 1990. Mr. Brown served from 1971 until 1974 as Executive Vice President and General Manager of Baldwin Electronics, Inc., a subsidiary of D.H. Baldwin Company and the predecessor of Medical Systems. Mr. Brown holds a B.S.E.E. from the University of Oklahoma.
Mr. Crocker began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. He was a founder of Medical Systems and has served as Chairman of the Board of Directors of Medical Systems since October 1974 and Chairman of the Board of Directors of Technologies since October 1997. Mr. Crocker assumed the positions of President (in which position he served until May 2000) and Chief Executive Officer of Technologies, effective October 1, 1997, after resigning as President and CEO of Medical Systems as a result of the Distribution. Mr. Crocker 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 Fiduciary Trust International, Pope & Talbot, Inc. and Teledyne Technologies, Inc. Mr. Crocker also serves as director of OpticNet, Inc., a minority owned subsidiary of the Company. Mr. Crocker holds a B.S. from Stanford University and an M.B.A. from the University of California, Berkeley.
Mr. Giroir began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. He was a director of Medical Systems from 1978 until his resignation as a result of the Distribution. He served as the Secretary of Medical Systems from 1974 to early 1995. Mr. Giroir is the sole member of Giroir,
PLLC. He is also President of Arkansas International Development Corporation II, LLC and Chairman of the Board of Directors for Clinical Study Centers, LLC. Mr. Giroir holds a B.A. and an L.L.B. from the University of Arkansas and an L.L.M. from Georgetown University.
Dr. Howard began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. He was a director of Medical Systems from December 1992 until his resignation as a result of the Distribution. He is currently an independent consulting engineer in microelectronics and technology-based business planning. From 1987 to 1990, Dr. Howard served as Senior Fellow of the National Academy of Engineering and, prior to that time, held various technical and management positions with Motorola, Inc., most recently as Senior Vice President and Director of Research and Development. He currently serves as director of RAMTRON International Corp., Credence Systems, Inc., Thunderbird Technologies, Inc., and Xilinx, Inc. Dr. Howard holds a B.S.E.E. and an M.S. from Cornell University and a Ph.D. in electrical engineering and computer sciences from the University of California, Berkeley.
Dr. Madni was appointed President and Chief Operating Officer of the Company in May 2000. He began serving as a Director and as a Vice President of the Company in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. Dr. Madni was appointed President of BEI Sensors & Systems Company, Inc. in October 1993, which was formed by the consolidation of BEI Motion Systems Company and the BEI Sensors & Controls Group, of which Dr. Madni had been President since October 1992. Prior to joining Medical Systems in 1992, he served over 17 years in various senior level technical and executive positions with Systron Donner Corporation, a manufacturer of avionics and aerospace sensors and subsystems. He was most recently Chairman, President and CEO of Systron Donner Corporation, a subsidiary of Thorn/EMI. Dr. Madni's degrees include a B.S and M.S. in Engineering from the University of California, Los Angeles, and a Ph.D. in Engineering from California Coast University. He is also a graduate of the Engineering Management Program from the California Institute of Technology, the AEA/Stanford Executive Institute from Stanford University, and the Program for Senior Executives from the Massachusetts Institute of Technology, Sloan School of Management. He is a Chartered Engineer and Fellow of the Institute of Electrical and Electronics Engineers, the Institution of Electrical Engineers, the Institute for the Advancement of Engineering, the New York Academy of Sciences, and the International Biographical Association.
Mr. Wrench began serving as a Director in June 1997 prior to the Distribution and resulting spin-off of the Company from Medical Systems in September 1997. He was Senior Vice President and Chief Financial Officer of Medical Systems from July 1993 until his resignation as a result of the Distribution, and held these same positions with Technologies until his retirement in May 2000. He was named a Director of Medical Systems in February 1986, and continues to serve as a director of Medical Systems. He also serves as a director of OpticNet, Inc., a minority owned subsidiary of the company, and has served as Chief Financial Officer of that company since May 2000. From April 1985 to July 1993, he served as Vice President of Medical Systems and President and Chief Executive Officer of BEI Motion Systems Company, Inc., then a wholly owned subsidiary of Medical Systems that is now a part of the Company. Other experience includes twenty years with Hughes Aircraft Company. 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 of 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 II directors to expire at the 2002 annual meeting of stockholders, the term of office of the Class III directors to expire at the 2003 annual meeting of stockholders and the term of office of the Class I directors to expire at the 2004 annual meeting of stockholders. Class II consists of Mr. Giroir, Dr. Madni and Mr. Wrench; Class III consists of Mr. Brooks and Dr. Howard; and Class I consists of Mr. Brown and Mr. Crocker. Directors elected to succeed those directors whose terms expire will be elected to a three-year term of office. All directors hold office until the next annual meetings of stockholders at which their terms expire and until their successors have been duly elected and qualified. Executive officers serve at the discretion of the Board. There are no family relationships between any of the officers and directors.
