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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 28, 2002 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number 0-22799
B E I T E C H N O L O G I E S, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 94-3274498
------------------------- --------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
-------------------------------
(Address of principal executive offices)
(415) 956-4477
--------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: $.001 Par Value, 14,589,298 shares issued and outstanding as of
December 28, 2002.
BEI TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
December 28, 2002 and September 28, 2002 3
Condensed Consolidated Statements of Operations--
Quarters ended December 28, 2002 and December 29,
2001 4
Condensed Consolidated Statements of Cash Flows--
Quarters ended December 28, 2002 and December 29,
2001 5
Notes to Condensed Consolidated Financial
Statements-- December 28, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 20
Page 2 of 23
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BEI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, September 28,
2002 2002
(Unaudited) (See note below)
(in thousands)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 2,967 $ 4,418
Investments 6,993 6,727
Trade receivables, net 26,886 25,200
Inventories, net 27,926 28,538
Deferred income taxes 8,333 8,333
Assets held for sale 67 2,011
Other receivable 6,000 --
Other current assets 4,974 5,945
-------- --------
Total current assets 84,146 81,172
Property, plant and equipment, net 37,168 37,770
Acquired technology 1,291 1,540
Goodwill 1,612 1,612
Other assets, net 4,901 4,002
-------- --------
$129,118 $126,096
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 13,800 $ 13,709
Accrued expenses and other liabilities 17,843 18,161
Deferred compensation liability 6,993 6,727
Current portion of long-term debt 14,299 7,094
-------- --------
Total current liabilities 52,935 45,691
Long-term debt, less current portion 15,487 22,500
Other liabilities 5,280 5,546
Stockholders' equity 55,416 52,359
-------- --------
$129,118 $126,096
======== ========
Note: The balance sheet at September 28, 2002 has been derived from the audited
consolidated balance sheet at that date.
See notes to condensed consolidated financial statements.
Page 3 of 23
BEI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended
---------------------------
December 28, December 29,
2002 2001
---------------------------
(in thousands except
per share amounts)
Net sales $ 47,088 $ 45,605
Cost of sales 34,773 34,314
-------- --------
Gross margin 12,315 11,291
Selling, general and administrative expenses 8,604 6,822
Research, development and related expenses 3,951 3,546
-------- --------
Earnings (loss) from operations (240) 923
Interest expense 522 606
Other income 5,443 61
-------- --------
Income before taxes 4,681 378
Provision for income taxes 1,708 138
-------- --------
Net income $ 2,973 $ 240
======== ========
Earnings per Common Share
Basic Earnings per Share
Net income per common share $ 0.21 $ 0.02
======== ========
Diluted Earnings per Common and Common Equivalent
Share
Net income per common and common
equivalent share $ 0.21 $ 0.02
======== ========
Dividends per common share $ 0.01 $ 0.01
======== ========
See notes to condensed consolidated financial statements.
Page 4 of 23
BEI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended
-------------------------
December 28, December 29,
2002 2001
(in thousands)
- --------------------------------------------------------------------------------
Net income $ 2,973 $ 240
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,591 2,103
Other (4,562) (13,554)
-------- --------
Net cash provided (used) by operating activities 1,002 (11,211)
Cash flows from investing activities:
Purchase of property, plant and equipment (1,396) (1,423)
Disposal of property, plant and equipment 51 --
Decrease (increase) in other assets (970) 335
-------- --------
Net cash used by investing activities (2,315) (1,088)
Cash flows from financing activities:
Proceeds from debt borrowings 13,122 8,954
Principal payments on debt and other liabilities (12,930) (11,655)
Proceeds from issuance of common stock 95 28
Repurchase of common stock (279) (1,322)
Payment of cash dividends (146) (144)
-------- --------
Net cash used by financing activities (138) (4,139)
-------- --------
Net decrease in cash and cash equivalents (1,451) (16,438)
Cash and cash equivalents at beginning of period 4,418 16,438
-------- --------
Cash and cash equivalents at end of period $ 2,967 $ --
======== ========
See notes to condensed consolidated financial statements.
