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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 October 3, 1998 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
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Post Street, Suite 2500
San Francisco, California 94104
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(Address of principal executive offices) (Zip code)
(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 November 27, 1998 was $72,983,150(A). As
of November 27, 1998, 7,396,556 shares of Registrant's Common Stock were
outstanding.
(A) Based upon the closing sale price of the Common Stock on November 27, 1998
as reported on the NASDAQ National Market System. Excludes 1,557,904 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on November 27, 1998.
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 1999 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
PART I
Item 1. Business..............................................
Item 2. Properties...........................................
Item 3. Legal Proceedings....................................
Item 4. Submission of Matters to a Vote of Security Holders..
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..........................
Item 6. Selected Financial Data..............................
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........
Item 8. Financial Statements and Supplementary Data..........
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure...............
PART III
Item 10. Directors and Executive Officers
of the Registrant....................................
Item 11. Executive Compensation...............................
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................
Item 13. Certain Relationships and Related Transactions.......
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..............................
Signatures .....................................................
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in 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 tax-free distribution of all of the outstanding common stock of
Technologies to the holders of record of BEI Electronics, Inc. (now named BEI
Medical Systems Company, Inc.) ("Electronics") common stock on September 24,
1997, on a basis of one share of Technologies common stock for every one share
of Electronics common stock outstanding on that date (the "Distribution".) For
further information including copies of the agreements governing ongoing
relationships between Technologies and Electronics, see the Form 10.
The principal business and continuing operations of Technologies are carried
out by its 100% owned subsidiary, BEI Sensors & Systems Company, Inc. ("Sensors
& Systems") which designs, manufactures and sells electronic devices that
provide vital sensory input for the control systems of advanced machinery and
automation systems. These sensors, most of which are concerned with physical
motion, provide information that is essential to logical, safe and efficient
operation of sophisticated machinery. Technologies' discontinued operations
consist of the operations of its wholly owned subsidiary, Defense Systems
Company ("Defense Systems").
The Company's long-term strategy is to provide, on a global basis, selected
advanced intelligent sensors based on proprietary technology. 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, Sensors & Systems' goal is to maintain, develop and
acquire a diverse offering of advanced sensor products, and manufacture and sell
these with certain complimentary products. Finally, the Company will target
proprietary, high margin niche markets for subsystems and end products in which
its traditional sensors, micromachined sensors and complementary products play
an enabling role. The Company's near term initiatives include: (a) broad
commercialization of the "yaw" quartz rate sensor for the automotive industry
(as described below); (b) development and commercialization of other internally
developed technologies that have broad applications and that management believes
to be promising; and (c) expansion of the product line through acquisitions of
complementary technologies.
A key feature of the Company's strategy is to be widely recognized as the
most capable source for the sensor categories it has selected. Its traditional
emphasis is on highly engineered motion sensing components and assemblies. The
Company believes it differentiates itself by offering (a) appropriate technology
to solve a customer problem (including innovative proprietary technology); (b)
quality service; and (c) engineering assistance in recommending and prescribing
technical solutions for its customers' applications. Sensors' products are not
sold as commodities. Its strategy is to provide technical advice 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) 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."
(2) After a power outage, an elevator system needs to know exactly where
each car is before permitting motion to resume. (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, distance, or exact location.
(3) An antenna on a moving ship needs to be actively stabilized so that the
antenna will continuously point at a satellite or another ship's pencil beam
laser signal. For such an application the Company might provide its proprietary
GyroChip(R) quartz rate sensor. It might also provide motor-encoders and
actuators to drive the compensating action of such a system.
(4) Some luxury 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 wheels,
while another of the Company's sensors instantly measures and reports the
presence of "yaw" forces which--if not corrected--could cause the vehicle to
spin out or "fishtail". The automation system in this case relies on sensors to
compare the driver's indicated directions and the actual result. The system can
then take corrective action automatically. Here the Company provides special
GyroChip quartz sensors as well as encoder and potentiometer combinations.
(5) Advanced engine control systems in tractors, trucks, and materials
handling and construction equipment need to know throttle position data in order
to assure efficient and clean combustion and safe and reliable gear changes and
other automated functions. The Company's potentiometers provide the necessary
throttle position data.
(6) Semiconductor production equipment requires extremely fast yet accurate
control of start-move-stop action on x-y positioners and tools. The Company's
magnetic actuators provide the energizing force for such tasks and its linear
encoders can measure travel and location.