Executive Officers
In addition to Mr. Crocker and Dr. Madni, whose positions with Technologies, experience and educational background are described under Directors above, the following persons are also Executive Officers of Technologies:
Mr. Brasuell is Vice President and General Manager of the Systron Donner Inertial Division of Technologies. Mr. Brasuell has served in this position since October 1995. From 1985 until 1995 Mr. Brasuell held executive staff level positions at Systron
Donner Inertial Division in Program Management and Contracts, Advanced Product Development and Manufacturing. Between 1976 and 1986 Mr. Brasuell held various technical and management positions at Systron Donner Inertial Division.
Mr. Corr was named a Vice President of Technologies in March 2000. He has served as Treasurer, Controller and Secretary of Technologies since September 1997 and held these same positions with Medical Systems prior to the Distribution in September 1997. Mr. Corr resigned from his positions with Medical Systems immediately prior to the Distribution. Mr. Corr served as Secretary of Medical Systems in February 1995 and served as Controller from November 1989 and as Treasurer from November 1987 until his resignation immediately prior to the Distribution. From 1978 to 1987, he was employed by AMPEX Corporation, an electronics and magnetic media company, in various financial positions. From 1975 to 1978, he was an auditor with Arthur Andersen LLP. Mr. Corr received a B.B.A. from Loyola University and is a Certified Public Accountant in the State of California.
Mr. LaBoskey began serving as Senior Vice President and Chief Financial Officer of the Company, in May 2000. He was appointed Vice President and Chief Financial Officer of BEI Sensors & Systems Company Inc., in October 1993, which was formed by the consolidation of BEI Motion Systems Company and the BEI Sensors & Controls Group, of which Mr. LaBoskey had served as Vice President and Controller since 1992. Prior to joining Technologies in 1992, he served for 7 years as Controller for Systron Donner Corporation, Microwave Division, a manufacturer of avionics and aerospace sensors and subsystems. He was most recently Director of Finance for Systron Donner Corporation, a subsidiary of Thorn/EMI. Mr. LaBoskey's degrees include a Bachelor of Arts from the University of California, Irvine, and a Masters in Business Administration from the University of Colorado. He is also a graduate of the Executive Program from the University of California, Los Angeles, Anderson School of Management. He is a Certified Management Accountant (CMA) through the Institute of Management Accountants (IMA), and Certified in Production and Inventory Management (CPIM) through the American Production and Inventory Control Society (APICS).
Mr. Pike serves as Senior Vice President of Divisional Administration and Human Resources for Technologies. Mr. Pike joined Technologies in 1983, and prior to his present position served in various operational, administrative and financial positions with BEI Sensors & Systems Company, a subsidiary of Technologies. Prior to joining Technologies, he was employed by Coastal Oil & Gas and AFCO Metals in their respective financial departments. He received a B.A. from Ouachita Baptist University in 1973 and his CPA in 1979 from the State of Arkansas.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased office space in San Francisco, California, under a lease that expires in 2003. The Company owns or operates nine other facilities that relate to the business and maintains office space in various locations throughout the United States and in Europe for sales and technical support. None of the owned principal properties is subject to any encumbrance material to the consolidated operations of the Company. Management believes that its existing owned or leased facilities are adequate to meet the Company's needs for the foreseeable future. In addition to its executive offices, the Company's principal facilities are as follows:
Location Description of Facility - --------------------------------------------------------------------------------
Maumelle, Arkansas Owns approximately 50,000 square foot manufacturing, engineering, administrative and research and development facility.
Concord, California Owns approximately 101,000 square foot manufacturing, engineering and administrative facilities.
Sylmar, California Leases approximately 74,000 square foot manufacturing, engineering and administrative facility.
Tustin, California Leases approximately 80,000 square foot manufacturing, engineering and administrative facility.
San Marcos, California Leases approximately 35,000 square foot manufacturing, engineering and administrative facilities.
Goleta, California Owns approximately 25,000 square foot manufacturing, engineering and administrative facility.
Campbell, California Leases approximately 5,000 square foot manufacturing, administrative and research and development facility.
Hayward, California Leases approximately 2,330 square foot engineering facility and leases approximately 15,000 square foot manufacturing, research and development facility.
Strasbourg, France Leases and subleases approximately 20,000 square foot manufacturing, engineering and administrative facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has pending various legal actions arising in the normal course of business. Management believes that none of these legal actions, individually or in the aggregate, will have a material impact on the Company's business, financial condition or operating results.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock commenced regular way trading on the NASDAQ National Market System under the symbol "BEIQ" on October 8, 1997. Set forth below are the high and low closing sale prices on the National Market System for the periods indicated, adjusted for the one-for-one stock dividend paid November 21, 2000 to shareholders of record as of October 30, 2000. Such quotations do not reflect retail mark-ups, markdowns or commissions.