Page 5 of 23
BEI TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of the
results that may be expected for the year ending September 27, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto in the Company's annual report on Forms 10-K and 10-K/A for the year
ended September 28, 2002.
BEI Technologies, Inc. ("the Company" or "Technologies") is an established
manufacturer of electronic sensors, motors, actuators and motion control
products used for factory and office automation, medical equipment, military,
aviation and space systems. In addition, sales to manufacturers of
transportation equipment including automobiles, trucks and off-road equipment
have become a significant addition to the Company's business in recent years.
The Company's micromachined quartz yaw rate sensors are being used in advanced
vehicle stability control systems and a significant increase in the production
of those sensors had been in progress from the middle of 1998 through fiscal
2001. The Company is currently transitioning to its next generation automotive
quartz yaw rate sensor product, a multi-sensor cluster configuration. The
Company also manufactures electronic steering wheel position sensors,
seat-memory modules, throttle position, pressure sensors and other devices used
in automotive systems. GyroChip and MotionPak are registered trademarks of the
Company.
Technologies was incorporated in Delaware in June 1997 and became publicly held
on September 27, 1997 as a result of the distribution of shares in Technologies
to all the stockholders of BEI Electronics, Inc. on September 24, 1997.
At the close of business on October 30, 2000, Technologies declared a
distribution to its stockholders of approximately 42% of the outstanding
securities of OpticNet, Inc. ("OpticNet"), a formerly controlled subsidiary of
Technologies. In the distribution, each holder of record of Technologies common
stock as of the close of business on October 30, 2000 received one share of
OpticNet common stock for every two shares of Technologies common stock held,
and cash in lieu of any fractional share of OpticNet common stock.
Since inception, all operating capital for OpticNet has been provided by the
Company as debt or equity financing. 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. Since that date, the Company has
recognized OpticNet's entire net loss reflecting Technologies being the sole
provider of operating capital to OpticNet. 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.
Use of Estimates
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
Page 6 of 23
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.
Product Warranty
The Company offers limited warranties for its products for a period that lasts
generally from one to four years. The specific terms and conditions of those
warranties vary depending upon the products sold that are specific to different
industries and customers. The Company estimates the costs that may be incurred
under its limited warranty and records a liability in the amount of such costs
at the time product revenue is recognized. Factors that affect the Company's
warranty liability include the number of installed units, historical and
anticipated rates of warranty claims, and cost per claim. The Company assesses
the adequacy of its recorded warranty liabilities on a minimum of a quarterly
basis and adjusts that amount as necessary. See "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies and the Use of Estimates" for a further description of
product warranty.
Changes in the Company's product warranty liability during the period are as
follows (in thousands):
Balance, September 28, 2002 $ 603
Warranties issued during the period 234
Settlements made during the period (319)
Changes in liability for pre-existing warranties
during the period, including expirations 18
--------
Balance, December 28, 2002 $ 536
NOTE 2. 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.
September 28,
2002
(Derived from the
December 28, audited consolidated
2002 balance sheet at
(Unaudited) September 28,
2002)
-----------------------------------
(dollars in thousands)
-----------------------------------
Finished products $ 3,257 $ 2,945
Work in process 5,816 7,238
Materials 18,853 18,355
------- -------
Net inventories $27,926 $28,538
======= =======
Page 7 of 23
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
Quarter Ended
-------------------------
December 28, December 29,
2002 2001
(in thousands except
per share amounts)
-------------------------
Numerator
---------
Net income $ 2,973 $ 240
========= =========
Denominator
-----------
Denominator for basic earnings per share --
Weighted average shares, net of nonvested
shares (FY 2003 - 728 shares;
FY 2002 - 569 shares) 14,098 13,947
Effect of dilutive securities:
Nonvested shares 61 128
Employee stock options 131 194
--------- ---------
Denominator for diluted earnings per share 14,290 14,269
========= =========
Basic earnings per share $ 0.21 $ 0.02
========= =========
Diluted earnings per share $ 0.21 $ 0.02
========= =========
NOTE 4. LONG-TERM DEBT
September 28,
2002
(Derived from
the audited
December 28, consolidated
2002 balance sheet at
(Unaudited) September 28,
2002)
-------------------------
(in thousands)
-------------------------
6.70% Senior Notes; due in annual installments
of $7,000 from November 16, 2001 through
November 16, 2005....................................... $ 21,000 $ 28,000
Revolving line of credit with a bank not to exceed
$25,000; due in full August 15, 2004.................... 7,200 --
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........................................... 1,586 1,594
-------- --------
29,786 29,594
Less current portion.................................... 14,299 7,094
-------- --------
$ 15,487 $ 22,500
======== ========
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.