(7) Process automation systems and various medical systems such as those
for cryosurgery and respiration therapy require compact, high reliability
pressure measurement and fast acting valves, which are accommodated by the
Company's silicon pressure sensors and/or magnetic actuators.
Customers and Markets
The foregoing examples illustrate a few of the thousands of machine control
situations for which the products of the Company are used. Customers who buy the
Company's products are makers and users of many different kinds of machinery and
systems used in diverse markets and industries. Important market categories
include factory automation, process automation, transportation (including cars,
trucks, mass transit, construction and farm equipment), health care and
scientific equipment, and military, space and telecommunications applications.
The Company considers its large number of customers and the vast scope of
existing and potential applications for its products to be a source of the
Company's existing business strength and an opportunity for substantial 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 Sensors &
Systems' direct sales force to more than 8,200 different commercial customers,
principally in the United States. These customers included both end users and
original equipment manufacturers. The value of individual orders from commercial
customers--which account for more than two thirds of total sales--is typically
less than $100,000.
Sales from continuing operations to the U.S. Government (or prime
contractors who manage government funded projects) represented approximately 22%
of the Company's sales in fiscal 1997, 27% in fiscal 1996 and 32% in fiscal
1995. No commercial customer accounted for more than 10% of sales in fiscal year
1997, 1996 or 1995. The Company sold approximately 12% of its products in
international markets. The Company has initiated actions which it believes will
increase its penetration of international markets in fiscal year 1997.
The Company also seeks to use its proprietary sensor capabilities to create
value-added subsystems or products. The goal is to make such high margin
products, enabled by the Company's proprietary technology, a growing part of the
Company's business. For example, the Company's success in providing components
for pointing and stabilizing telecommunications antennae has led to it
exploring the market for a proprietary stabilized platform for optical systems
that the Company may offer as a product.
Products and Proprietary Systems
The Company's main product groups may be categorized as follows:
1. Traditional sensors and complementary products,
2. Micromachined sensors, and
3. Engineered Subsystems (such as inertial measurement units, electronic
servo control systems, cryocoolers, scanner assemblies and trackballs)
A more detailed description of the products and systems designed,
manufactured and sold by the Company follows below:
Traditional Sensors and Complementary Products:
Shaft Encoders. 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. Sensors & Systems
offers a wide array of 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 which employ shaft encoders include
servo motors and servo drive electronic control systems.
Brushless DC Motors. Brushless DC Motors give high performance and
efficiency in compact, lightweight packages and ease of interface with
microprocessors. The motors, which feature high energy magnets, are
characterized by long life and low acoustic and electrical noise. They are well
suited to high speed, high reliability applications, such as in respiration
therapy equipment where the risk of dust from a brush motor could be troublesome
or where electrical noise could disrupt computers or computer-controlled
equipment.
Precision Potentiometers. Similar in basic function to encoders,
potentiometers measure motion by analog (not digital) changes in electrical
potential. These changes may sometimes be subsequently translated into digital
code. Potentiometers are used as economical motion or position-sensing devices
for throttle, steering, suspension, and seat and mirror position controls in
automobiles and in some heavy equipment, such as earth movers, and construction
and farm machinery. They are also used as position sensors in such applications
as actuators on molding presses, saw mills and numerous other types of
industrial equipment and in oil well logging calipers. Incorporating Sensors &
Systems' potentiometer technology with its proprietary shaft encoder technology
has resulted in a highly engineered steering wheel position sensor used for
intelligent stability control systems for automobiles and potentially for other
vehicles in the future.
Magnetic Actuators. Magnetic actuators are used in place of cams or
solenoids to achieve precise control of short stroke linear or limited rotary
motion. Actuators using very high energy magnets are also produced for
specialized applications requiring intense force, torque or acceleration
relative to the size of the device.
Accelerometers. Accelerometers and rate sensors using traditional
mechanical technology (e.g., a moving mass suspended by a pivot and jewel
mechanism) rely on the movement of complex machined metallic parts to measure
motion.
Linear Encoders. Linear encoders give very high accuracy, scale-based
optical measurement of linear travel over distances ranging from a few
millimeters to tens of meters. The Company has recently commenced exclusive
marketing in North America of linear encoders developed by the well known German
optical company, Carl Zeiss.