2001 Fiscal Year Cash Dividend (ended 9/29/01) High Low Declared - -------------------------------------------------------------------------------- Fourth Quarter $28.60 $13.50 $0.01 Third Quarter $37.00 $15.69 $0.01 Second Quarter $18.56 $11.00 $0.01 First Quarter $21.69 $ 9.94 $0.045
2000 Fiscal Year Cash Dividend (ended 9/30/00) High Low Declared - -------------------------------------------------------------------------------- Fourth Quarter $29.31 $11.19 $0.01 Third Quarter $14.47 $ 6.25 $0.01 Second Quarter $10.63 $ 5.25 $0.01 First Quarter $ 9.38 $ 5.63 $0.01
As of November 26, 2001, there were approximately 1,200 holders of record of the Company's common stock. The Board of Directors declared and the Company paid cash dividends per share of common stock noted above in fiscal 2001 and 2000. Payment of dividends is within the discretion of the Company's Board of Directors, will be subject to periodic review and will depend, among other factors, upon the earnings, capital requirements, operating results and financial condition of the Company from time to time. There are no restrictions on the Company's ability to pay dividends provided the covenants set forth in its bank credit agreement and Senior Note Agreement are met (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 4 to the Consolidated Financial Statements). The covenants primarily concern certain operating ratios and minimum balances of tangible net worth.
ITEM 6.
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 and their related Notes, and the other financial information included therein.
ITEM 7.
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 in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and in the "Business--Risk Factors"--section of this Report.
The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by certain items in the Company's Consolidated Statements of Operations.
Continuing Operations
Net Sales
During fiscal 2001, net sales for the Company increased 9.0% to $239.0 million from $219.2 million in fiscal 2000, reflecting continuing increases in sales due to growth in the automotive industry's demand for the Company's GyroChip sensors used in automotive stability systems. Sales to the automotive industry, including sales of the Company's GyroChip sensors, increased 29.0% to $138.7 million from $107.5 million in fiscal 2000. In fiscal 2002, the Company is transitioning to its next generation GyroChip sensor, a multi-sensor cluster configuration. Sales to other industrial customers decreased $11.2 million to $81.8 million from $93.0 million during fiscal 2001 resulting primarily from reduced sales to the semiconductor capital equipment industry. Government related sales decreased $0.2 million in fiscal 2001 to $18.5 million from $18.7 million during fiscal 2000.
During fiscal 2000, net sales for the Company increased 37.5% to $219.2 million from $159.4 in fiscal 1999, reflecting continuing increases in sales due to growth in the automotive industry's demand for the Company's GyroChip sensors used in automotive stability systems. Sales to the automotive industry, including sales of the Company's GyroChip sensors, increased 97.3% to $107.5 million from $54.5 million in fiscal 1999. Sales to other industrial customers increased $7.2 million to $93.0 million from $85.8 million during fiscal 2000. Government related sales decreased $0.5 million in fiscal 2000 to $18.7 million from $19.2 million during fiscal 1999.
The Company's sales to international customers were approximately 56%, 45%, and 28% of the Company's net sales for fiscal 2001, 2000 and 1999, respectively. The increase in international sales is attributable to increased sales of the Company's GyroChip sensors and the Company's acquisition in August 1998 of Ideacod, S.A., a sensor manufacturer located in Strasbourg, France. The vast majority of sales to non-U.S. customers are denominated in U.S. Dollars.
Cost of Sales and Gross Profit
In fiscal 2001, cost of sales as a percentage of net sales increased 0.5 percentage points due to increased shipments of products having higher average production costs. The Company also continued to expand its manufacturing capacity for the production of GyroChip sensors resulting in higher costs for employee hiring and training in fiscal 2001. Management continues to undertake technological initiatives designed to increase manufacturing and production efficiencies and attempts to maintain close relationships with vendors and customers in an effort to reduce costs and increase margins.
In fiscal 2000, cost of sales as a percentage of net sales increased 2.6 percentage points due to increased shipments of products having higher average production costs and continued expansion of manufacturing capacity for the production of GyroChip sensors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2001 increased $0.8 million from $34.3 million in fiscal 2000 to $35.1 million primarily as a result of costs incurred to support the increase in sales during fiscal 2001. As a percentage of sales, selling, general and administrative expenses decreased 0.9 percentage points to 14.7% in fiscal 2001 from 15.6% in fiscal 2000 as a result of increased sales.
Selling, general and administrative expenses in fiscal 2000 increased $4.3 million from $30.0 million in fiscal 1999 to $34.3 million as a result of costs incurred to support the increase in sales during fiscal 2000. As a percentage of sales, selling, general and administrative expenses decreased 3.2 percentage points to 15.6% in fiscal 2000 from 18.8% in fiscal 1999 as a result of management's cost reduction efforts.
Research, Development and Related Expenses
Research and development expenses in fiscal 2001 decreased $0.1 million to $8.8 million from $8.9 million in fiscal 2000. The decrease is due to a spending reduction primarily associated with SiTek, partially offset by increased spending on the design and development of non-contacting position and torque sensors (e.g. NCAPS) for industrial and automotive applications.
Research and development expenses in fiscal 2000 increased 34.8% to $8.9 million from $6.6 million in fiscal 1999. This increase was primarily due to spending incurred for research efforts focused on silicon micro-electromechanical systems (MEMS) and costs of refocusing engineering resources related to automotive GyroChip production from manufacturing support in an attempt to achieve further product enhancement of existing GyroChip sensors.
The Company believes that the continued timely development of new products and enhancements to its existing products is essential to maintaining its competitive position. Accordingly, the Company anticipates that expenses associated with such efforts will increase in absolute amount, but may fluctuate as a percentage of sales depending on the Company's success in acquiring customers or, in some cases, U.S. Government contracts funding research and development efforts.
