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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 28, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-22799
BEI TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3274498
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
One Post Street, Suite 2500
San Francisco, California 94104
(Address of principal executive officers) (Zip code)
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(415) 956-4477
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K.[ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 11, 2002 was $160,941,014 (A).
As of December 11, 2002, 14,597,591 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on December 11, 2002
as reported on the NASDAQ National Market System. Excludes 3,436,633 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 11, 2002.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement with respect to its 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this report.
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 18
Item 3. Legal Proceedings.............................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................................... 19
Item 6. Selected Financial Data........................................................ 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 22
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..................... 28
Item 8. Financial Statements and Supplementary Data.................................... 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................................... 50
PART III
Item 10. Directors and Executive Officers
of the Registrant.............................................................. 50
Item 11. Executive Compensation......................................................... 50
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................................... 50
Item 13. Certain Relationships and Related Transactions................................. 50
PART IV
Item 14. Controls and Procedures........................................................ 50
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K........................................................ 50
Signatures ............................................................................... 54
2
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. When
used herein, the words, "intend," "anticipate," "believe," "estimate" and
"expect" and similar expressions as they relate to the Company are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in Item 1, "Business" as well as Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PART I
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 (the "Distribution") to all the
stockholders of record of BEI Electronics, Inc. ("Electronics") on September 24,
1997. BEI Electronics was subsequently renamed BEI Medical Systems Company, Inc.
and acquired by Boston Scientific Corporation in 2002. The principal business
and 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 and actuation for the control systems of
advanced machinery and automation systems. Sensors designed and manufactured by
Technologies, most of which are concerned with physical motion, provide
information that is essential to logical, safe and efficient operation of
sophisticated machinery. Technologies also develops and produces motors and
actuators, which are the prime movers in high performance machinery.
Effective as of October 30, 2000, the Board of Directors of
Technologies declared a one-for-one stock dividend to its stockholders of record
as of the close of business on October 30, 2000. Stockholders of record as of
such date 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, actuators 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, motors and actuators play
an enabling role. The Company's near term initiatives include: (a) increase
global penetration of the quartz "yaw" sensor for the automotive industry (as
described below); (b) leverage the advancements made to the GyroChip from
automotive efforts into the current opportunities of the aerospace and defense
markets; (c) development and commercialization of other internally developed
technologies that have broad industrial and commercial applications for motion
control, pressure, rate and position sensing; and (d) expand product lines
through synergistic acquisitions and strategic relationships of complementary
and value added technologies.
A key feature of the Company's strategy is to be recognized worldwide
as the most capable source for the sensor categories the Company produces. 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) application
engineering expertise in recommending and prescribing technical solutions for
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 excessive could cause the vehicle to spin out or fishtail.
The automation system relies on these sensors to compare the driver's indicated
direction with the actual result and can then take corrective action
automatically. To this end the Company provides special GyroChip quartz sensors.
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(2) Commercial and military aircraft utilize many sensors to help
control movements of the aircraft's control surfaces as well as provide
instrumentation readings to the pilot on the aircraft's heading and position.
The Company's GyroChip sensors are engaged in sensing for yaw damping, back up
attitude-heading and reference instruments, and navigation instrumentation on
many platforms.
(3) Advanced control systems in tractors, trucks, automobiles and
construction equipment need position data in order to control implements on
tractors and adjust engine speed and other automated functions on all such
equipment and vehicles. 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.
(4) 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.
(5) 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 in other position control applications.
(6) 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.
(7) 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
communication signal. For such an application the Company could supply its
proprietary GyroChip quartz rate sensor. It might also supply motor-encoders and
actuators to drive the compensating action of such a system.
(8) 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.
(9) A number of today's heavy equipment vehicles used in off-road
applications are utilizing drive-by-wire technologies. A number of the Company's
sensors are utilized to provide the input for steering and throttle functions of
these vehicles.
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 transportation (including cars, trucks, mass transit,
construction and farm equipment), factory automation, process control, health
care and scientific equipment, and military, aviation, space and
telecommunications applications.
The Company considers its large number of customers and the 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' sales force to more than 7,400 different commercial customers,
principally in the United States. These customers include both end users and
original equipment manufacturers. The Company ships 91% of sales to commercial
customers, with approximately 56% to the automotive market and 44% to other
industrial markets. The value of individual orders from industrial customers is
typically less than $100,000.
Sales from operations to the U.S. Government (or prime contractors who
manage government funded projects) represented approximately 9% of the Company's
net sales in fiscal 2002, 8% in fiscal 2001 and 9% in fiscal 2000. One customer,
Continental Teves AG & Co. ("Continental Teves"), accounted for approximately
39%, 49% and 37% of net sales in fiscal year 2002, 2001 and 2000, respectively.
In fiscal 2002, approximately 50% of the Company's sales occurred in foreign
markets with approximately 4% 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.
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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;
2. Micromachined sensors;
3. Magnetic actuators and motors; and
4. 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
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 or noncontacting technology devices that measure
motion by analog (not digital) changes in electrical potential, magnetic field
or inductive field. 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.
Traditional Accelerometers. Traditional accelerometers 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 linear and angular motion.
Micromachined Sensors
Rate Sensors. A rate sensor provides 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 aircraft and vehicles, and for intelligent
vehicle stability, roll-over and navigation systems in the automotive industry.
Technologies produces miniature, solid state quartz rate sensors based on
innovative and proprietary chemical micromachining 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 over traditional mechanical units are increased reliability, reduced
size, and lower production and life cycle costs. This family of rate sensors is
known as the GyroChip.
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 varied applications. The most frequent use of GyroChip
units is as yaw sensors in stability control or spinout prevention systems for
automobiles. GyroChip sensors provide performance suitable for commercial,
military, aviation and space applications while offering ruggedness, lower cost,
longer life, and smaller size than many other gyro technologies.
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
5
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 micromachined 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.
Magnetic Actuators and Motors
Magnetic Actuators. Magnetic actuators are used in place of cams or
motors to achieve fast and 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. These motors, which feature
high-energy magnets, are characterized by long life and low acoustic and
electrical noise. They are well suited to high reliability applications, such as
in respiration therapy equipment where there is a long life requirement, where
the risk of dust from a brush motor could be troublesome or where electrical
noise could disrupt computers or computer-controlled equipment.
Engineered Subsystems
Inertial Measurement Units ("IMU") and Navigation Subsystems. 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 has made
new breakthroughs in size, reliability and cost for it's proprietary IMU
subsystems. BEI has integrated GPS, IMU, and software to market complete
navigation 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 electronics), 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 in 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 28, 2002 and at September
29, 2001, were $72,639,000 and $76,272,000, respectively.
The Company's commercial operations typically ship standard products
within 3 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.
6
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 28, 2002 are scheduled for
shipment during fiscal 2003. 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, Invensys,
Siemens AG and General Electric. There are smaller or product-specific
companies, some of whose products compete with those of the Company, including
CTS Corp., Heidenhain, Silicon Sensing Systems, Kulite Semiconductor, Servo
Magnetics Corp., Bourns, Inc., Kavlico Corp. and BI Technologies Corp.
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 and
custom products designed to meet the specialized requirements of particular
customers. 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 yields 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 to date one
has been issued.
During the 2002 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 continued to work with customers on applications using
a dual output hall effect angular position sensor for use in heavy duty off road
and military applications.
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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 $15.4 million, $8.8 million and $8.9 million in
fiscal 2002, 2001 and 2000, respectively. In addition, customer-funded research
and development expenditures charged to cost of sales were $0.5 million, $0.2
million and $0.6 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.
From time to time, the Company's research and development efforts may
result in the development of proprietary technology only tangentially related to
the Company's core business. During fiscal 2000, the Company undertook to
distribute shares in a majority-owned subsidiary, OpticNet, Inc. ("OpticNet"),
founded to exploit such derivative technology, to its stockholders. Certain
proprietary technology related to and useful in the optical networking industry
was contributed to OpticNet at such time. 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. 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 shares of OpticNet common stock. OpticNet has deferred development of
future fiber optic components and subsystems for use in telecommunication
systems until additional external funding is available. Management of the
Company views OpticNet's ability to continue as a stand alone entity highly
uncertain, absent significant positive developments in the optical networking
industry and new opportunities for OpticNet.
Employees
As of September 28, 2002, Technologies had 1,104 employees, including
153 in research, development and engineering, 125 in administration, 57 in
marketing and sales, and 769 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 currently hold 89 U.S. patents and 36 foreign patents with
expiration dates ranging from February 2003 to January 2021. 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, development and utilization of
customized ASIC's, 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.
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Facility Security Clearance
The Company has several facility security clearances from the U.S.
Government. During fiscal 2002 the Company did not have any net sales derived
from work requiring such clearance, but these sales are expected in future
years. A portion of the Company's net sales in fiscal 2001 and 2000 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 Security Service (DSS), 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 DSS 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 50%, 56% and
45% of revenues for fiscal 2002, 2001 and 2000, 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,
magnetic encoders, laser gyros, fiber optic gyros and silicon gyros. 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
9
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 having produced 1.8 million automotive
quartz rate sensors in fiscal 2001. In fiscal 2002, the Company manufactured
approximately 1.2 million units of its automotive quartz rate sensor in its
Concord, California facility, which supplied sensors to approximately 5% of new
automobiles sold in the North American and European markets in fiscal 2002. In
years prior to fiscal 2001, the Company encountered difficulties in scaling up
production of the GyroChip sensors, including problems involving production
yields, component supplies and shortages of qualified personnel. Although many
of these issues were resolved in fiscal 2001, a continued ramp up is expected by
management beyond fiscal 2002. 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 damaged or that process disciplines and controls
could be temporarily lost, which would cause the Company to experience problems
achieving acceptable manufacturing rates and 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 "Part I-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.; CAN Bus and microprocessor chip sets, supplied by Texas
Instruments; housings, supplied by C&H Casting; 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
10
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 acceptable alternative suppliers are available to the Company,
identifying them and entering into arrangements with them is difficult and time
consuming requiring validation of quality standards. 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 39% of the net sales of the Company in fiscal 2002 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. The Company is currently
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 9%, 8% and 9% of the net sales of Technologies in fiscal
2002, 2001 and 2000, 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 1.5% of the Company's net sales in fiscal 2002. 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.