Micromachined Sensors:
Rate Sensors and Accelerometers. These products provide precise and
reliable measurement of minute linear and angular motion for control, guidance
and instrumentation. In general, these devices operate without need for direct
linkage to the driving mechanisms. Such measurements are required for heading
and attitude reference instruments in aircraft and missiles, stabilization of
satellites, pointing and control of antennae on aircraft, ships and other moving
platforms, navigation of oil well drill bit assemblies, and for intelligent
vehicle stability and navigation systems in the automotive industry. In
contrast, Sensors & Systems' miniature, solid state accelerometers and rate
sensors are based on innovative and proprietary chemical micro-machining of a
single element from crystalline quartz using photolithographic methods similar
to those used in the manufacture of silicon semiconductor chips. The advantages
of quartz rate sensors and accelerometers over traditional mechanical units are
increased reliability, reduced size, and lower production and life cycle costs.
BEI GyroChip(R) Sensors. The Company's family of GyroChip quartz rate
sensors, developed primarily to accommodate the need for reliable and high
precision yet economical gyros, have found use in such varied requirements as
navigation of autonomous (robotic) guided vehicles, ocean buoy and sea-state
monitoring, and stabilization of pointing systems for antennas and optical
systems. The most frequent use of GyroChip units is as yaw sensors in stability
control or spin-out prevention systems for automobiles. GyroChip sensors provide
performance suitable for commercial applications while offering ruggedness,
longer life and smaller size at a lower cost than military versions of quartz
rates sensors.
Pressure Sensors. Pressure sensors measure absolute or differential
pressure from vacuum to 10,000 psi. Various sensing technologies are used
including silicon micromachined structures used for commercial and industrial
markets. The Company provides standard products as well as application specific
solutions to pressure measurement requirements.
Micro-Electromechanical Structures (MEMS). MEMS are a new category of ultra
small devices, usually micro-machined from crystalline materials such as quartz
or silicon. The GyroChip sensors and other quartz devices discussed above are
examples of MEMS currently being sold by Electronics. Management expects the
Company's MEMS research and development programs to lead to new devices for
sensing motion, pressure and other physical parameters.
Engineered Subsystems:
Inertial Measurement Units (IMU's). 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 assure a back-up in case the GPS
signal is interrupted. Technologies' quartz rate sensors have made new
breakthroughs in size, reliability and cost for the proprietary IMU subsystems
it sells.
Cryocoolers. The Company's proprietary, compact and lightweight stirling
cycle refrigerators are designed for cooling advanced electronic vision sensors
to liquid nitrogen temperatures. These cryocoolers are utilized in infrared
cameras used in surveillance, night vision pilotage systems and superconducting
applications.
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 assure that the scanner delivers jitter-free,
well-resolved images.
Servo Systems. Servo Systems are closed-loop electronic systems that
control the position or velocity of rotating shafts or other moving parts by
noting a desired rate of movement or position (usually input from computers or
keyboards), monitoring the actual position or 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 has been achieved.
Trackballs. BEI's trackballs have flexible and rugged designs that allow
them to be an integral part of a keyboard as well as stand-alone cursor
positioners. They are used in ultra-sound scanning machines, factory automation
and defense applications. The flexibility is provided by the interface
electronics design that accommodates various standard and customized interfaces
and rugged performance is provided by a proprietary ball sealing technique that
allows operation in harsh environments.
Backlog
Backlog of the Company's continuing business, Sensors & Systems, at
September 27, 1997 and at September 28, 1996, was $46,696,000 and $39,832,000,
respectively.
The Company's commercial operations typically ship standard products within
30 to 90 days after receipt of a purchase authorization. Management of the
Company believes that its competitive position depends in part on minimizing the
time that elapses between receipt and shipment of an order. Products that
require special analysis, design or testing, such as those produced for
customers in the aviation, defense or space technology markets, are generally
shipped from six to eighteen months after receipt of the purchase authorization.
Backlog includes aggregate contract revenues remaining to be earned by the
Company principally over the next twelve months of scheduled deliveries under
existing contracts. Some contracts undertaken by Sensors & Systems extend beyond
one year. Accordingly, portions of certain contracts are carried forward from
one year to the next as part of backlog. Approximately 88% of the backlog as of
September 27, 1997 is scheduled for shipment during fiscal 1998; all of the
remainder of the backlog is scheduled for shipment during fiscal 1999.
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 for convenience. 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
Allied-Signal, Boeing, Danaher Corp., Honeywell, Litton and Panasonic. There are
smaller or product-specific companies, some of whose products compete include
Axsys Technologies, CTS Corp., Dynamics Research Corp., Heidenhain, Kollmorgen,
Kulite Semiconductor, Pacific Scientific, and Servo Magnetics 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 catalog
products and products designed to meet the specialized requirements of a
particular customer. The Company's products, whether standard or "custom", are
normally manufactured in response to customers' orders and are in general not
held as finished goods. Most are assembled from parts or subassemblies that are
proprietary to the Company.