Interest Expense and Other Income
Interest expense was $2.5 million, $2.6 million and $3.0 million in fiscal 2001, 2000 and 1999, respectively. Interest expense in fiscal 2001 approximated interest expense in fiscal 2000. The decrease in interest expense during fiscal 2000 from fiscal 1999 resulted from a reduction in the amount and frequency of borrowings on the Company's line of credit as a result of the Company's increased cash flows. The Company's average interest rate in fiscal 2001 approximated the average interest rate in fiscal 2000. The Company's average interest rate was lower in fiscal 2000 than in fiscal 1999 due to the reduced need for bank borrowings.
Other income in fiscal 2001, 2000 and 1999 was comprised of royalties and interest income earned on highly liquid investments. Other income was $0.5 million, $1.0 million and $0.4 million for fiscal 2001, 2000 and 1999, respectively. The higher income in fiscal 2000 resulted primarily from the sale in the second quarter of fiscal 2000 of an asset held for investment for $0.5 million, net.
Income Taxes
The Company's effective tax rate was 39.1%, 39.3% and 40.4% for fiscal 2001, 2000 and 1999, respectively. The effective tax rate primarily reflects the statutory federal tax rate and the weighted average tax rate of the states in which the Company conducts business. The decrease of 0.2 percentage points in fiscal 2001 from fiscal 2000 and the decrease of 1.1 percentage points in fiscal 2000 from fiscal 1999 results from increased federal and state tax credits, primarily foreign tax credits and manufacturer's investment credits, for the Company during fiscal 2001 and fiscal 2000, respectively.
Deferred Income Taxes
At September 29, 2001, the Company had net current deferred income tax assets of $6.3 million and net non-current deferred income tax assets of $3.0 million. Realization of the net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years to benefit from a reversal of the underlying temporary differences.
Liquidity and Capital Resources
During fiscal 2001, operations of the Company provided $15.1 million in cash. Net income of $11.7 million plus non-cash charges for depreciation, amortization and deferred income taxes of $6.5 million, $3.2 million and $1.2 million, respectively, together with a decrease of $6.3 million in trade receivables provided $28.9 million in cash. These cash inflows were offset by increases in assets held for sale and other assets of $6.4 million and $3.7 million, respectively, and net decreases in trade accounts payable, accrued expenses and other liabilities of $3.7 million. The assets held for sale include research and development equipment of $3.3 million that will be bundled for lease financing when the assets are placed in service. The Company expects to rent capacity on this equipment to OpticNet, an equity investee. Assets held for sale also include production equipment of $3.1 million that the Company plans to sell to a significant customer. Additionally, other liabilities included an amount of $1.0 million in respect of stock repurchased under a temporary change to SEC and NASDAQ rules at fiscal 2001 year end.
Investing activities for the Company in fiscal 2001 consisted primarily of the purchase of $8.4 million in capital equipment to support increased production. The majority of the equipment purchased was for the production of automotive sensors. In addition, the Company paid $1.0 million for the investment in OpticNet, and another cash outflow was due to an increase of $0.2 million in other assets. These cash outflows were offset by the receipt of $0.1 million in cash from the disposal of equipment resulting in net cash used by investing activities of $9.5 million.
Fiscal 2001 financing activities primarily consisted of the Company's open-market repurchases of its common stock totaling $1.5 million. In addition, the Company paid $1.1 million in dividends and $0.2 million for debt repayment. These cash outflows were offset by proceeds of $0.7 million from stock issuances related to the exercise of options granted under the Company's 1997 Equity Incentive Plan and contributed capital from a minority interest in one of the Company's majority-owned subsidiaries, as well as $0.7 million from the tax benefit of the exercised stock options, resulting in net cash used for financing activities of $1.4 million during fiscal 2001.
The Company anticipates that its existing capital resources, including cash provided by operating activities and available bank borrowings, will be adequate to fund the Company's operations for at least the next twelve months.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a material effect on the Company's operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the form of changes in foreign exchange rates, changes in the prices of marketable equity securities held as part of a deferred compensation plan (a "Rabbi" trust) and interest income sensitivity.
The Company has approximately $2,500,000 (calculated based on the conversion rate for French francs at September 29, 2001) permanently invested in the assets of Ideacod, S.A., located in Strasbourg, France. The potential loss in fair value resulting from a hypothetical 10% adverse change in the foreign currency exchange rate amounts to $250,000, which would not be material to the consolidated financial statements.
The Rabbi trust assets, consisting of cash equivalents and debt and equity securities, are offset by an equivalent deferred compensation liability to the trust participants. The liability fluctuates equally with changes in the value of the assets. Because the liability completely offsets the assets of the trust, changes in asset value have no effect on the Company's results of operations or financial position.