11
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 50%, 56% and 45% of the Company's net sales in fiscal 2002, 2001
and 2000, 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.
12
Financial Risk Covered by Insurance or Uninsured
It is the policy of the Company to insure for certain property and
casualty risks consisting primarily of physical loss to property, business
interruptions resulting from property losses, workers' compensation,
comprehensive general liability, and auto liability. Insurance coverage is
obtained for catastrophic property and casualty exposures as well as those risks
required to be insured by law or contract. Although the Company believes that
its insurance coverage is reasonable, significant events such as judicial
decisions, legislation, economic conditions and large losses could materially
affect the Company's insurance obligations and future expense.
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 factors, as well as general
economic, political, market and other factors unrelated to operating performance
may adversely affect the market price of the Company's Common Stock. The Company
anticipates that the price for Technologies Common Stock may continue to be
volatile for the same reasons. 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 28, 2002 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 have 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.
Risk of Extended Economic Downturn
The United States has been experiencing a general economic downturn,
particularly in the manufacturing sector. Although economic conditions may have
leveled off, the Company has yet to see significant improvement in economic
conditions and cannot predict when improvements might occur. As a result of this
uncertainty, forecasting and financial and strategic planning are more difficult
than usual. If the current downturn in the economy remains for an extended
period, Technologies will suffer from the lack of opportunities to grow sales as
customers will continue to limit their spending. Specifically, the recent
downturn and continuing lack of growth in the economy has resulted and may
continue to result in diminished factory utilization and decreased consumer
demand in the automobile, aviation, aerospace and factory automation markets,
resulting in lower demand for Technologies' products. In addition, the
continuing adverse impact of the downturn on the capital markets could impair
Technologies ability to raise capital as needed and impede the Company's ability
to expand.
In addition, this economic downturn has been exacerbated by the
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, and specifically to
the automotive industry, government programs, and other industries to which
Technologies sells, is not known at this time. Any future terrorist attacks or
outbreaks, or escalation of
13
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.
14
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their ages as of
December 1, 2002 are as follows:
Name Age Position
---- --- --------
Charles Crocker........................ 63 Chief Executive Officer and Chairman of the Board of Directors
Dr. Asad Madni......................... 55 President, Chief Operating Officer and Director
John LaBoskey.......................... 49 Senior Vice President and Chief Financial Officer
Robert R. Corr......................... 56 Vice President, Secretary, Treasurer and Controller
Gerald D. Brasuell..................... 54 Vice President and General Manager, BEI Systron Donner
Automotive Division
David Pike............................. 49 Senior Vice President Divisional Administration and Human
Resources
Richard M. Brooks(1)(2)................ 74 Director
George S. Brown(2)..................... 81 Director
C. Joseph Giroir, Jr.(1)(2)............ 63 Director
Dr. William G. Howard, Jr.(1).......... 61 Director
Gary D. Wrench ........................ 69 Director
- -----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Directors
Mr. Brooks began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in September
1997. From 1987 until his resignation as a result of the Distribution, he served
as a director of Electronics. He is currently an independent financial
consultant, and also serves as a director of 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 Electronics in September
1997. He served as a director of Electronics from October 1974 until his
resignation as a result of the Distribution. Mr. Brown served as President and
Chief Executive Officer of Electronics 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 Electronics. 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 Electronics in September
1997. He was a founder of Electronics and was named Chairman of the Board of
Directors of Electronics in October 1974. He continued to serve as a Director of
BEI Medical Systems, Inc. (formerly Electronics prior to September 1997) until
the sale of BEI Medical Systems, Inc. in June 2002. Mr. Crocker has served as
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 Electronics 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 Electronics in September
1997. He was a director of Electronics from 1978 until his resignation as a
result of the Distribution. He served as the Secretary of Electronics 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.
15
Dr. Howard began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in September
1997. He was a director of Electronics 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.,
Xilinx, Inc., and Arete, Inc., a private company. 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 Electronics 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 Electronics 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, the American
Association for the Advancement of Science, 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 Electronics in September
1997. He was Senior Vice President and Chief Financial Officer of Electronics
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. Mr.
Wrench was named a Director of Electronics in February 1986. He continued to
serve as a Director of BEI Medical Systems, Inc. (formerly Electronics prior to
September 1997) until the sale of BEI Medical Systems, Inc. in June 2002. 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 Electronics
and President and Chief Executive Officer of BEI Motion Systems Company, Inc.,
then a wholly owned subsidiary of Electronics that is now a part of the 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
III directors to expire at the 2003 annual meeting of stockholders, the term of
office of the Class I directors to expire at the 2004 annual meeting of
stockholders and the term of office of the Class II directors to expire at the
2005 annual meeting of stockholders. Class III consists of Mr. Brooks and Dr.
Howard; Class I consists of Mr. Brown and Mr. Crocker; and Class II consists of
Mr. Giroir, Dr. Madni and Mr. Wrench. 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 Automotive Division of BEI Technologies. Mr. Brasuell was appointed to
this position in December 2002. He served as General Manager of the Systron
Donner Inertial Division from October 1995 to February 2002. Until December
2002, Mr. Brasuell held a Corporate Development Position. From 1985 until 1995
Mr. Brasuell held executive staff level positions at Systron Donner Inertial
Division in Program Management and
16
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 Electronics prior to the
Distribution in September 1997. Mr. Corr resigned from his positions with
Electronics immediately prior to the Distribution. Mr. Corr served as Secretary
of Electronics 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 in 1968 and his CPA in 1978 from 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 Electronics in 1992, he served for 7
years as Controller for Systron Donner Corporation, Microwave Division, a
manufacturer of avionics and aerospace sensors and subsystems. 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 Electronics 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 Electronics, 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.
17
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 2006. 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.
The Company has identified a property as excess space, see Note 16.
In addition to its executive offices, the Company's principal facilities are as
follows:
Location Description of Facility
- --------------------------------------------------------------------------------
Maumelle, Arkansas Owns approximately 54,000 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.
SanMarcos, 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.
Hayward, California Leases approximately 15,000 square foot
manufacturing, research and development
facility.
Strasbourg, France Owns and subleases approximately 20,000
square foot manufacturing, engineering and
administrative facility.
18
ITEM 3. LEGAL PROCEEDINGS
The Company has pending various legal actions arising in the normal course of
business. Management believes that none of the legal actions not already
recognized in the financial statements as material, individually or in the
aggregate, will have a material impact on the Company's business, financial
condition or operating results.
During fiscal 2002, BEI Defense Systems Company, a discontinued subsidiary of
Technologies, was subject to litigation with a former landlord regarding damages
to real property formerly leased. The United States District Court for the
Western District of Arkansas entered a judgment, including attorney's fees, of
approximately $0.7 million. Technologies is in the process of contesting the
award and has determined that it will appeal the judgment. The Company has
reserved $0.7 million for this judgment during the fiscal quarter ended June 29,
2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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.
2002 Fiscal Year Cash Dividend
(ended 9/28/02) High Low Declared
- --------------------------------------------------------------------------------
Fourth Quarter $13.30 $ 8.51 $0.01
Third Quarter $22.08 $11.16 $0.01
Second Quarter $22.54 $15.20 $0.01
First Quarter $20.09 $14.00 $0.01
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
As of December 11, 2002, there were approximately 4,300 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 2002
and 2001. 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.
A dividend of $0.01 per share was declared November 8, 2002 to shareholders of
record on November 25, 2002.
19
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- -----------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights (a) compensation plans
(excluding securities
reflected in column (a))
- -----------------------------------------------------------------------------------------------------------------------------
Equity Compensation plans
approved by security holders:
1997 Equity Incentive Plan 582,349 $10.84 242,949
Equity Compensation plans not
approved by security holders: -- -- --
Total 582,349 $10.84 242,949
- -----------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended
September 28, September 29, September 30, October 2, October 3,
2002 2001 2000 1999 1998
(amounts in thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $185,638 $238,985 $219,216 $159,403 $124,264
Income (loss) from continuing
operations (before extraordinary
item) (8,806) 11,717 9,607 5,339 2,515
Diluted income (loss) from continuing
operations per share (before
extraordinary item and discontinued
operations) (0.63) 0.81 0.65 0.37 0.17
Shares used in computing diluted
income (loss) per share (before
extraordinary item) 13,993(1) 14,444(1) 14,807(1) 14,508(1) 14,548(1)
Dividends per common share 0.04(1) 0.075(1) 0.04(1) 0.04(1) 0.04(1)
Balance Sheet Data:
Working capital $ 35,481 $ 43,764 $ 41,808 $ 37,937 $ 36,124
Total assets 126,096 146,357 138,288 123,360 109,515
Long-term debt (excluding current
portion) 22,500 29,556 36,614 36,705 37,157
Stockholders' equity 52,359 60,320 49,096 45,843 40,194
- ----------------------------------------------------------------------------------------------------------------------------
(1) Share numbers have been adjusted for the one-for-one stock dividend paid
November 21, 2000 to shareholders of record as of October 30, 2000
21
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.
See "Critical Accounting Policies and the Use of Estimates" for a
description of the Company's critical accounting policies.
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.