A special code pattern generator designed by and proprietary to the Company
is used to produce shaft encoder parts. Special quartz micromachining equipment
is used for the production of QRS units. Special high throughput automated or
semi-automated equipment is used for the production of QRS assemblies, brushless
motors and potentiometers. Some parts are fabricated under clean room
conditions.
The Company's production of automotive yaw sensors requires scaling-up its
normal production to the quantities required by the automobile market. The
Company has initiated production engineering measures to support the
fabrication, assembly, and testing of new sensors in the appropriate quantities.
Research and Development
The major research and development focus has been to improve performance
and yield of existing products, with special emphasis on the quartz sensors used
in high accuracy IMU's and high volume yaw rate sensors for the automotive
industry. Substantial effort has also been devoted to the development of
manufacturing methods necessary to deliver competitive prices and quality in the
automotive market. Other development has focused on expanding applications of
existing sensors and utilizing the Company's various complimentary products to
create the capability to electronically stabilize platforms.
The Company has also produced prototypes of future products incorporating
silicon micro-electromechanical structures (MEMS) geared towards next generation
requirements for automotive, medical, industrial and aerospace markets.
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 $4.9 million, $3.6 million and $4.0 million in
fiscal 1997, 1996, and 1995, respectively. In addition, customer funded research
and development expenditures charged to cost of sales were $1.1 million, $3.0
million and $6.3 million, respectively, for the same periods. Development of the
quartz rate sensor comprised most of prior years' customer funded research and
development expenditures. As these sensors have gone from development to
production, there has been a corresponding decrease in customer funded research
and development expenditures.
Employees
As of September 27, 1997, the units comprising Technologies had 977
employees, including 122 in research, development and engineering, 77 in
administration, 72 in marketing and sales, and 706 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
own 79 U.S. patents and 45 foreign patents with expiration dates ranging from
December 1997 to October 2014. Because many of these patents relate to
technology that is important to certain of the Company's products, the Company
considers these patents to be significant to its business.
While management believes that the Company's intellectual property rights
are important, management also believes that because of the rapid pace of
technological change in the industries in which the Company competes, factors
such as innovative skills, technical expertise, the ability to adapt quickly to
technological change and evolving customer requirements, product support and
customer relations are of equal competitive significance.
Environmental Matters
The Company uses certain controlled or hazardous materials in its research
and manufacturing operations and, as a result, is subject to federal, state and
local regulations governing the storage, use and disposal of such materials.
Management of the Company believes that it is currently in compliance with such
laws and regulations.
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--Contracting with
the U.S. Government" below.
Facility Security Clearance
The Company has several facility security clearances from the U.S.
Government. A portion of the Company's net sales in fiscal 1997, 1996 and 1995
was derived from work for which this clearance was required. Continuation of
this clearance requires that the Company remain free from foreign ownership,
control or influence (FOCI). In addition, the Company is required to comply with
the regulations promulgated by the Defense Investigative Service (DIS), which
relate, in large part, to the Company's control of classified documents and
other information. Management does not believe that there is presently any
substantial risk of FOCI or DIS noncompliance that would cause any of its
security clearances to be revoked.
Regulation of Foreign Sales
Certain of Sensors and Systems' 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 from continuing operations to foreign
customers constituted approximately 11.8%, 11.3% and 11.0% of revenues for
fiscal 1997, 1996 and 1995, 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
Competition
Competitors for various products offered by Technologies are noted above
under "Business--Competition". In addition, the Company also may compete with
manufacturers of competing technologies, such as resolvers, inductosyns, laser
and fiber optic gyros and magnetic encoders. Many of the Company's existing
competitors in each market, and also a number of potential entrants into these
markets, have significantly greater financial resources and manufacturing
capabilities, are more established, have larger marketing and sales
organizations and larger technical staffs. 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.
Limited Manufacturing Experience; Scale-Up Risk; Product Recall Risk
Technologies is in the process of scaling up production of its automotive
yaw sensors for the quantities required by the automobile market. The Company
has relatively limited experience in large-scale manufacturing. The Company
currently manufactures moderate quantities of its automotive yaw sensor in the
Concord, California facility and its steering sensor in the Tustin,
California facility. Manufacturers sometimes encounter difficulties in
scaling up production of new products, including problems involving
production yields, quality control and assurance, component supply and
shortages of qualified personnel. If such difficulties were encountered
by the Company in manufacturing scale-up, they could have a material adverse
effect on its business, financial condition and results of operations. 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.