The Company's exposure to interest income sensitivity is affected by changes in the general level of U.S. interest rates, as a portion of the Company's investments are in short-term debt securities issued by corporations. The Company's investments are placed with high-duality issuers and the Company attempts to limit the amount of credit exposure to any one issuer. Due to the nature of the Company's short-term investments, the Company believes that it is not subject to any material market risk exposure. The Company does not have any foreign currency or other derivative financial instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS BEI Technologies, Inc. and Subsidiaries
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS (cont.) BEI Technologies, Inc. and Subsidiaries
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS BEI Technologies, Inc. and Subsidiaries
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS BEI Technologies, Inc. and Subsidiaries
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
BEI Technologies, Inc. and Subsidiaries
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BEI Technologies, Inc. and Subsidiaries September 29, 2001
Note 1 Summary of Significant Accounting Policies
Basis of Presentation: BEI Technologies ("Technologies" or the "Company") was incorporated in Delaware in June 1997 and became publicly held on September 27, 1997 as a result of the distribution of shares in Technologies to all the stockholders of BEI Electronics, Inc., (since renamed BEI Medical Systems Company, Inc., ("Medical Systems") on September 24, 1997 (the "Distribution").
At the close of business on October 30, 2000, Technologies declared a distribution to its stockholders of approximately 42% of the outstanding securities of OpticNet, Inc. ("OpticNet"), a formerly majority-owned subsidiary of Technologies. In the distribution, each holder of record of Technologies common stock as of the close of business on October 30, 2000 received one share of OpticNet common stock for every two shares of Technologies common stock held, and cash in lieu of any fractional share of OpticNet common stock. The OpticNet common stock dividend valued at $0.04 per share of Technologies common stock resulted in a tax basis of $0.08 per OpticNet share. The total dividend was approximately $300,000, based on an appraisal of OpticNet.
In the quarter ending December 30, 2000, Technologies' effective ownership in OpticNet was reduced to 24%. OpticNet's net loss for the three month period from October 1, 2000 through December 30, 2000 of $176,000 is included in the consolidated results of Technologies. Beginning December 31, 2000, the Company accounted for its investment in OpticNet under the equity method and, as of September 29, 2001, reduced its initial $1.0 million investment in OpticNet by $160,000, reflecting the Company's share of OpticNet losses for the nine months from December 31, 2000 to September 29, 2001.
The Board of Directors of Technologies also declared a one-for-one stock dividend to its stockholders, effective October 30, 2000. Immediately following the effectiveness of the distribution of the OpticNet shares, stockholders of record as of the close of business on October 30, 2000, received one additional share of the common stock of Technologies for each share held as of such date, and cash in lieu of any fractional share of Technologies common stock. All per share numbers and per share data included within the Company's consolidated financial statements have been adjusted as appropriate to reflect the stock dividend.
The accompanying financial statements present the consolidated financial position and results of operations of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The Sensors & Systems business provides sensors, engineered subsystems and associated components which are used for controlled precision machinery and equipment in industrial, medical, automotive, aerospace and military applications.
Fiscal Year: The Company's fiscal year ends on the Saturday nearest September 30. Fiscal years 2001, 2000 and 1999 each contained 52 weeks.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk: The Company's products are primarily sold to commercial customers throughout the United States and in various foreign countries and to the United States government. Substantially all foreign sales are denominated in U.S. dollars. 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.
Revenue Recognition: Revenue from product sales is generally recognized upon shipment provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, any fee is fixed or determinable and collectibility is deemed probable. If uncertainties regarding customer acceptance exist, revenue is recognized when such uncertainties are resolved. The Company records a warranty liability on its products at the time of revenue recognition.
Inventories: Inventories are carried principally at the lower of cost (first-in, first-out method) or fair value and do not exceed net realizable value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Assets Held for Sale: Assets held for sale include research and development equipment of $3.3 million that will be bundled for lease financing when the assets are placed in service. The Company expects to rent capacity on this equipment to OpticNet, an equity investee. Assets held for sale also include $0.9 million, which is the current portion of deposits and advances on production equipment that a significant customer has agreed to fund over a period of two years. In addition, assets held for sale totaling $1.5 million have been included in long term other assets because it is not expected that payment in respect of this portion of the assets held for sale will be received in the next fiscal year. The assets are not in production, are not being depreciated and are available for immediate sale. Assets held for sale are carried at cost.
Depreciation and Amortization: Property, 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 3 to 30 years, using the straight-line method for structures and accelerated or straight-line methods for equipment. Leasehold improvements and assets acquired under capital leases are amortized over the shorter of the lease term or their estimated useful lives.
Other Assets: Tradenames, patents and related assets are being amortized over their remaining lives at the date of acquisition up to a period of seventeen years. Other current assets include assets held for sale.
Technology acquired under license agreements consists primarily of the cost of exclusive rights to make, use and sell products utilizing quartz rate sensing technology. Technology acquired is being amortized over thirteen years, which approximates its estimated useful life from the date of acquisition.
Goodwill consists of the excess of cost over fair value of net tangible assets acquired in purchase acquisitions. Goodwill is amortized by the straight-line method over 20 years.
Long-Lived Assets: The Company recognizes impairment losses in accordance with Financial Accounting Statement ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Long-lived assets, including property, plant and equipment and other assets, are reviewed and impairment recognized when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets.
Research and Development: Costs to develop the Company's products are expensed as incurred.
Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 141 ("FAS 141"), "Business Combinations." FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method for those business combinations. FAS 141 became effective on July 1, 2001. The adoption of this standard had no impact on the Company.
In July 2001, the FASB issued FAS No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus amortization of goodwill, including goodwill recorded in past transactions, will cease upon adoption of this statement. FAS 142 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted for entities with fiscal years beginning after March 15, 2001. The Company has chosen to adopt FAS 142 for its fiscal year beginning September 30, 2001. After adoption, the elimination of goodwill amortization is not expected to have a significant impact on the Company.
In October 2001, the FASB issued FAS No. 144 ("FAS144"), "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for fiscal periods beginning after December 15, 2001. FAS 144 provides a single accounting model for , and supersedes previous guidance on, accounting and reporting for the impairment/disposal of long-lived assets. FAS 144 sets new criteria for the classification of assets held-for-sale and changes the reporting of discontinued operations. The Company does not believe that the adoption of FAS 144 will have a significant impact on its financial statements.
Net Income Per Share: Basic income per share is computed using the weighted average number of shares outstanding. Diluted income per share is computed using the weighted average number of shares outstanding, adjusted for the incremental shares attributed to unvested stock and outstanding options to purchase common stock calculated using the treasury stock method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Foreign subsidiary: The financial statements of Ideacod, S.A. , a wholly owned subsidiary, have been translated into U.S. dollars at fiscal year-end, using the exchange rates on those dates for assets and liabilities and the average exchange rates during the period for income and expenses. The resulting unrealized translation adjustments are recorded as a component of other comprehensive income.
Reclassification: Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform with current year presentations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
On November 16, 1998, the Company sold $35.0 million of senior notes in a private placement. The notes have an interest rate of 6.7% and mature in annual installments of $7.0 million beginning November 16, 2001 up to and including November 16, 2005. The note agreement contains covenants regarding certain operating ratios, limitations on debt, dividend payments and minimum net worth. The proceeds from the senior notes were used to repay the pre-existing senior notes and pay down outstanding borrowings on the Company's line of credit as they matured. The prepayment penalty and the remaining unamortized loan fees of $326,000, net of the related tax benefit, were charged in the first quarter of fiscal 1999 as an extraordinary loss on the early extinguishment of the debt.
On December 16, 1998, the Company established a $12.0 million two year line of credit with a bank and terminated the $25.0 million facility in place at the end of fiscal 1998. Under the terms of line of credit, the amount available to the Company increased $1.0 million to $13.0 million during fiscal 2000. During fiscal 2001, the Company completed an amendment to its line of credit agreement that increased the amount available to the Company to $25.0 million. No borrowings were outstanding under the new line of credit at September 29, 2001. On December 13, 1998, the mortgage note payable was refinanced with the original lender and the due date extended from fiscal 1999 to fiscal 2003.
Maturities of long-term debt, adjusted for the effect of senior notes and the mortgage refinancing and excluding capitalized equipment lease obligation (see Note 9), are as follows: fiscal 2002 $7,070,000; fiscal 2003 $7,034,000; fiscal 2004 $8,522,000; fiscal 2005 $7,000,000; fiscal 2006 $7,000,000.
Interest of approximately $2,499,000, $2,480,000 and $2,354,000 were paid during fiscal years 2001, 2000, and 1999, respectively.
Note 5 Research and Development
The Company's internally funded research, development and related engineering expenditures were approximately $8.8 million, $8.9 million and $6.6 million in fiscal 2001, 2000, and 1999, respectively. In addition, customer-funded research and development expenditures charged to cost of sales were $0.2 million, $0.6 million and $0.4 million, respectively, for the same periods.
Note 6 Income Taxes
The Company accounts for income taxes under FAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws known at this time and that will be in effect when the differences are expected to reverse.
The provision for income tax expense consists of the following (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) requires the tax benefit related to the Company's restricted stock program to be reported as an addition to paid-in-capital. In the current year, $1,139,000 of accumulated tax benefit was reclassed from deferred taxes to paid-in-capital.
Significant components of the Company's net deferred tax assets are as follows (in thousands):
Realization of the net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years to obtain benefit from the reversal of the underlying temporary differences.
The differences between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 34.0% for 1999 and 35.0% for 2000 and 2001 (in thousands) are as follows:
Cash paid for income taxes in fiscal year 2001, 2000 and 1999 was $6,341,000, $9,245,000 and $2,171,000, respectively.
Note 7 Equity Incentive Plans
The Company has adopted the disclosure only alternative for its equity incentive plan as described in FAS No. 123, "Accounting for Stock Based Compensation"(FAS 123). The Company accounts for employee stock awards using the intrinsic value method in accordance with APB 25.