Years Ended
2002 2001 2000
---- ---- ----
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................... 72.4 72.8 72.3
----- ----- -----
Gross profit........................................................ 27.6 27.2 27.7
Operating expenses:
Selling, general and administrative expenses................... 16.6 14.7 15.6
Research, development and related expenses..................... 8.3 3.7 4.1
Provision for excess capacity....................................... 5.5 0.0 0.0
Provision for uncollectables from a related party................... 1.7 0.0 0.0
Provision for product line move and other........................... 1.2 0.0 0.0
----- ----- -----
Earnings (loss) before interest and taxation (EBIT).................. (5.7) 8.8 8.0
Other income (expense).............................................. (0.9) 0.2 0.4
Interest expense.................................................... (1.2) (1.0) (1.2)
----- ----- -----
Income (loss) before income taxes................................... (7.8) 8.0 7.2
Provision (benefit) for income taxes................................ (3.1) 3.1 2.8
----- ----- -----
Net income (loss)................................................... (4.7)% 4.9% 4.4%
===== ===== =====
Net Sales
During fiscal 2002 net sales for the Company decreased 22.3% to $185.6
million from $239.0 million in fiscal 2001. The sales volume decrease was
primarily due to lower commercial sales to domestic and foreign automotive
customers due to competition supplying yaw rate sensors to the Company's largest
customer, lower automotive production levels for vehicles containing ESP
systems, lower product pricing, and to a lesser extent, reduced sales to
industrial customers primarily due to the continuing soft economy. Sales to the
automotive industry, including sales of the Company's GyroChip sensors,
decreased 31.7% to $94.7 million from $138.7 million in fiscal 2001. Sales to
other industrial customers decreased $7.8 million to $74.0 million from $81.8
million during fiscal 2002 resulting primarily from reduced sales to the
semiconductor capital equipment industry. Government related sales decreased
$1.6 million in fiscal 2002 to $16.9 million from $18.5 million during fiscal
2001 primarily from shipment timing on contracts.
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. 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.
The Company's sales to international customers were approximately 50%,
56%, and 45% of the Company's net sales for fiscal 2002, 2001 and 2000,
respectively. The decrease in international sales in fiscal 2002 is attributable
to competitors supplying yaw rate sensors to the Company's largest customer. The
increase in international sales in fiscal 2001 is attributable to increases in
sales of the Company's GyroChip sensors. The vast majority of sales to non-U.S.
customers are denominated in U.S. Dollars.
22
Cost of Sales and Gross Profit
In fiscal 2002, cost of sales as a percentage of net sales decreased
0.4 percentage points due primarily to a lower proportion of automotive sales
with higher than average cost of sales percentage offset to some degree by the
impact of improved yields on the new automotive sensor cluster product. There
may be additional margin rate variability in future years due to the
introduction of new products, changes in product pricing, changes in
manufacturing processes and volumes, and product life cycles. 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 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2002 decreased
$4.2 million from $35.1 million in fiscal 2001 to $30.9 million primarily due to
management actions to reduce spending in light of sales decreases in the current
fiscal year, which reduction was partially offset by an increase in the
provision for allowance for doubtful accounts as compared to fiscal 2001. As a
percentage of sales, selling, general and administrative expenses increased 1.9
percentage points to 16.6% in fiscal 2002 from 14.7% in fiscal 2001 primarily as
a result of reduced sales.
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.
Research, Development and Related Expenses
Research and development expenses in fiscal 2002 increased $6.6 million
to $15.4 million from $8.8 million in fiscal 2001. The increase is due to
management's dedication to the development of new and enhanced products, such as
the next generation quartz and silicon automotive gyro sensors, NCAPS, and
improvements to other existing product families.
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, a majority-owned subsidiary,
partially offset by increased spending on the design and development of a
non-contacting position sensor (e.g. NCAPS) and torque sensing technology for
industrial and automotive applications.
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.
Related Party Expense and Financing
Since inception, all operating capital for OpticNet (see "Business -
Research and Development") has been provided by the Company as debt or equity
financing, as a result of OpticNet's inability to gain outside financing from
independent parties to date, in light of the severe downturn in the optical
networking industry. 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 the Company. Originally, the Company accounted for its investment in
OpticNet under the equity method of accounting until March 31, 2002, when the
Company deemed its investment impaired. The Company has recognized OpticNet's
entire net loss for the six months ended September 28, 2002. As of March 30,
2002, the Company reserved its initial $1.0 million investment in OpticNet to
zero.
In October 2000, the Company agreed to provide OpticNet with a line of
credit originally established for up to $2.0 million, amended in March 2002 to
allow for borrowings by OpticNet of up to $3.0 million. During the fiscal
quarter ended
23
June 29, 2002, the Company suspended the availability of advances to OpticNet
under the line of credit, under which amounts outstanding at such time totaled
approximately $2.7 million in principal amount. In the six months ending
September 28, 2002, the Company provided an additional $1.8 million of financing
to OpticNet, which was advanced with the intent to convert such cash advances
into additional equity in OpticNet, upon terms to be decided. The $1.8 million
advanced was expensed during the third and fourth quarters, reflecting
OpticNet's net loss for the six-month period from March 31, 2002 through
September 28, 2002. Effective September 28, 2002, OpticNet issued a total of
18,146,420 shares of OpticNet's nonvoting and nonconvertible Series B Preferred
Stock to the Company, in consideration of $1.8 million advanced during the third
and fourth quarters to OpticNet by the Company. See Note 11 for a further
description of the relationship with OpticNet.
Provisions
Provisions for excess capacity, uncollectables from a related party and
for product line moves consisted of approximately $10.3 million related to the
expected future losses on operating lease payments on facility and production
assets that partially supported OpticNet's operations, as well as $3.1 million
to reserve against nonpayment on the line of credit note receivable from
OpticNet and impairment of the original investment in OpticNet. Additionally,
the Company wrote down approximately $2.2 million for a product line move and
other costs to close a facility and relocate manufacturing activities to a more
cost effective location.
Interest Expense and Other Income
Interest expense was $2.3 million, $2.5 million and $2.6 million in
fiscal 2002, 2001 and 2000, respectively. Interest expense as a percentage of
sales increased slightly in fiscal 2002 as compared to fiscal 2001 due to
reduced sales and changes in the Company's debt levels. The Company's fixed
interest rate debt decreased in fiscal 2002 due to a principal payment on
long-term debt in November 2001. In addition, during fiscal 2002 the Company
borrowed on, and fully repaid, its line of credit as described under "Liquidity
and Capital Resources" below. The Company's average interest rate declined in
fiscal 2002 due to use of lower cost bank borrowings. The Company's average
interest rate in fiscal 2001 approximated the average interest rate in fiscal
2000.
Other net expense of $1.8 million in fiscal 2002 was comprised of the
Company's interest in the net loss of OpticNet, which included severance costs
and other expenses to support their current level of operations. Other income in
2001 and 2000 was comprised of royalties and interest income earned on highly
liquid investments. Other income was $0.5 million and $1.0 million for fiscal
2001and 2000 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 39.6%, 39.1% and 39.3% for fiscal
2002, 2001 and 2000, respectively. The effective tax rate primarily reflects the
statutory U.S. federal tax rate and the weighted average tax rate of the states
in which the Company conducts business. The net increase of 0.5 percentage
points in fiscal 2002 from fiscal 2001 results from the Company generating a
pre-tax loss in the current year and the adverse impact that result has on all
the permanent difference items, in addition to a decrease in both the U.S.
federal statutory rate and the tax benefit related to foreign sales. The
decrease of 0.2 percentage points in fiscal 2001 from fiscal 2000 results from
increased federal and state tax credits and an increase in tax benefits related
to foreign sales for the Company during fiscal 2001. Other factors may have
favorable and unfavorable effects upon the Company's effective tax rate in 2003
and subsequent years. These factors include, but are not limited to,
interpretations of existing tax laws, changes in tax laws and rates, future
levels of research and development spending, and future levels of capital
expenditures.
Deferred Income Taxes
At September 28, 2002, the Company had net current deferred income tax
assets of $8.3 million and net non-current deferred income tax assets of $2.6
million. Realization of the net deferred tax assets is dependant upon the
Company's ability to either carry back the reversal of the underlying temporary
differences and obtain a refund of taxes previously paid or generate sufficient
taxable income in future years to benefit from the reversal of the underlying
temporary differences.
Liquidity and Capital Resources
During fiscal 2002, operations of the Company provided $2.8 million in
cash. A net loss of $8.8 million plus non-cash charges for depreciation,
amortization and provisions of $6.9 million, $2.1 million, and $15.6
respectively, together with a
24
decrease in trade receivables, inventory, and assets held for sale of $1.5
million, $2.3 million, and $2.4 million, respectively, provided $22.0 million in
cash. These cash inflows were offset by decreases in other current assets of
$3.0 million, deferred income taxes of $1.7 million and trade accounts payable,
accrued expenses and other liabilities of $14.5 million.
Investing activities for the Company in fiscal 2002 consisted primarily
of the purchase of $7.6 million in capital equipment to support planned capacity
increases for future production. The majority of the equipment purchased was for
the production of automotive quartz GyroChip sensor products. This cash outflow
was offset by the receipt of $0.4 million in cash from the disposal of equipment
and decrease in other assets of $1.1 million resulting in net cash used by
investing activities of $6.1 million.
Fiscal 2002 financing activities primarily consisted of debt payments
of $52.0 million, which consisted of $7.0 million in principal paid on senior
notes payable, as well as $45.0 million in payments on the Company's line of
credit. Other cash used by financing activities included cash purchases of the
Company's stock at open market prices for $1.6 million and dividend payments of
$0.6 million. These cash outflows were offset by proceeds from recurring
borrowing on the Company's line of credit of $45.0 million, tax benefits from
exercised stock options of $0.4 million, and proceeds of $0.1 million from stock
issuances related to the exercise of options granted under the Company's 1997
Equity Incentive Plan, resulting in net cash used for financing activities of
$8.7 million during fiscal 2002.
The Company relies on its $25.0 million line of credit and $28.0
million of senior note funding, of which annual payments are due in the first
fiscal quarter of the following year, to sustain operations. There can be no
assurance that these facilities will continue to be available to sustain future
operating levels.