Page 8 of 23
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 of fiscal 2002 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. As of
December 28, 2002 the Company had an outstanding balance of $7.2 million.
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. The Company's
operating results for the quarter ended December 28, 2002 result in the Company
maintaining compliance as of that date.
NOTE 5. 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 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%.
The Company has entered into an agreement with OpticNet 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, resulting in lower
use of this equipment.
The Company also 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 for the space and equipment from OpticNet, based on the portion of the
facilities OpticNet requires to support its current customers.
Page 9 of 23
The Company is party to an intercompany services agreement with OpticNet,
entered into in October 2000, under which the 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. For the quarter ending December
28, 2002, the Company has recognized approximately $527,000 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 of fiscal 2002, reflecting OpticNet's net loss for the six-month period
from March 31, 2002 through September 28, 2002. Effective September 28, 2002,
the Company and OpticNet had determined that OpticNet would authorize and issue
to the Company a series of nonvoting preferred stock. In November 2002, OpticNet
issued a total of 18,146,420 shares of nonvoting and nonconvertible Series B
Preferred Stock to Technologies, in consideration of the $1.8 million advanced
during the third and fourth quarters of fiscal 2002.
In the quarter ended December 28, 2002, the Company provided approximately
$190,000 of additional funding to OpticNet for general operating expenses.
The detail of the Company's provision for excess capacity is as follows (in
thousands):
Accrued Balance at Additional Charges Amounts Utilized Q1 Accrued balance at
September 28, 2002 Q1 Fiscal 2003 Fiscal 2003 December 28, 2002
------------------ -------------- ----------- -----------------
Equipment lease
charges.............. 5,235 -- (425) 4,810
Facility lease
impairment charge 578 -- -- 578
Other commitments...... 409 -- (102) 307
------ ------ ------ ------
$6,222 $-- $(527) $5,695
====== ====== ====== ======
NOTE 6. 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. For the quarter ending December 28, 2002, the Company has
recognized approximately $186,000 against this accrual. The Company expects this
plan to be completed within 12 months.
Page 10 of 23
The detail of the Company's provision for product line move and other is as
follows (in thousands):
Accrued Balance at Additional Charges Amounts Utilized Q1 Accrued balance at
September 28, 2002 Q1 Fiscal 2003 Fiscal 2003 December 28, 2002
------------------ -------------- ----------- -----------------
Facility closure
charges.............. $1,583 $ -- $(186) $1,397
Property impairment
charges.............. 155 -- -- 155
------ ------ ------ ------
$1,738 $ -- $(186) $1,552
====== ====== ====== ======
NOTE 7. CONTINGENCIES AND LITIGATION
Claim against U.S. Government
The Company believes that BEI Defense Systems Company, a subsidiary of the
Company with discontinued operations, 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. Effective December 2002, the
parties finalized mediation which resulted in a settlement, net of expenses, of
$5.4 million. This amount was recorded in other income for the quarter ended
December 28, 2002. On January 23, 2003, the Company and the U.S. Government
signed the settlement agreement discussed above.
Other
During fiscal 2002, BEI Defense Systems Company 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 against the Company.