Research and Development
The Company depends in part on its research and development initiatives to
provide new products and product improvements which will maintain the Company's
favorable reputation in its various markets. There can be no assurance that the
outcome of its research and development activity will yield the desired results.
Manufacturing Processes and Equipment
The Company manufactures certain products such as quartz rate sensors and
some shaft encoders using highly complex proprietary processes and equipment.
The possibility exists that equipment could be damaged or that process
disciplines and controls could be temporarily lost. Such events could disrupt
production, which could have a material adverse effect on the Company's business
and results of operations.
Dependence Upon Key Personnel
The Company is dependent upon a number 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 will also depend
on its ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, many of whom are often subject to offers from competing employers.
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 required. The Company does not currently maintain key person
insurance on any employee. See "Business--Employees" and "Business--Directors
and Executive Officers of the Company."
Dependence Upon Key Suppliers
Although the majority of the components used in Company products are
available from multiple sources, several components are built or provided to
Technologies' specifications. Such components include quartz, supplied by Sawyer
Research Products, Inc.; scanner motors, supplied by Litton Industries, Inc.;
three types of ASIC's, supplied by National Semiconductor Corporation, Honeywell
Inc. and Semtech Corp.; and two types of LED's, supplied by Optek Technology,
Inc. and Opto Diode Corp. While the Company currently relies on single suppliers
for these components, in each instance, the Company is aware of alternative
suppliers and believes the components could be manufactured by these alternative
suppliers with minimal supply reduction should the need arise to change vendors.
To date, the Company has not experienced any significant interruptions in the
supply of these components, but 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.
Contracting with the U.S. Government
Approximately 22%, 27% and 32% of the net sales of units comprising the
continuing operations of Technologies in fiscal 1997, 1996 and 1995,
respectively, were derived from contracts with the U.S. Government or under
subcontract to other prime contractors to the Government. Because a significant
portion of Technologies' business is derived from contracts with the Department
of Defense or other agencies of the Government, the Company's business is
sensitive to changes in Government spending policies, which 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 Government procurement
policies or reductions in Government expenditures for products furnished
by the Company.
Under applicable regulations, various audit agencies of the Government
conduct regular audits of contractors' compliance with a variety of Government
regulations. The Government also has the right to review retroactively the cost
records under most Government contracts. Contract prices may be adjusted in the
event the 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 Government are competitive fixed price or negotiated fixed price contracts,
although cost-plus-fixed-fee contracts were approximately 3% of the Company's
net sales from continuing operations in fiscal 1997. For fixed price contracts,
the Company bears the risk of cost overruns and derives the benefits from cost
savings. As a result, greater risks are involved under fixed price contracts
than under cost-plus contracts because failure to anticipate technical problems,
estimate costs accurately or control costs during contract performance may
reduce or eliminate the contemplated profit or may result in a loss.
All Government contracts contain termination clauses that allow the
contract to be terminated either for contractor default or for the convenience
of the 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 Sensors
& Systems' contracts by the 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.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their ages as of
December 1, 1998 are as follows:
Name Age Position
- ----------------------------------- ------ ----------------------------------
Charles Crocker................. 59 President, Chief Executive Officer
and Chairman of the Board of
Directors
Gary D. Wrench.................. 65 Senior Vice President, Chief
Financial Officer and Director
Dr. Asad Madni.................. 51 Vice President and Director
Richard M. Brooks(1)(2)......... 70 Director
George S. Brown(2).............. 77 Director
C. Joseph Giroir, Jr.(1)(2)..... 59 Director
Dr. William G. Howard, Jr.(1)... 57 Director
Dr. Robert Mehrabian(1)......... 57 Director
Dr. Lawrence A. Wan............. 60 Vice President, Chief Technical
Officer
Robert R. Corr.................. 52 Secretary, Treasurer & Controller
- ---------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Directors
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 has served as
Chairman of the Board of Directors of Electronics since October 1974 and
Chairman of the Board of Directors of Technologies since October 1997.
Mr. Crocker assumed the positions of President 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 Company
International, Pope & Talbot, Inc. and KeraVision. Mr. Crocker holds a
B.S. from Stanford University and a M.B.A. from the University of
California, Berkeley.
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. He currently holds these same positions with Technologies.