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.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
Management's discussion and analysis of financial condition and results
of operations is based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The Company reviews the accounting
policies used in reporting its financial results on a regular basis. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. The estimates are based on historical experience and on various
other assumptions that management believes to be reasonable under the
circumstances. On an ongoing basis, the Company evaluates its estimates. Results
may differ from these estimates due to actual outcomes being different from
those on which the Company based its assumptions. The Company believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
Product Warranty
The Company records a warranty liability on its products at the time of
revenue recognition based on historical experience and any specific warranty
issues that the Company has identified. Although historical warranty costs have
been within expectations, there can be no assurance that future warranty costs
will not exceed historical amounts. If actual future warranty costs exceed
historical amounts, additional allowances may be required, which could have a
material adverse impact on the Company's operating results in future periods.
Allowance for Doubtful Accounts
The Company continuously monitors collections and payments from its
customers and maintains allowances for doubtful accounts based upon historical
experience and any specific customer collection issues that the Company has
identified. While such credit losses have historically been within management's
expectations, there can be no assurance that the Company will continue to
experience the same relative level of credit losses that it has in the past. In
addition, although the Company's sales have historically been to many customers
in a variety of markets, in recent periods, one automotive
25
customer accounted for a significant portion of the Company's net sales. A
significant change in the liquidity or financial position of that customer or a
further deterioration in the economic environment in general could have a
material adverse impact on the collectability of the Company's accounts
receivable and future operating results, including a reduction in future
revenues and additional allowances for doubtful accounts. If, at the time of
shipment, the Company determines that collection of a receivable is not
reasonably assured, the revenue is deferred and recognized at the time
collection becomes reasonably assured, which is generally upon receipt of
payment.
Inventories
The Company writes down its inventory for estimated obsolescence for
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
Inventories are carried principally at the lower of cost or fair value
and do not exceed net realizable value. Cost is determined by the first-in,
first-out (FIFO) method, including material, labor and factory overhead.
Long-Lived and Intangible Assets and Goodwill
Management reviews goodwill and intangible assets with indefinite
useful lives for impairment either on an annual basis or quarterly if an event
occurs that might reduce the fair value of the long-lived asset below its
carrying value. All other long-lived and intangible assets are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the asset may not be recoverable. An impairment loss would be recognized based
on the difference between the carrying value of the asset and its estimated fair
value, which would be determined based on either discounted future cash flows or
other appropriate fair value methods. The evaluation of goodwill and intangibles
with indefinite useful lives for impairment requires management to use
significant judgments and estimates including, but not limited to, projected
future revenue, operating results, and cash flows.
Although management currently believes that the estimates used in the
evaluation of goodwill and intangibles with indefinite lives are reasonable,
differences between actual and expected revenue, operating results, and cash
flow could cause these assets to be deemed impaired. If this were to occur, the
Company would be required to charge to earnings the write-down in value of such
assets, which could have a material adverse effect on the Company's results of
operations and financial position.
Provision for Excess Capacity, Uncollectables from a Related Party and Product
Line Move and Other
During the quarter ended March 30, 2002, the Company established a
reserve for the closure of a specific manufacturing facility. This reserve
required the use of estimates. Though the Company believes that these estimates
accurately reflect the costs of these plans, they relate to matters that are
inherently uncertain and actual results may be different.
Income Taxes
The Company has significant amounts of deferred tax assets that are
reviewed periodically for recoverability and valued accordingly. These assets
are evaluated by using the four sources of taxable income that may be considered
under FAS 109: (1) Future reversals of existing temporary differences; (2)
Taxable income in prior carryback years, if carryback is permitted under the tax
law; (3) Tax planning strategies and; (4) Future taxable income exclusive of
reversing temporary differences and carryforwards. In the event it is determined
more likely than not that some portion or all of the deferred tax assets will
not be realized, a valuation allowance would be recorded with a corresponding
charge to income in the period such determination occurs.
Litigation
The Company reserves for legal claims when payments associated with the
claims become probable and can be reasonably estimated. Due to the difficulty in
estimating costs of resolving legal claims, actual costs may be substantially
higher than the amounts reserved.
26
Environmental Matters
The Company reserves for known environmental claims, of which there are
none in fiscal 2002, when payments associated with the claims become probable
and the costs can be reasonably estimated. The Company's environmental reserves,
for all periods presented, are recorded at the expected payment amount. The
actual cost of resolving environmental issues may be higher than that reserved
primarily due to difficulty in estimating such costs and potential changes in
the status of government regulations.
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are primarily generated from the sale of electronic devices to
our customers, typically the end-user.
The Company recognizes revenue using the guidance from SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". Under
these guidelines, revenue recognition is deferred on transactions where (i)
persuasive evidence of an arrangement does not exist, (ii) revenue recognition
is contingent upon performance of one or more obligations of the Company, (iii)
the price is not fixed or determinable or (iv) payment is not reasonably
assured.
Property, Plant and Equipment and Related Depreciation
The Company records property, plant and equipment at cost, which is
depreciated using the straight-line method for structures and accelerated or
straight-line methods for equipment over their estimated useful lives. Leasehold
improvements and assets acquired under capital leases are amortized over the
shorter of the lease term or their estimated useful lives. Management reviews
the estimated useful lives of property, plant and equipment to verify that the
assets are being depreciated in accordance with their usage and all assets no
longer in service are fully depreciated.
Accrued Expenses and Other Liabilities
The Company records liabilities for services or products received in
the period in which the benefit was recognized. Due to the difficulty in
estimating costs of these services or products received, actual costs may be
substantially higher than the amounts recorded.
27
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 $3,000,000 (calculated based on the
conversion rate for Euros at September 28, 2002) permanently invested in the
assets of Ideacod, S.A.S., 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 $300,000, 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-quality 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.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------
September 28, September 29,
dollars in thousands except share and per share amounts 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $4,418 $16,438
Investments 6,727 7,099
Trade receivables:
Commercial customers, less allowance for doubtful
accounts (2002--$1,365; 2001--$1,662) 22,364 22,734
United States Government 2,836 4,034
------------------- -----------------
25,200 26,768
Inventories, less inventory reserves (2002-- $2,427; 2001-- $3,755) 28,538 30,808
Deferred income taxes 8,333 6,322
Assets held for sale 2,011 4,881
Other current assets 5,945 5,476
------------------- -----------------
Total current assets 81,172 97,792
Property, plant and equipment
Land 4,264 4,294
Structures 14,717 14,378
Equipment 61,751 66,496
Leasehold improvements 1,706 1,671
------------------- -----------------
82,438 86,839
Less allowances for depreciation and amortization 44,668 49,032
------------------- -----------------
37,770 37,807
Other assets
Tradenames, patents and related assets,
less amortization (2002--$3,678; 2001--$3,493) 331 424
Technology acquired under license agreements,
less amortization (2002--$9,068; 2001--$8,077) 1,540 2,731
Goodwill, less amortization (2002--$590; 2001--$590) 1,612 1,612
Deferred income taxes, non-current 2,587 3,174
Other 1,084 2,817
------------------- -----------------
7,154 10,758
------------------- -----------------
$126,096 $146,357
=================== =================
See notes to consolidated financial statements
29
CONSOLIDATED BALANCE SHEETS (cont.)