The Company is in the process of contesting the award and has filed an appeal of
the judgment. Due to the uncertainty of success in the appeal, 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 8. SUBSEQUENT EVENT
On January 8, 2003, the Company and Athena Technologies, Inc. ("Athena")
finalized a strategic agreement for the purpose of development, marketing, and
production of future control systems and control systems technologies. This
strategic relationship, including an investment of $2.0 million by the Company
into Athena for its Series B Preferred Stock, representing a 17.3% ownership
interest on a fully-diluted basis of Athena, leverages the Company's core
competencies in inertial sensing technologies and high volume production with
Athena's expertise in nonlinear sensor fusion algorithms and control system
technologies as embodied in Athena's line of GuideStar integrated flight control
systems.
Page 11 of 23
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those expressed in, or
implied by, such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section, and those discussed in the Company's Forms 10-K and 10-K/Afor
the year ended September 28, 2002, in particular, within the "Risk Factors"
section thereof.
See "Critical Accounting Policies and the Use of Estimates" for a description of
the Company's critical accounting policies.
Results of Operations
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
Quarter Ended
-----------------------------
December 28, December 29,
2002 2001
-----------------------------
Net sales 100.0% 100.0%
Cost of sales 73.8 75.2
---------- ----------
Gross margin 26.2 24.8
Selling, general and administrative expenses 18.3 15.0
Research, development and related expenses 8.4 7.8
---------- ----------
Earnings (loss) before interest and taxation (0.5) 2.0
Interest expense 1.1 1.3
Other income 11.6 0.1
---------- ----------
Income before taxes 10.0 0.8
Provision for income taxes 3.6 0.3
---------- ----------
Net income 6.4% 0.5%
========== ==========
Quarters ended December 28, 2002 and December 29, 2001
Net sales for the first quarter of fiscal 2003 ended December 28, 2002,
increased $1.5 million or 3.3% to $47.1 million from $45.6 million during the
same period in fiscal 2002.
The sales volume increase was primarily due to government sales and to a lesser
extent commercial sales to domestic and foreign automotive customers. Automotive
sensor sales increased by $0.9 million to $24.0 million in the first quarter of
fiscal 2003, from $23.1 million in the comparable period of fiscal 2002. Sales
under government contracts increased by $ 2.0 million from the same period of
fiscal 2002, while sales of non-automotive commercial products decreased by $1.5
million from the same period of fiscal 2002. Although the Company's sales have
historically been to many customers in a variety of markets, during the first
quarter of fiscal 2003 and fiscal 2002, one automotive customer accounted for
approximately 32% and 40%, respectively, of the Company's net sales.
Cost of sales as a percentage of net sales in the first quarter of fiscal 2003
decreased 1.4 percentage points to 73.8% from 75.2% in the comparable period of
fiscal 2002 due primarily to a higher proportion of government sales with high
margins offset partially by lower automotive margins. There may be additional
Page 12 of 23
margin rate variability in future quarters due to the introduction of new
products and related changes in average prices, changes in manufacturing
processes and volumes, and product life cycles.
Selling, general and administrative expenses as a percentage of net sales
increased in the first quarter of fiscal 2003 versus the comparable period of
fiscal 2002 due primarily to significant spending on legal proceedings
associated with the Company's allegation of patent infringement by a Japanese
company. Actual selling, general and administrative expenses increased $1.8
million from the prior fiscal year period primarily due to the legal costs noted
above of $1.0 million.
Research, development and related expenses as a percentage of net sales for the
first quarter of fiscal 2003 increased over the comparable period of fiscal 2002
due to increased research and development spending with continued focus on
quartz refinement and a redeployment of a portion of the silicon effort
previously associated with OpticNet back to continuing efforts to develop a
silicon gyro and accelerometer. Actual research, development and related
expenses increased $0.4 million over the prior fiscal year period. Interest
expense as a percentage of sales decreased slightly from the same period of the
prior fiscal year. The Company's fixed interest rate debt decreased from the
same period of the prior fiscal year due to a principal payment on long-term
debt in the middle of the first quarter of fiscal 2003. Short term borrowings
are at rates slightly below fixed rates.