The Company's 1997 Equity Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors in September 1997. The Incentive Plan provides for the granting of incentive stock options to employees and nonstatutory stock options, restricted stock purchase awards, and stock bonuses (collectively, "Stock Awards") to consultants, employees and directors. The Company has reserved 2,278,890 shares of common stock for issuance under the Incentive Plan, which included shares for substitute options granted to the option holders of Medical Systems in connection with the Distribution.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Option activity under the Technologies Incentive Plan is summarized below:
As of September 29, 2001, options for 104,757 shares were vested and exercisable at a weighted average exercise price of $5.08.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Under the Incentive Plan, the holders of the 1,400,000 shares of Medical Systems common stock that had been issued under the Medical Systems 1992 Restricted Stock Plan who became employees of Technologies received Technologies common stock of equal value subject to forfeiture if employment terminated prior to the end of prescribed vesting periods. The market value at the date of grant of shares is recorded as unearned restricted stock and is amortized to compensation expense over its vesting periods. As of September 29, 2001, 1,482,873 shares had been granted, of which 1,256,683 shares are outstanding, and 811,967 shares have fully vested. Compensation expense of $755,000, $1,178,000 and $595,000 for the amortization of the restricted stock was recorded in fiscal years 2001, 2000, and 1999, respectively.
The Company computed the pro forma disclosures required under FAS No. 123 for options granted in fiscal years 2001, 2000, and 1999 using the Black-Scholes option pricing model. The impact on the calculation of pro forma results of operations and earnings per share required by FAS 123 was determined to be immaterial for fiscal year 1999. For fiscal years 2001 and 2000, the significant assumptions used in the Black-Scholes calculation were a risk-free interest rate of 4.00% and 5.98%, a weighted average expected life of 5 and 3 years, a volatility rate of 83% and 85%, and an expected dividend yield of 0.4% and 0.4%, respectively.
During fiscal years 2001 and 2000, options to acquire 131,440 and 215,000 shares were granted with a weighted average fair value of $10.85 and $5.08 per share, respectively. For the year ended September 29, 2001, the compensation cost of options under FAS 123 would have reduced net income from $11.7 million to $11.2 million, and diluted earnings per share from $0.81 to $0.77. For the year ended September 30, 2000, the compensation cost of options under FAS 123 would have reduced net income from $9.6 million to $9.3 million, and diluted earnings per share from $0.65 to $0.63.
In addition to options, during fiscal years 2001 and 2000, 116,421 and 145,000 shares of nonvested stock were granted with a weighted average fair value of $14.17 and $7.55 per share, respectively. The weighted average fair value of nonvested stock is amortized to compensation expense over its related vesting period.
Note 8 Employee Benefit Plan
The Company has a multi-employer defined contribution retirement plan for the benefit of all eligible employees. Matching non-discretionary contributions are based on a percentage of employee contributions. Contributions to the plan by the Company for the benefit of its employees for fiscal years 2001, 2000 and 1999 were approximately $1,068,00, $960,000 and $911,000, respectively. The plan includes employees of BEI Technologies, Inc. and subsidiaries and employees of OpticNet, Inc.
The Company has a grantor trust to fund deferred compensation for certain employees (a "Rabbi Trust" or "trust".) As determined by the trustee, the assets in the Rabbi Trust, consisting of cash equivalents and debt and equity securities, are recorded at current market prices principally based upon national exchange and over-the-counter markets. The trust assets are available to satisfy claims of the Company's general creditors in the event of its bankruptcy. The trust's assets and the corresponding deferred compensation obligation are included in the accompanying balance sheets at September 29, 2001 and September 30, 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Note 9 Lease Commitments
Operating leases consist principally of leases for real properties, manufacturing equipment and land. Certain of the operating leases contain various options for renewal and/or purchase of the related assets for amounts approximating their fair market value at the date of exercise of the option. Capital leases were assumed as part of the acquisition of a business. At September 29, 2001 and September 30, 2000, assets recorded under capital leases consist of land, buildings and equipment of $876,000 and $875,000, net of accumulated amortization of $376,000 and $265,000, respectively. The future minimum payments for operating and capital leases, net of future minimum rentals to be received under noncancelable subleases, consist of the following at September 29, 2001 (in thousands):
On September 28, 2001, the Company completed the leasing of research and development equipment placed in service during the quarter ended September 29, 2001, which had been previously purchased by the Company for $700,000. Under the terms of the lease transaction, the Company sold $700,000 of equipment and then immediately leased the equipment from the sole purchaser under a non-cancelable operating lease with a lease term of three years and an interest rate of approximately 6.9%. Total rent expense, including interest, during the lease term will be approximately $660,000 and is included in the table of future minimum annual rental commitments under operating leases.
The Company has entered into an agreement with OpticNet, an equity investee, to rent capacity of this equipment to OpticNet from month to month based on OpticNet's usage of the equipment beginning in October 2001.
Total rental expense amounted to approximately $2,304,000, $2,192,000 and $2,187,000 for fiscal years 2001, 2000 and 1999, respectively.
Note 10 Contingencies and Litigation
Claim against U.S. Government
The Company believes that its now discontinued subsidiary, Defense Systems, suffered substantial monetary damages due to actions of the U.S. Government in connection with the parties' H70 contract in effect during the 1992-1996 timeframe. As a result, Defense Systems filed a substantial claim against the U.S. Government in 1996. Following attempts to negotiate a settlement, Defense Systems filed an appeal of its claim that is now being adjudicated before the Armed Services Board of Contract Appeals. Due to the uncertainties inherent in the formal claims process, the Company has not recorded any recovery of these claims in the accompanying financial statements.