BEI Technologies, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------- -- ----------------
September 28, September 29,
dollars in thousands except share and per share amounts 2002 2001
- --------------------------------------------------------------------------------------- -- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $13,709 $18,357
Accrued expenses and other liabilities 18,161 21,483
Deferred compensation liability 6,727 7,099
Current portion of long-term debt 7,094 7,089
------------------- ----------------
Total current liabilities 45,691 54,028
Long-term debt, less current portion 22,500 29,556
Other liabilities 5,546 2,453
Stockholders' equity
Preferred stock
($.001 par value; authorized 2,000,000 shares; none issued)
Common stock -- --
($.001 par value; authorized 35,000,000 shares; issued
and outstanding; 2002--14,599,137; 2001--14,326,272)
Retained earnings 8,119 4,025
Accumulated other comprehensive loss 49,670 59,434
(239) (458)
------------------- ----------------
57,550 63,001
Less: Unearned restricted stock (5,191) (2,681)
------------------- ----------------
Total stockholders' equity 52,359 60,320
------------------- ----------------
$126,096 $146,357
=================== ================
See notes to consolidated financial statements
30
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Technologies, Inc. and Subsidiaries
--------------------------------------------------
Years Ended
--------------------------------------------------
September 28, September 29, September 30,
dollars in thousands except share and per share amounts 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 185,638 $ 238,985 $ 219,216
Cost of sales 134,311 173,897 158,526
---------------- -------------- ----------------
Gross profit 51,327 65,088 60,690
Selling, general and administrative expenses 30,912 35,077 34,300
Research, development and related expenses 15,397 8,825 8,897
---------------- -------------- ----------------
Subtotal 5,018 21,186 17,493
Provision for excess capacity 10,275 - -
Provision for uncollectables from a related party 3,072 - -
Provision for product line move and other 2,230 - -
---------------- -------------- ----------------
Earnings (loss) before interest and taxation (EBIT) (10,559) 21,186 17,493
Other income (expense) (1,760) 524 968
Interest expense (2,270) (2,466) (2,644)
---------------- -------------- ----------------
Income (loss) before income taxes (14,589) 19,244 15,817
Provision (benefit) for income taxes (5,783) 7,527 6,210
---------------- -------------- ----------------
Net income (loss) $ (8,806) $ 11,717 $ 9,607
================ ============== ================
Basic Income (Loss) Per Share
---------------- -------------- ----------------
Net income (loss) per common share $ (0.63) $ 0.84 $ 0.68
================ ============== ================
Shares used in computing basic income (loss) per
common share 13,993,013 13,904,937 14,113,156
================ ============== ================
Diluted Income(Loss) Per Share
---------------- -------------- ----------------
Net income (loss) per common and common equivalent share $ (0.63) $ 0.81 $ 0.65
================ ============== ================
Shares used in computing diluted income (loss) per common
and common equivalent share 13,993,013 14,443,609 14,806,504
================ ============== ================
See notes to consolidated financial statements
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Technologies, Inc. and Subsidiaries
Years Ended
---------------------------------------------------
September 28, September 29, September 30,
dollars in thousands 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (8,806) $ 11,717 $ 9,607
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 6,926 6,456 6,067
Amortization 2,172 3,247 2,826
Deferred income taxes (1,669) 1,250 (3,036)
Loss (gain) on disposition of assets (397) 17 (415)
Foreign currency translation 219 (60) (292)
Provision for excess capacity 10,275 -- --
Provision for uncollectables from a related party 3,072 -- --
Provision for product line move and other 2,230 -- --
Changes in operating assets and liabilities:
Trade receivables 1,569 6,298 (3,511)
Inventories 2,270 276 (47)
Assets held for sale 2,411 (6,383) --
Other current assets (3,023) (4,013) 997
Trade accounts payable, accrued expenses and other liabilities (14,488) (3,706) 11,375
-------------- -------------- --------------
Net cash provided by operating activities 2,761 15,099 23,571
Cash flows from investing activities:
Investment in minority owned equity investee - OpticNet -- (1,000) --
Purchase of property, plant and equipment (7,596) (8,436) (8,408)
Proceeds from sale of assets 400 109 1,868
Other 1,085 (194) (27)
-------------- -------------- --------------
Net cash used by investing activities (6,111) (9,521) (6,567)
Cash flows from financing activities:
Proceeds from long-term debt 44,966 3 1,472
Principal payments on debt and other financing (52,017) (153) (2,121)
Proceeds from issuance of common stock 160 667 903
Tax benefit from exercised stock options 433 654 31
Repurchase of stock (1,636) (1,531) (7,586)
Payment of cash dividend (576) (1,076) (588)
-------------- -------------- --------------
Net cash used by financing activities (8,670) (1,436) (7,889)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (12,020) 4,142 9,115
Cash and cash equivalents at beginning of year 16,438 12,296 3,181
Cash and cash equivalents at end of year $ 4,418 $ 16,438 $ 12,296
============== ============== ==============
See notes to consolidated financial statements
32
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
BEI Technologies, Inc. and Subsidiaries
Years Ended
--------------------------------------------------
September 28, September 29, September 30,
dollars in thousands 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of non cash investing and financing
activities:
Grants of restricted stock $3,808 $1,596 $1,097
Cancellations of restricted stock 323 180 179
Tax benefit from restricted stock 269 1,139 --
Repurchase of stock paid in subsequent year -- 999 --
Disposal recognition of fully depreciated equipment $12,450 $ -- $ --
See notes to consolidated financial statements
33
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
BEI Technologies, Inc. and Subsidiaries
Accumulated
Other Unearned
Common Retained Comprehensive Comprehensive Restricted
dollars in thousands Stock Earnings Income Income Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
Balances at October 2, 1999 $3,731 $44,498 $(106) $(2,280) $45,843
Net income for 2000 9,607 9,607 9,607
Other comprehensive income
Foreign currency translation
loss, net of income tax of $96 (292) (292) (292)
---------------
Comprehensive income 9,315
===============
Restricted stock plan 918 260 1,178
Stock options exercised 903 903
Tax benefit from exercised stock
options 31 31
Repurchase of stock (3,262) (4,324) (7,586)
Cash dividends (588) (588)
----------- --------------- -------------- ------------ ------------
Balances at September 30, 2000 2,321 49,193 (398) (2,020) 49,096
Net income for 2001 11,717 11,717 11,717
Other comprehensive income
Foreign currency translation
loss, net of income tax of $39 (60) (60) (60)
---------------
Comprehensive income 11,657
===============
Restricted stock plan 1,416 (661) 755
Stock options exercised 390 390
Tax benefit from exercised stock
options 654 654
Tax benefit from restricted stock 1,139 1,139
Repurchase of stock (2,130) (400) (2,530)
Cash dividends (1,076) (1,076)
Contributed capital and other 235 235
----------- --------------- -------------- ------------ ------------
Balances at September 29, 2001 4,025 59,434 (458) (2,681) 60,320
Net loss for 2002 (8,806) (8,806) (8,806)
Other comprehensive income
Foreign currency translation
gain, net of income tax of $144 219 219 219
---------------
Comprehensive income (loss) (8,587)
===============
Restricted stock plan 3,485 (2,510) 975
Stock options exercised 160 160
Tax benefit from exercised stock
options 433 433
Tax benefit from restricted stock 269 269
Repurchase of stock (253) (382) (635)
Cash dividends (576) (576)
----------- --------------- -------------- ------------ ------------
Balances at September 28, 2002 $8,119 $49,670 $(239) $(5,191) $52,359
=========== =============== ============== ============ ============
See notes to consolidated financial statements
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEI Technologies, Inc. and Subsidiaries
September 28, 2002
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
(the "Distribution") to all the stockholders of BEI Electronics, Inc.,
("Electronics") on September 24, 1997. BEI Electronics was subsequently renamed
BEI Medical Systems Company, Inc. and was acquired by Boston Scientific
Corporation in 2002.
Effective October 30, 2000, the Board of Directors of Technologies
declared a one-for-one stock dividend to its stockholders. 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
majority-owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
The Company 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 2002, 2001 and 2000 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. Generally, shipments are made F.O.B. point of
origin, with variations due to contract specific agreements. 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
or fair value and do not exceed net realizable value. Cost is determined by the
first-in, first-out (FIFO) method, including material, labor and factory
overhead. The Company writes down its inventory for estimated obsolescence for
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
The Company's inventories are evaluated for obsolescence and excess
quantity on the minimum of an annual basis, with quarterly updates for the most
significant operations.
Assets Held for Sale: Assets held for sale include approximately $2.0
million for the current portion of deposits and advances on production equipment
that a significant customer has agreed to fund over a period of two years.
Assets held for sale are carried
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
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 17 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 13 years, which
approximates its estimated useful life from the date of acquisition. The
amortization expense relating to intangible assets for fiscal year 2002 totaled
approximately $1.1 million. In fiscal 2003 and thereafter, estimated
amortization will be $1.1 million and $0.8 million, respectively.
Goodwill consists of the excess of cost over fair value of net tangible
assets acquired in purchase acquisitions. Goodwill is maintained at fair value
and is reviewed for impairment when an event occurs that might reduce the fair
value of the asset.
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 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 chose to adopt FAS 142 for its fiscal year beginning September 30, 2001.
Impact of adopting FAS 142 was that approximately $137,000 of amortization
expense which otherwise would have been recognized was not recorded during
fiscal 2002.
In October 2001, the FASB issued FAS No. 144 ("FAS 144"), "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.
In June 2002, the FASB issued FAS No. 146 ("FAS 146") "Accounting for
Costs Associated with Exit or Disposal Activities." FAS 146 is effective for
exit or disposal activities that are initiated after December 31,2002. This
standard addresses financial accounting and reporting for costs associated with
exit or disposal activities and replaces EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. FAS 146 also requires
that liabilities recorded in connection with exit plans be initially measured at
fair value. The Company does not believe the adoption of FAS No. 146 will have a
material impact on its financial statements.
Net Income (Loss) Per Share: Basic income (loss) per share is computed
using the weighted average number of shares outstanding. Diluted income (loss)
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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Foreign subsidiary: The financial statements of Ideacod, S.A.S., 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.
Related Party Financing and Arrangements: During fiscal 2000,
Technologies made a $1.0 million equity investment in OpticNet, Inc.
("OpticNet"), the Company's then majority owned subsidiary. The equity
investment was provided as initial financing with the expectation that OpticNet
would seek additional funding from third parties in the future. 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. See
Note 11 "Related Party Transactions" for further description.
Since inception, all operating capital for OpticNet has been provided
by the Company as debt or equity financing. 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 the Company. Originally, the Company
accounted for its investment in OpticNet under the equity method of accounting
until March 31, 2002, when the Company deemed its investment impaired. The
Company has recognized OpticNet's entire net loss for the six months ended
September 28, 2002. As of March 30, 2002, the Company recognized as impaired the
carrying value of its initial $1.0 million investment in OpticNet and reduced
the investment to zero and fully reserved as uncollectable its $2.7 million loan
to OpticNet.
Reclassification: Certain reclassifications have been made to the 2002,
2001, and 2000 consolidated financial statements to conform with current year
presentations.
Note 2 Inventories
September 28, September 29,
2002 2001
------- -------
(in thousands)
Finished products ........................ $ 2,945 $ 4,919
Work in process .......................... 7,238 7,354
Materials ................................ 18,355 18,535
------- -------
Total inventories ........................ $28,538 $30,808
======= =======
Note 3 Accrued Expenses and Other Liabilities
September 28, September 29,
2002 2001
------- -------
(in thousands)
Employee compensation ........................... $ 1,513 $ 3,548
Vacation ........................................ 1,967 2,066
Accrued taxes ................................... 984 1,846
Contract costs .................................. 75 550
Accrued professional fees ....................... 1,858 1,088
Insurance ....................................... 846 762
Royalties and related costs ..................... 3,639 5,593
Customer advances ............................... 31 245
Commissions ..................................... 422 589
Interest ........................................ 711 885
Warranty ........................................ 654 791
Reserve for excess capacity ..................... 2,082 --
Reserve for product line move and other ......... 1,583 --
Repurchase of stock ............................. -- 999
Other ........................................... 1,796 2,521
------- -------
Total accrued expenses and other liabilities .... $18,161 $21,483
======= =======
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Note 4 Long-Term Debt
September 28, September 29,
2002 2001
------- -------
(in thousands)
6.70% Senior Notes; due in annual installments of $7,000 from
November 16, 2001 through November 16, 2005................................... $28,000 $35,000
Mortgage note payable with interest at 6.87%; due in monthly installments of
principal and interest of $14 until December, 2003 when the remaining
balance of approximately $1,400 is due; collateralized by certain real
property ..................................................................... 1,594 1,626
Capitalized equipment lease obligations......................................... -- 19
------- -------
29,594 36,645
Less current portion............................................................ 7,094 7,089
------- -------
$22,500 $29,556
======= =======
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.