Other net income as a percentage of sales increased over the same period of the
prior fiscal year due to the settlement of litigation with the U.S. Government
regarding the H70 contract, see Note 7 to the condensed consolidated financial
statements. This settlement resulted in a net favorable settlement of $5.4
million, recognized in other income in the current quarter.
Liquidity and Capital Resources
During the first quarter of fiscal 2003, total cash provided by operations was
$1.0 million. Cash provided by operations included the positive impact of
non-cash charges from depreciation and amortization of $2.0 million and $0.6
million, respectively. In addition, positive impacts to cash resulted from the
net income of $3.0 million, decreases in inventories, assets held for sale, and
prepaid income taxes of $0.6 million, $1.9 million and $1.5 million,
respectively, as well as an increase in income tax payable of $0.2 million and
customer advances of $0.1 million. These items were offset by increases in
accounts receivable, other receivable and other current assets of $1.7 million,
$6.0 million and $0.5 million, respectively, and decreases in accrued
liabilities and other liabilities of $0.7 million and $0.3 million,
respectively.
Cash used by investing activities included equipment purchases of $1.4 million
primarily to expand production capacity and an increase in other assets of $1.0
million.
Cash used by financing activities included debt payments of $12.9 million, which
consisted of $7.0 million in principal paid on senior notes payable, as well as
$5.9 million in payments on the Company's line of credit. Other cash used by
financing activities included cash purchases of the Company's stock for $0.3
million and dividend payments of $0.1 million. These items were partially offset
by proceeds from borrowings on the Company's line of credit of $13.1 million and
proceeds from the issuance of common stock of $0.1 million.
While the Company believes that its available credit line and cash derived from
operations will be sufficient to meet the Company's capital requirements for the
next twelve months, the Company may need to raise additional funds through
public or private financing or other arrangements. Revenue and profitability may
be negatively affected until there is clear evidence of an upswing in the
industrial economy. There can be no assurance that the Company will not require
additional funding, or that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. Any additional equity
financing may be dilutive to the stockholders, and debt financing, if available,
may involve restrictive covenants.
The Company had no material capital commitments at December 28, 2002.
Page 13 of 23
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. See Note 1
the the condensed consolidated financial statements for product warranty
disclosure.
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 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.
Page 14 of 23
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 Financial Accounting Standards ("FAS") No. 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.
Environmental Matters
The Company reserves for known environmental claims, of which there are none in
the quarter ended December 28, 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.
Page 15 of 23
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 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have been no material changes in the reported
market risks faced by the Company since those discussed in the Company's Forms
10-K and 10-K/A for the fiscal year ended September 28, 2002 under the heading
corresponding to that set forth above. The Company's exposure to market risk is
limited to interest income sensitivity, which 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.
Page 16 of 23
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
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
Page 17 of 23
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 vi
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 vi
99.5 CEO Certification Pursuant to 18 U.S.C. as adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002
Page 18 of 23
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.
(vi) Incorporated by reference. Previously filed as an exhibit to the
Form 10-K (File No. 000-22799) as filed on December 23, 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) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 28, 2002.
Page 19 of 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on February 10, 2003.
BEI Technologies, Inc.
By: /s/ Robert R. Corr
------------------------------------
Robert R. Corr
Treasurer, Controller and Secretary
(Chief Accounting Officer)
Page 20 of 23
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Charles Crocker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BEI Technologies,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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 February 10, 2003
--------------------
/s/ Charles Crocker
--------------------
Charles Crocker
Chief Executive Officer and Chairman of the Board of Directors
Page 21 of 23
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, John LaBoskey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BEI Technologies,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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 February 10, 2003
--------------------
/s/ John LaBoskey
--------------------
John LaBoskey
Senior Vice President and Chief Financial Officer
Page 22 of 23
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
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
Page 23 of 23