Other
The Company has pending various legal actions arising in the normal course of business. Management believes that none of these legal actions, individually or in the aggregate, will have a material impact on the Company's business, financial condition or operating results.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Note 11 Related Party Transactions
During the fiscal year, Technologies entered into an agreement to provide working capital bridge financing to OpticNet, an equity investee. Under the terms of the agreement, Technologies agreed to make available to OpticNet, from time to time, until September 28, 2002, an amount not to exceed at any time the aggregate principle amount of $2 million. At September 29, 2001, OpticNet has borrowed $1.1 million under this agreement. OpticNet's obligation to repay the advances is evidenced by a promissory note, due in full on or before September 28, 2002, unless extended by mutual agreement of the parties. The outstanding principal on the note bears interest at prime plus 1.5% per annum.
OpticNet's business is focused on developing fiber optic components and subsystems, such as optical switches, used in telecommunication systems. OpticNet's primary activities since inception have been devoted to developing its product offerings and related technologies, recruiting key management and technical personnel and seeking capital to fund operations. OpticNet has operating losses for its fiscal year ended September 29, 2001 and the sole source of funding for OpticNet's operations is from BEI. OpticNet's operations are subject to significant risks and uncertainties, including competitive, financial, developmental, operational, growth and expansion, technological, regulatory and other risks associated with an emerging business. OpticNet is pursuing various funding options to sustain and expand future operations.
Note 12 Sales and Major Customers
The principal business and continuing operations of Technologies are conducted within one business segment and are carried out by operations which design, manufacture and sell electronic devices that provide vital sensory input for the control systems of advanced machinery and automation systems for the commercial automotive, government and industrial industries. The sales to major industries are as follows (in thousands):
Although the Company is directly affected by the economic well being of the above industries, management does not believe significant credit risk exists at September 29, 2001.
The Company's foreign operations are conducted throughout Europe. A summary of foreign vs. domestic sales follows (in thousands):
Foreign sales accounted for approximately 56%, 45%, and 28% of total sales for fiscal 2001, 2000 and 1999, respectively.
In fiscal 2001, 2000 and fiscal 1999, one customer accounted for 49%, 37% and 20%, respectively, of the Company's net sales.
Note 13 Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for fiscal years 2001 and 2000:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Note 14 Fair Value of Financial Instruments
FAS No. 107 (FAS 107), "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Whenever possible, quoted market prices were used to develop fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments as of September 29, 2001 and as of September 30, 2000.
Cash, Cash Equivalents and Investments: The carrying amounts reported in the balance sheet for cash, cash equivalents and investments approximate those assets' fair values.
Long-Term Debt: The fair value of long-term debt has been estimated based upon discounted future cash flows. The discount rate used included a risk free rate derived from the Treasury yield curve plus a risk weighting commensurate with the Company's borrowing position. The fair value of long-term debt is approximately $30,567,000 and $35,787,000 compared with the carrying amounts of $29,556,000 and $36,614,000 at September 29, 2001 and September 30, 2000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BEI Technologies, Inc. and Subsidiaries
Note 15 - Income Per Share
The following table sets forth the computation of basic and diluted income per common share from continuing operations:
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders BEI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of BEI Technologies, Inc. and subsidiaries as of September 29, 2001 and September 30, 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended September 29, 2001. 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 Technologies, Inc. and subsidiaries at September 29, 2001 and September 30, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 29, 2001 in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
San Francisco, California October 29, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 and Exchange Act of 1934" of the Proxy Statement related to the Company's 2002 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11.
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 Definitive Proxy Statement.
ITEM 12.
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 Definitive Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the sections entitled "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation" of the Definitive Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
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.
(i) Incorporated by reference. Previously filed as an exhibit to the Registrant's Information Statement on Form 10 (File No. 0-22799) as filed on September 22, 1997.
(ii) Incorporated by reference. Previously filed as an exhibit to the Form 10-K (File No. 0-22799) as filed on December 30, 1998.
(iii) Incorporated by reference. Previously filed as an exhibit to the Form 10-Q (File No. 000-22799) as filed on February 13, 2001.
(iv) Incorporated by reference. Previously filed as an exhibit to the Form 10-Q (File No. 000-22799) as filed on August 14, 2001.
* Items which are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) No reports on Form 8-K were filed by the Company during the quarter ended September 29, 2001.
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 TECHNOLOGIES, INC.
By: /s/ Robert R. Corr ------------------
Robert R. Corr Vice President, Secretary, Treasurer and Controller December 12, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles Crocker and John LaBoskey, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SCHEDULE II
BEI TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
S-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE II
The Board of Directors and Shareholders BEI Technologies, Inc.
We have audited the consolidated financial statements of BEI Technologies, Inc. and subsidiaries as of September 29, 2001 and September 30, 2000, and for each of the three years in the period ended September 29, 2001, and have issued our report thereon dated October 29, 2001. Our audits also included the financial statement schedule listed in Item 14(a) 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 consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
San Francisco, California October 29, 2001
S-2
INDEX TO EXHIBITS - -----------------
Exhibit Number Description - ------ -----------
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP Independent Auditors
24.1 Power of Attorney