He served as a Director of Electronics since February 1986, and continues
to serve as a director of both Electronics (now named BEI Medical Systems
Company, Inc.) and Technologies. 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 Sensors & Systems. Other experience
includes twenty years with Hughes Aircraft Company. Mr. Wrench holds a
B.A. from Pomona College and a M.B.A. from the University of California,
Los Angeles.
Dr. Madni 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 Sensors & Systems in October 1993, which was formed by the
consolidation of BEI Motion Systems Company and the BEI Sensors and
Controls Group, of which Dr. Madni had been President since October 1992.
Prior to joining BEI in 1992, he served for 17 years in various executive
and technical management 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 Bachelor of
Science and Master of Science 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 Program for Senior Executives
from the Massachusetts Institute of Technology, Sloan School of
Management. He is a fellow of the Institute of Electrical and Electronics
Engineers.
Mr. Brooks is currently an independent financial consultant. He 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. From 1987 to 1990 he served as President of SFA
Management Corporation, the managing general partner of St. Francis
Associates, an investment partnership. He currently serves as a director
of Longs Drug Store Corporation, Granite Construction, Incorporated and
the Western Farm Credit Bank, a private company. Mr. Brooks holds a B.S.
from Yale University and a 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. 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 Secretary of
Electronics from 1974 to early 1995. He is currently of counsel of the
law firm of Giroir, Gregory, Holmes & Hoover, PLC. Mr. Giroir is also
President of Arkansas International Development Corporation II, LLC. Mr.
Giroir holds a B.A. and an L.L.B. from the University of Arkansas and an
L.L.M. from Georgetown University.
Dr. Howard began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from 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 Chairman of RAMTRON International
Corp. and as a director of Credence Systems, Inc., VLSI Technologies,
Inc., and Xilinx, Inc. Dr. Howard holds a B.E.E. and a M.S. from Cornell
University and a Ph.D. in electrical engineering and computer sciences
from the University of California, Berkeley.
Dr. Mehrabian 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 June 1997 until his
resignation as a result of the Distribution. He is Executive Vice
President and Executive in charge of the Aeronautics, Electronic and
Industrial segments of Allegheny Teledyne, Inc. From 1990 through June
1997, he was president of Carnegie Mellon University. He is an
internationally recognized materials scientist, with numerous awards
including membership in the National Academy of Engineering. He serves on
the boards of directors of Allegheny Teledyne, Inc., Mellon Bank
Corporation, Mellon Bank, N.A., and PPG Industries. Dr. Mehrabian holds
B.S. and Sc.D. degrees from Massachusetts Institute of Technology (MIT).
Staggered Board of Directors
The Company has a staggered Board of Directors, which may have the
effect of deterring hostile takeovers or delaying changes in control of
management of the Company. For purposes of determining their term of
office, directors are divided into three classes, with the term of office
of the Class II directors to expire at the 1999 annual meeting of
stockholders, and the term of office of the Class III directors to expire
at the 2000 annual meeting of stockholders and the term of office of the
Class I directors to expire at the 2001 annual meeting of stockholders.
Class II consists of Mr. Giroir, Dr. Madni and Mr. Wrench; Class III
consists of Mr. Brooks, Dr. Howard and Dr. Mehrabian and Class I consists
of Mr. Brown and Mr. Crocker. Directors elected to succeed those
directors whose terms expire will be elected to a three year term of
office. All directors hold office until the next annual meeting 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 Messrs. Crocker and Wrench 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:
Dr. Wan is Vice President of Engineering for Sensors & Systems and is
President of Sensors & Systems subsidiary, SiTek Inc. Dr. Wan served as
Vice President, Corporate Technology for Electronics from April 1991 until
the Distribution in September 1997. Dr. Wan resigned from his current
position with Electronics immediately prior to the Distribution and is now
Vice President, and Chief Technical Officer for Technologies and a
director of Electronics (now named BEI Medical Systems Company, Inc.).
From 1984 until 1990, Dr. Wan served as Vice President, Engineering for
Systron Donner Corporation. Between 1979 and 1984, he held various
technical and general management positions with Systron Donner
Corporation. From 1968 to 1979, he served as Chief Executive Officer for
Sycom, Inc. a commercial electronics company which he founded. From 1964
to 1968, he worked for Hughes Aircraft Company, where he headed the Radar
Systems Section of the Hughes Ground Systems Group. In 1962, Dr. Wan and
two other professors established an Engineering School at University of
California, Santa Barbara, where he also taught Engineering. Dr. Wan
holds B.S., M.S. and Ph.D. degrees in Engineering and Applied Sciences
from Yale University.