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.
As of the quarter ended March 30, 2002, the Company completed an
amendment with its senior note holders, which provided that the net impact of
the provisions for excess capacity, uncollectables from a related party and
product line move recognized in the second quarter would not cause an event of
default. The Company's operating results for the quarter ended March 30, 2002,
excluding these provisions from the calculation of debt covenants, result in the
Company maintaining compliance as of that date.
On August 14, 2002, the Company established a $25.0 million line of
credit, which matures on August 15, 2004, with a bank and terminated the $25.0
million facility in place at the end of fiscal 2001 with another bank. No
borrowings were outstanding under the new line of credit at September 28, 2002.
During December 2002, the Company received a waiver of one of its
financial covenants of its senior notes for the fiscal quarter ended September
28, 2002. Additionally, the Company completed an amendment reducing the coverage
level required with its senior note holders, related to the same financial
covenant discussed above, for the fiscal quarter ended December 28, 2002.
Maturities of long-term debt, adjusted for the effect of senior notes
and the mortgage refinancing are approximately as follows: fiscal 2003 $7.1
million; fiscal 2004 $8.5 million; fiscal 2005 $7.0 million; fiscal 2006 $7.0
million.
Interest of approximately $2.4 million, $2.5 million and $2.5 million
was paid during fiscal years 2002, 2001, and 2000, respectively.
Note 5 Research and Development
The Company's internally funded research, development and related
engineering expenditures were approximately $15.4 million, $8.8 million and $8.9
million in fiscal 2002, 2001, and 2000, respectively. In addition,
customer-funded research and
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
development expenditures charged to cost of sales were $0.5 million, $0.2
million and $0.6 million, respectively, for the same periods. The increase is
due to management's dedication to the development of new and enhanced products,
such as the next generation quartz and silicon automotive gyro sensors and
improvements to other existing product families.
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 (benefit) for income tax expense consists of the
following (in thousands):
Year Ended
--------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
------- ------ ------
Current
Federal.......................................................... $(3,987) $5,691 $7,504
State............................................................ (127) 586 1,742
------- ------ ------
Total Current............................................... (4,114) 6,277 9,246
Deferred
Federal ........................................................ (865) 815 (2,500)
State ........................................................ (804) 435 (536)
------- ------ ------
Total Deferred............................................. (1,669) 1,250 (3,036)
------- ------ ------
Total income tax provision (benefit).................................. $(5,783) $7,527 $6,210
======= ====== ======
Tax benefits of $702,000, $1,793,000, and $31,000 related to employee
stock option plans were credited to stockholders' equity, and increased the
amount of taxes currently refundable during fiscal year 2002, 2001, and 2000,
respectively.
Significant components of the Company's net deferred tax assets are as
follows (in thousands):
September 28, September 29,
2002 2001
------- -------
Deferred tax assets
Net operating loss carryforwards........................................................ $ 150 $ --
Tax credits............................................................................. 427 --
Accrued expenses........................................................................ 5,979 8,218
Asset impairment reserves............................................................... 4,636 --
Inventory valuation..................................................................... 1,186 1,572
Other reserves.......................................................................... 923 1,396
Other................................................................................... 938 847
------- -------
Total deferred tax assets....................................................... 14,239 12,033
------- -------
Deferred tax liabilities
Depreciation and property basis difference.............................................. 2,551 2,135
Other................................................................................... 768 647
------- -------
Total deferred tax liabilities..................................................... 3,319 2,782
------- -------
Net deferred tax assets............................................................ $10,920 $ 9,251
======= =======
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
The differences between the provision for income taxes and the income
tax determined by applying the statutory federal income tax rate of 34% for 2002
and 35.0% for 2001 and 2000 (in thousands) are as follows:
September 28, September 29, September 30,
2002 2001 2000
------- ------- -------
Income tax at the statutory rate ....................................... $(4,960) $ 6,735 $ 5,536
State income tax, net of federal income tax effect ..................... (585) 616 789
Goodwill amortization .................................................. -- 118 19
Tax credits ............................................................ (292) (260) --
Other .................................................................. 54 318 (134)
------- ------- -------
Total income taxes ..................................................... $(5,783) $ 7,527 $ 6,210
======= ======= =======
Cash paid for income taxes in fiscal year 2002, 2001 and 2000 was
$428,000, $6,341,000 and $9,245,000, respectively.
As of September 28, 2002, the Company has state net operating loss
carryforwards of $2.4 million, which begin to expire in the year 2007. Total tax
credit carryforwards of $427,000 expire in the years 2012 through 2022, except
for $164,000 of California research and development tax credits that have no
expiration date.
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
Electronics in connection with the Distribution.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Option and restricted stock activity under the Technologies Incentive Plan is
summarized below:
Restricted Shares
Outstanding Options Outstanding
---------- ------------------------------
Common stock Number of Number of Weighted average
available for common common exercise price
grant shares shares per share
---------- ---------- ---------- ---------
Balances, October 2, 1999 1,222,328 1,060,666 334,082 $ 3.82
Restricted stock granted (145,000) 145,000 -- $ --
Restricted stock
terminated 33,824 (33,824) -- $ --
Granted (215,000) -- 215,000 $ 7.24
Exercised -- -- (139,690) $ 3.75
Terminated 47,464 -- (47,464) $ 5.12
---------- ---------- ---------- ---------
Balances, September 30, 2000 943,616 1,171,842 361,928 $ 5.72
Restricted stock granted (116,421) 116,421 -- $ --
Restricted stock
terminated 31,580 (31,580) -- $ --
Granted (131,440) -- 131,440 $ 15.74
Exercised -- -- (81,220) $ 4.70
Terminated 30,388 -- (30,388) $ 11.58
---------- ---------- ---------- ---------
Balances, September 29, 2001 757,723 1,256,683 381,760 $ 8.98
Restricted stock granted (305,500) 305,500 -- $ --
Restricted stock
terminated 22,786 (22,786) -- $ --
Restricted stock retired -- (41,320) -- $ --
Granted (262,000) -- 262,000 $ 13.19
Exercised -- -- (31,471) $ 5.09
Terminated 29,940 -- (29,940) $ 13.40
---------- ---------- ---------- ---------
Balances, September 28, 2002 242,949 1,498,077 582,349 $ 10.84
========== ========== ========== =========
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Weighted Average Weighted Average
Number Remaining Contractual Exercise Price Per
Range of Exercise Prices Outstanding Life (Years) Share
- ------------------------ ----------- ------------ -----
$2.33 - $2.97............................... 14,890 1.38 $ 2.66
$3.50 ...................................... 56,478 6.02 $ 3.50
$5.25 - $6.22............................... 13,002 6.79 $ 5.65
$6.25 ...................................... 105,322 7.19 $ 6.25
$7.44 - $12.78.............................. 171,168 9.49 $10.44
$13.25 ..................................... 72,923 8.19 $13.25
$14.58 ..................................... 10,000 3.19 $14.58
$15.25 - $28.60 ............................ 138,566 8.66 $17.63
- --------------- ------- ---- ------
$2.33 - $28.60.............................. 582,349 8.00 $10.84
======
As of September 28, 2002, options for 204,149 shares were vested and
exercisable at a weighted average exercise price of $7.35.
Under the Incentive Plan, the holders of the 1,400,000 shares of
Electronics common stock that had been issued under the Electronics 1992
Restricted Stock Plan ("1992 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.
Under both the 1992 Plan and Incentive Plan, as of September 28, 2002,
1,788,373 shares had been granted, of which 1,498,077 shares are outstanding,
and 940,968 shares have fully vested. Compensation expense of $975,000, $755,000
and $1,178,000 for the amortization of the restricted stock was recorded in
fiscal years 2002, 2001, and 2000, respectively.
The Company computed the pro forma disclosures required under FAS No.
123 for options granted in fiscal years 2002, 2001, and 2000 using the
Black-Scholes option pricing model. For fiscal years 2002, 2001 and 2000, the
significant assumptions used in the Black-Scholes calculation were a risk-free
interest rate of 4.13%, 4.00% and 5.98%, a weighted average expected life of 5,
5 and 3 years, a volatility rate of 80%, 83% and 85%, and an expected dividend
yield of 0.3%, 0.4% and 0.4%, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The effects of
applying FAS 123 in the pro forma disclosures may not be indicative of future
amounts as additional awards in future years are anticipated and because the
Black-Scholes option pricing model involves subjective assumptions which may be
materially different than actual amounts.
During fiscal years 2002 and 2001, options to acquire 262,000 and
131,440 shares were granted with a weighted average fair
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
value of $9.55 and $10.85 per share, respectively. For the year ended September
28, 2002, the compensation cost of options under FAS 123 would have increased
net loss from $8.8 million to $9.6 million, and diluted loss per share from
$0.63 to $0.69. 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.
In addition to options, during fiscal years 2002 and 2001, 305,500 and
116,421 shares of nonvested stock were granted with a weighted average fair
value of $12.45 and $14.17 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
2002, 2001 and 2000 were approximately $1,290,000, $1,068,000 and $960,000,
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 of approximately $7.0 million are included in the accompanying
balance sheets at September 28, 2002 and September 29, 2001.