Mr. Corr became Secretary, Treasurer and Controller of Technologies in
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 was
named Secretary of Electronics in February 1995 and served as Controller
from November 1989 and as Treasurer from November 1987 until the
Distribution. From 1978 to 1987, he was employed by AMPEX Corporation,
an electronics and magnetic media company, in various financial positions.
From 1975 to 1978, he was an auditor with Arthur Andersen LLP. Mr. Corr
received a B.B.A. from Loyola University and is a Certified Public
Accountant in the State of California.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in leased office space in
San Francisco, California, under a lease which expires in 1998. The Company owns
or operates ten other facilities that relate to the business and maintains
office space in various locations throughout the United States for sales and
technical support. None of the owned principal properties is subject to any
encumbrance material to the consolidated operations of the Company. In addition
to its executive offices, the Company's principal facilities are as follows:
Location Description of Facility
- --------------------------- ----------------------------------------------
Maumelle, Arkansas Owned 50,000 square foot manufacturing,
engineering, administrative and research and
development facility.
Concord, California Owned 101,000 square foot manufacturing,
engineering and administrative facilities.
Sylmar, California Subleased 83,000 square foot manufacturing,
engineering and administrative facility.
Tustin, California Leased 80,000 square foot manufacturing,
engineering and administrative facility.
San Marcos, California Leased 35,000 square foot manufacturing,
engineering and administrative facilities.
Goleta, California Owned 22,000 square foot manufacturing,
engineering and administrative facility.
Campbell, California Subleased 5,000 square foot manufacturing,
administrative and research and development
facility.
Hayward, California Leased 2,330 square foot engineering facility.
engineering and administrative facilities.
Euless, Texas Owned 72,000 square foot manufacturing,
engineering and administrative facility and
subleased 2,000 square foot warehouse, used
primarily for record storage.
Strasbourg, France Leased and subleased 20,000 square foot
manufacturing, engineering and administrative
facility.
ITEM 3. LEGAL PROCEEDINGS
The Company has pending various legal actions arising in the normal course of
business. Management believes that none of these legal actions, individually or
in the aggregate, will have a material impact on the Company's business,
financial condition, or results of operations.
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
On September 26, 1997, Technologies issued and sold 7,114,803 shares of
common stock to Electronics in exchange for those assets of Electronics
which were not related to Electronics' medical device business, and on
September 27, 1997, pursuant to Division of Corporation Finance Staff
Legal Bulletin No. 4 dated September 16, 1997, all of the outstanding
common stock of Technologies was distributed by Electronics to its
stockholders, on the basis of one share of Technologies common stock
received for each share of Electronics common stock held on that date.
For further discussion of this transaction see the Form 10.
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. Such quotations do not reflect
retail mark-ups, markdowns or commissions.
1998 Fiscal year Cash Dividend
(ended 10/03/98) High Low Declared
- --------------------------------------------------------------------------------
Fourth Quarter $14.88 $6.00 $0.02
Third Quarter $19.63 $14.25 $0.02
Second Quarter $18.31 $11.88 $0.02
First Quarter $13.75 $11.63 $0.02
As of November 27, 1998, there were approximately 1,200 holders of record
of the Company's common stock. The Board of Directors has declared and
the Company has paid three cash dividends of $0.02 per share of common
stock in fiscal 1998. The Board of directors has declared a dividend of
$.02 per share of common stock payable to stockholders of record at
December 4, 1998, on December 22, 1998. 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 5 to the Consolidated
Financial Statements). The covenants primarily concern certain operating
ratios and minimum balances of tangible net worth.
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.
- ---------------------------------------------------------------------------------------------------------
Year Ended
-----------------------------------------------------------------------
October 3, September 27, September 28, September 30, October 1,
1998 1997 1996 1995 1994
- -------------------------------- ------------ ------------- ------------- ------------- ------------
(dollars in thousands except per share amounts)
Statement of Income Data:
Net sales....................... $124,264 $101,539 $96,746 $90,475 $82,361
Net income(loss) from
continuing operations....... 2,515 2,997 2,873 (964) 321
Dilute earnings(loss) from
continuing operations....... 0.35 0.42 0.40 (0.14) 0.05
Weighted average shares used in
computing diluted earnings
per share................... 7,274 7,067 6,978 6,759 6,807
Balance Sheet Data:
Working capital................. $36,124 $26,967 $27,775 $29,774 $39,179
Total assets.................... 109,515 94,855 92,171 92,418 97,852
Long-term debt (excluding
current portion)............ 37,157 27,508 24,137 29,765 29,860
Stockholders' equity............ 40,194 36,617 33,246 28,863 30,928
- ---------------------------------------------------------------------------------------------------------
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 "Business."