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. The
future minimum payments for operating leases, net of future minimum rentals to
be received under noncancelable subleases, consist of the following at September
28, 2002 (in thousands):
Operating
Fiscal Year Leases
----------- ------
2003 ................................................................... $4,089
2004 ................................................................... 3,920
2005 ................................................................... 1,426
2006 ................................................................... 869
2007 ................................................................... 669
Thereafter............................................................... 662
-------
Total minimum lease payments, net of future minimum rental
income...................................................... $11,635
=======
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. In
addition, on December 20, 2001 and March 28,2002, the Company executed
additional equipment lease schedules under this agreement to lease equipment
similar to the described above valued at approximately $3.5 million and $2.8
million, respectively. Under the terms of the lease transaction, the Company
sold the 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 $6.6 million 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. In March
2002, OpticNet significantly reduced operations to support only its current
customer base. See Note 11 "Related Party Transactions" for a further
description.
Total rental expense amounted to approximately $2,342,000, $2,304,000
and $2,192,000 for fiscal years 2002, 2001 and 2000, respectively.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
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 has been heard
before an Administrative Judge at the Armed Services Board of Contract Appeals
("ASBCA"). In fiscal 2002, the Judge ruled that Defense Systems is entitled to
an "equitable reformation" of the prices on certain rockets and motors in the
H70 contract. The decision was remanded to the parties to negotiate the amount.
The parties were unable to negotiate an amount on their own, so the parties then
agreed to enter a non-binding mediation of Alternate Dispute Resolution process
with the same Administrative Judge from the ASBCA who had rendered the original
entitlement decision. The process is in an advanced stage of continuing
discussion and may result in a resolution in the near future.
Other
During fiscal 2002, BEI Defense Systems Company, a discontinued
subsidiary of Technologies, was subject to litigation with a former landlord
regarding damages to real property formerly leased. The United States District
Court for the Western District of Arkansas entered a judgment, including
attorney's fees, of approximately $0.7 million. Technologies is in the process
of contesting the award and has determined that it will appeal the judgment. The
Company has reserved $0.7 million for this judgment during the fiscal quarter
ended June 29, 2002.
The Company has pending various legal actions arising in the normal
course of business. Management believes that none of the legal actions not
already recognized in the financial statements as material, individually or in
the aggregate, will have a material impact on the Company's business, financial
condition or operating results.
Note 11 Related Party Transactions
During fiscal 2001, the Company agreed to provide OpticNet with a line
of credit originally established for up to $2.0 million, amended in March 2002
to allow for borrowings by OpticNet of up to $3.0 million and in October 2002 to
extend the maturity date to December 31, 2002. The outstanding principal on the
note evidencing the line of credit bears interest at prime plus 1.5% per annum.
During the fiscal quarter ended June 29, 2002, the Company suspended the
availability of advances to OpticNet under the line of credit, as the Company
concluded that the note receivable totaling $2.7 million in principal amount at
such time was uncollectable and the Company's original investment in OpticNet
was impaired. This determination was a result of OpticNet's inability to attract
significant strategic partners or third party financing necessary to sustain
operations. Therefore, a charge of $3.1 million was recorded in the Company's
statement of operations in fiscal 2002 as the note receivable was deemed
uncollectable and the carrying value of the original investment in OpticNet was
deemed impaired.
On September 28, 2001, the Company entered into an equipment sublease
agreement with OpticNet to rent capacity on research, development and
manufacturing equipment to OpticNet from month to month based on OpticNet's
usage of the equipment beginning in October 2001.
The Company leases 15,571 square feet of office and manufacturing
facilities used for research and development and manufacturing activities in
Hayward, California, which it originally subleased entirely to OpticNet under an
agreement entered into in October 2001, for an initial term expiring December
2005. During March 2002, OpticNet concluded it was necessary to reduce operating
costs due to its inability to obtain significant strategic partners or third
party financing. The companies both agreed that a reduction in operations would
lower usage of the equipment and the subleased facilities described above.
Beginning March 31, 2002, the Company agreed to prorate the annual lease
payments from OpticNet, based on the portion of the facilities OpticNet requires
to support customers.
The Company is party to an intercompany services agreement with
OpticNet, entered into in October 2000, under which the
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Company provides certain administrative services to OpticNet at a cost of
$25,000 per fiscal quarter. During the third quarter of fiscal 2002, the Company
agreed to suspend current and future charges under the agreement, in light of
the inability of OpticNet to obtain outside financing to such date.
In the quarter ended March 30, 2002, the Company concluded that
portions of the assets held under leases were excess to the Company's
requirements. Historically, these assets had been primarily used by OpticNet.
This determination was a result of OpticNet's lack of success in attracting
strategic partners or third party financing given the current negative
conditions prevailing in the fiber optic telecommunications market. In March
2002 the Company recorded a charge of $10.3 million for expected future losses
on the leases of the facility and production assets noted above. A portion of
the facility and equipment will continue to be used by the Company for its
ongoing silicon MEMS research and development effort. As of September 28, 2002,
the Company has recognized approximately $1.0 million against the related
accrual.
In the six months ending September 28, 2002, the Company provided an
additional $1.8 million of financing to OpticNet, which was advanced with the
intent to convert such cash advances into additional equity in OpticNet, upon
terms to be decided. The $1.8 million advanced was expensed during the third and
fourth quarters, reflecting OpticNet's net loss for the six-month period from
March 31, 2002 through September 28, 2002. Effective September 28, 2002,
OpticNet issued a total of 18,146,420 shares of OpticNet's nonvoting and
nonconvertible Series B Preferred Stock to the Company, in consideration of $1.8
million advanced during the third and fourth quarters to OpticNet by the
Company.
OpticNet's business is focused on developing fiber optic components and
subsystems, such as are used in optical switches and 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. To date, OpticNet
has shown operating losses and the sole source of funding for OpticNet's
operations is from BEI. In fiscal 2002, OpticNet undertook to further reduce
operations, including layoffs and reduction in capital expenditures. As of
September 28, 2002, Technologies owns approximately 40% of the outstanding
voting securities of OpticNet. Management of the Company views OpticNet's
ability to continue as a stand alone entity highly uncertain, absent significant
positive developments in the fiber optic telecommunications industry and new
opportunities for OpticNet.
The detail of the Company's provision for excess capacity is as follows
(in thousands):
Cash paid during Accrued balance at
Charges fiscal 2002 Asset write downs September 28, 2002
------- ----------- ----------------- ------------------
Asset impairment
charges ................................... $ 3,106 $ -- $ (3,106) $ --
Equipment lease
charges ................................... 6,100 (865) -- 5,235
Facility lease
impairment charge ......................... 660 (82) -- 578
Other commitments ........................... 409 -- -- 409
-------- -------- -------- --------
$ 10,275 $ (947) $ (3,106) $ 6,222
======== ======== ======== ========
Summary of financial information for non-consolidated equity investee -
OpticNet (in thousands):
September 28, September 29, September 30,
2002 2001 2000
------- ------- -------
Total assets ................... $ 9 $ 1,049 $ 1,013
Total liabilities .............. 2,925 1,663 69
Net income (loss) .............. $(4,131) $(1,575) $ (106)
Note 12 Sales and Major Customers (Unaudited)
The principal business and operations of Technologies are conducted
within one business segment and are carried out by
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
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):
September 28, September 29, September 30,
2002 2001 2000
-------- -------- --------
Commercial automotive sensors sales ........................... $ 94,694 $138,702 $107,459
Government .................................................... 16,901 18,501 18,723
Industrial sales .............................................. 74,043 81,782 93,034
-------- -------- --------
Total sales from operations ................................... $185,638 $238,985 $219,216
======== ======== ========
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 28, 2002.
The Company's foreign operations are conducted throughout Europe. A
summary of foreign and domestic sales follows (in thousands):
September 28, September 29, September 30,
2002 2001 2000
-------- -------- --------
Domestic sales ............................................. $ 92,558 $104,377 $120,894
Foreign .................................................... 93,080 134,608 98,322
-------- -------- --------
Total sales from operations ................................ $185,638 $238,985 $219,216
======== ======== ========
Foreign sales accounted for approximately 50%, 56% and 45% of total
sales for fiscal 2002, 2001 and 2000, respectively.
In fiscal 2002, 2001 and fiscal 2000, one customer accounted for 39%,
49% and 37%, 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 2002 and 2001:
Operations
Three months ended
----------------------------------------------------------------
December 29, March 30, June 29, September 28,
2001 2002 2002 2002
-------- -------- -------- --------
(dollars in thousands except per share amounts)
Net sales .................................................... $ 45,605 $ 48,800 $ 47,815 $ 43,418
Gross profit ................................................. 11,291 13,160 13,960 12,916
Net income (loss) ............................................ 240 (9,246) 960 (766)
Basic Income (Loss) Per Share
Net income (loss) per share-basic (rounded) .................. $ 0.02 $ (0.66) $ 0.07 $ (0.05)
Diluted Income (Loss) Per Share
Net income (loss) per share-diluted (rounded) ................ $ 0.02 $ (0.66) $ 0.07 $ (0.05)
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
December 30, March 31, June 30, September 29,
2000 2001 2001 2001
------- ------- ------- -------
Net sales .................................................. $60,221 $65,116 $61,811 $51,837
Gross profit ............................................... 17,494 18,259 14,877 14,458
Net income ................................................. 3,292 3,460 2,853 2,112
Basic Income Per Share
Net income per share-basic (rounded) ....................... $ 0.24 $ 0.25 $ 0.20 $ 0.15
Diluted Income Per Share
Net income per share-diluted (rounded) ..................... $ 0.23 $ 0.24 $ 0.20 $ 0.15
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 28, 2002 and as of September 29, 2001.
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 $21,446,000 and $30,567,000 compared with the carrying
amounts of $22,500,000 and $29,556,000 at September 28, 2002 and September 29,
2001, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
Note 15 Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
income (loss) per common share from operations:
Year Ended
--------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
------ ------ ------
(in thousands, except per share amounts)
Numerator
Income (loss) from operations, net of taxes $(8,806) $11,717 $9,607
======== ======= ======
Denominator
Denominator for basic income (loss) per share - Weighted average shares, net of
nonvested shares (fiscal 2002--699 shares; fiscal 2001--501 shares;
fiscal 2000--543 shares) 13,993 13,905 14,113
Effect of dilutive securities:
Nonvested shares -- 299 422
Employee stock options -- 240 272
------ ------ ------
Denominator for diluted earnings (loss) per share 13,993 14,444 14,807
====== ====== ======
If the Company had reported net income, the calculation of diluted
earnings (loss) per share would have included the shares used in the computation
of historical net loss per share as well as an additional 232,000 common
equivalent shares related to outstanding stock options and nonvested restricted
stock (determined using the treasury stock method) for the year ended September
28, 2002.
Note 16 Provision for Product Line Move and Other
In March 2002, the Company approved a plan to close a facility and
relocate manufacturing activities to a more cost-effective location. As a
result, the Company accrued $2.2 million related primarily to the closure of
manufacturing facilities and administrative functions including the accrual of
remaining payments on the facility operations lease, less future anticipated
sublease payments. Other costs included write-downs of fixed assets and
inventories to their fair value. As of September 28, 2002, the Company has
recognized approximately $492,000 against this accrual. The Company expects this
plan to be completed within 12 months.
The detail of the Company's provision for product line move and other
is as follows (in thousands):
Cash paid during Accrued balance at
Charges fiscal 2002 Asset write downs September 28, 2002
------- ----------- ----------------- ------------------
Facility closure
charges ....................................... $ 2,075 $(492) $-- $ 1,583
Property impairment
charges ....................................... 155 -- -- 155
------- ----- --- -------
$ 2,230 $(492) $-- $ 1,738
======= ===== === =======
48
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 28, 2002 and September 29,
2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended September 28, 2002. 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 28, 2002 and September 29, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 28, 2002 in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
San Francisco, California
October 29, 2002
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive officers is
set forth in Part I of this Report. Additional information required by
this Item is incorporated herein by reference to the section entitled
"Compliance with Section 16(a) of the Securities and Exchange Act of
1934" of the Proxy Statement related to the Company's 2003 Annual
Meeting of Stockholders to be filed by the Company with the Securities
and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the sections entitled "Executive Compensation" and
"Certain Transactions" of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information with respect to securities authorized for issuance
under equity compensation plans is set forth in Part II, Item 5 of this
Report. Additional 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. 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. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, has conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15 within 90 days of the filing of this report.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be
filed in this annual report has been made known to them in a timely
fashion. There have been no significant changes in internal controls,
or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
Form 10-K
Page Number
-----------
(a)(1) Index to Consolidated Financial Statements
50
The following Consolidated Financial Statements of BEI Technologies, Inc. and its
Subsidiaries are filed as part of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors 49
Consolidated Balance Sheets -
September 28, 2002 and September 29, 2001 29
Consolidated Statements of Operations - Years ended September 28,
2002, September 29, 2001 and September 30, 2000 31
Consolidated Statements of Cash Flows - Years ended September 28,
2002, September 29, 2001 and September 30, 2000 32
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income (Loss) - Years ended September 28, 2002, September 29, 2001
and September 30, 2000 34
Notes to Consolidated Financial Statements -
September 28, 2002 35
(a)(2) Index to Financial Statement Schedule
The following Consolidated Financial Statement Schedule of BEI
Technologies, Inc. for each of the years in the period ended
September 28, 2002 is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts S-1
Report of Ernst & Young LLP, Independent Auditors as to
Schedule S-2
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(a)(3) Listing of Exhibits
Exhibit Numbers Description Footnote
--------------- ----------- --------
2.1 Distribution Agreement between BEI Electronics, Inc.
and BEI Technologies, Inc. i
2.2 Corporate Services Agreement between BEI Technologies,
Inc. and BEI Electronics, Inc. i
2.3 Tax Allocation and Indemnity Agreement between BEI
Electronics, Inc. and BEI Technologies, Inc. i
2.4 Assumption of Liabilities and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies, Inc. i
2.5 Technology Transfer and License Agreement by and
between BEI Electronics, Inc. and BEI Technologies, Inc. i
2.6 Trademark Assignment and Consent Agreement by and
51
between BEI Electronics, Inc. and BEI Technologies, Inc. i
2.7 Agreement Regarding Certain Representations and
Covenants by and between BEI Electronics, Inc. and BEI
Technologies, Inc. i
3.1 Certificate of Incorporation of BEI Technologies, Inc. i
3.2 Bylaws of BEI Technologies, Inc. i
3.3 Registrant's Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as Exhibit
99.3 hereto) i
4.1 Specimen Common Share Certificate i
4.2 Certificate of Incorporation of BEI Technologies, Inc.
(filed as Exhibit 3.1 hereto) i
4.3 Bylaws of BEI Technologies, Inc. (filed as Exhibit 3.2
hereto) i
4.4 Registrant's Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as Exhibit
99.3 hereto) i
4.5 Form of Rights Certificate (filed as Exhibit 99.4 hereto) i
10.1 * Registrant's 1997 Equity Incentive Plan and forms of
related agreements i
10.2 * Executive Change in Control Benefits Agreement between
BEI Technologies, Inc. and Certain Named Executive
Officers i
10.5 Note Purchase Agreement dated November 16, 1998 by and
between BEI Technologies, Inc., BEI Sensors & Systems
Company, Inc., Connecticut General Life Insurance
Company and Allstate Life Insurance Company ii
10.6 Amendment to Tax Allocation and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies, Inc. ii
10.9 Development and Supply Agreement, dated April 26, 2001,
by and between Systron Donner Inertial Division and
Continental Teves AG & Co. iv
10.10 Amendment to Note Purchase Agreement as amended as of
March 30, 2002, by and between BEI Technologies, Inc.,
BEI Sensors & Systems Company, Inc., Connecticut
General Life Insurance Company and Allstate Life
Insurance Company v
10.11 Credit Agreement dated August 14, 2002, by and between
BEI Technologies, Inc., BEI Sensors & Systems Company,
Inc. and Union Bank of California
10.12 Second Amendment to Note Purchase Agreement and Waiver
dated December 20, 2002, by and between BEI
Technologies, Inc., BEI Sensors & Systems Company, Inc.,
Connecticut General Life Insurance Company and Allstate
Life Insurance Company.
52
21.1 Subsidiaries of the Registrant ii
23.1 Consent of Ernst &Young LLP, Independent Auditors
24.1 Power of Attorney
99.1 BEI Technologies, Inc. Information Statement dated
September 24, 1997 ii
99.2 Rights Agreement dated as of September 11, 1997 among
BEI Technologies, Inc. and ChaseMellon Shareholder
Services, L.L.C. i
99.3 Registrant's Certificate of Designation of Series A
Junior Participating Preferred Stock i
99.4 Form of Rights Certificate i
99.5 CEO Certification Pursuant to 18 U.S.C. as adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
99.6 CFO Certification Pursuant to 18 U.S.C. as adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
(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.
(v) Incorporated by reference. Previously filed as an exhibit to the Form
10-Q (File No. 000-22799) as filed on May 13, 2002.
* 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 fiscal
2002.
53
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
Date December 19, 2002
-----------------
54
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Charles Crocker, certify that:
1. I have reviewed this annual report on Form 10-K of BEI Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date with 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors and material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated December 19, 2002
/s/ Charles Crocker
- -----------------------------------
Charles Crocker
Chief Executive Officer and Chairman of the Board of Directors
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, John LaBoskey, certify that:
1. I have reviewed this annual report on Form 10-K of BEI Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date with 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors and material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated December 19, 2002
/s/ John LaBoskey
- -----------------------------
John LaBoskey
Senior Vice President and Chief Financial Officer
SCHEDULE II
BEI TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- ------------------------- -------- --------
Additions
---------------------------------------------------------------------
Balance at Charged to Balance at
Beginning Costs and Charged to End of
Description of Period Expenses Other Accounts Deductions Period
----------- --------- -------- -------------- ---------- ------
(in thousands)
Year ended September 28, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts .................. $1,662 $1,526 $-- $1,823(A) $1,365
Inventory reserve ................................ 3,755 1,053 -- 2,381(B) 2,427
------ ------ ----- ------ ------
Total ..................................... $5,417 $ 460 $-- $2,125 $3,792
====== ====== ===== ====== ======
Year ended September 29, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts .................. $1,084 $1,093 $-- $ 515(A) $1,662
Inventory reserve ................................ 4,452 4,843 -- 5,540(B) 3,755
------ ------ ----- ------ ------
Total ..................................... $5,536 $5,936 $-- $6,055 $5,417
====== ====== ===== ====== ======
Year ended September 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts .................. $ 597 $ 550 $-- $ 63(A) $1,084
Inventory reserve ................................ 3,154 4,685 -- 3,387(B) 4,452
------ ------ ----- ------ ------
Total ..................................... $3,751 $5,235 $-- $3,450 $5,536
====== ====== ===== ====== ======
(A) Write-offs of uncollectible accounts
(B) Write-offs of obsolete and scrap items
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 28, 2002 and September 29, 2001, and for each
of the three years in the period ended September 28, 2002, and have issued our
report thereon dated October 29, 2002. Our audits also included the financial
statement schedule listed in Item 15(a)2 of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
Ernst & Young LLP
San Francisco, California
Date October 29, 2002
S-2
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.11 Credit Agreement dated August 14, 2002, by and between BEI
Technologies, Inc., BEI Sensors & Systems Company, Inc. and
Union Bank of California
10.12 Second Amendment to Note Purchase Agreement and Waiver dated
December 20, 2002, by and between BEI Technologies, Inc.,
BEI Sensors & Systems Company, Inc., Connecticut General Life
Insurance Company and Allstate Life Insurance Company.
23.1 Consent of Ernst & Young LLP Independent Auditors
24.1 Power of Attorney
99.5 CEO Certification Pursuant to 18 U.S.C as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.6 CFO Certification Pursuant to 18 U.S.C. as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002