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. The table and the accompanying
analysis covers periods in which the businesses now carried on by
Technologies were operated by Electronics. However, the table and
analysis have been prepared as if the Company and its businesses were a
separate entity for all periods discussed.
Year Ended
---------------------------------------
October 3, September 27, September 28,
1998 1997 1996
------------ ------------ ------------
Net sales........................... 100.0% 100.0% 100.0%
Cost of sales....................... 68.9% 64.3% 62.5%
------------ ------------ ------------
Gross profit........................ 31.1% 35.7% 37.5%
Operating expenses:
Selling, general and
administrative expenses......... 20.5% 24.6% 27.0%
Research, development and
related expenses................ 5.1% 4.8% 3.7%
------------ ------------ ------------
Income from operations.............. 5.5% 6.3% 6.8%
Other income........................ 0.4% 0.3% 0.2%
Interest expense.................... -2.4% -1.9% -2.4%
------------ ------------ ------------
Income (loss) before income taxes... 3.5% 4.7% 4.5%
Income taxes (benefit).............. 1.5% 1.9% 1.5%
------------ ------------ ------------
Income (loss) from continuing
operations........................ 2.0% 2.9% 3.0%
Income (loss) from discontinued
operations, net of income
taxes............................. 0.1% 1.6% 1.7%
------------ ------------ ------------
Net income (loss)................... 2.1% 4.5% 4.7%
============ ============ ============
Continuing Operations
Net Sales
In fiscal 1998, net sales from continuing operations increased 22.4%
to $124.3 million from $101.5 million in fiscal 1997, reflecting increases
in sales of automotive quartz rate sensors ("AQRS"), and traditional
motion control products, primarily potentiometers and actuators.
In fiscal 1997, net sales from continuing operations increased 5.0% to
$101.5 million from $96.7 million in fiscal 1996. This increase reflects
the continued growth in sales to commercial customers, including those for
industrial, automotive and medical markets offset by decreased sales for
government programs.
The Company's sales to international customers were approximately
14.0%, 11.8%, and 11.3% of the Company's net sales from continuing
operations for fiscal 1998, 1997 and 1996, respectively. A significant
portion of shipments of automotive quartz rate sensors for Continental
Teves, which began volume deliveries in the fourth quarter of fiscal 1998,
are international shipments and are expected to have a significant impact
on net sales in fiscal 1999.
Cost of Sales and Gross Profit
In fiscal 1998, cost of sales as a percentage of net sales increased
4.6 percentage points due primarily to start up costs associated with
increased production needs for AQRS. Based upon projections of future
demand for the AQRS product provided by customers, the Company incurred
significant hiring, training, test production and qualification costs in
the second half of fiscal 1998 associated with increasing the Company's
AQRS manufacturing capacity in the fourth quarter of fiscal 1998. In
addition, the shut down and start up of AQRS production caused by the
General Motors strike and a resultant decrease in deliveries for six weeks
of the fourth quarter 1998 had a negative impact on the quarter.
Fiscal 1997 cost of sales as a percentage of net sales increased 1.8%
compared with fiscal 1996 due primarily to costs associated with the start
up of production for new automotive sensors and cryocoolers, as well as
unfavorable changes in product mix.
Downward pressure on gross profit margins continues for both commercial
and government contracts. Management continues to implement measures
intended to reduce costs and improve average margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net
sales from continuing operations were 20.5%, 24.6%, and 27.0% in fiscal
1998, 1997 and 1996, respectively.
Fiscal 1998 selling, general and administrative expenses increased $0.5
million from $25.0 million in fiscal 1997 to $25.5 million in fiscal 1998
due primarily to spending to support all growing product areas, primarily
AQRS and precision potentiometers.
Fiscal 1997 selling, general and administrative expenses decreased $1.2
million from $26.2 million in fiscal 1996 to $25.0 million due primarily
to increased efforts to control corporate costs.
Research, Development and Related Expenses
The Company's internally funded research, development and related
expenses as a percentage of net sales from continuing operations were
5.1%, 4.8% and 3.7% for fiscal 1998, 1997 and 1996, respectively.
Research and development expenses in fiscal 1998 increased 31.7%
reflecting primarily additional funding for micro-electromechanical
systems (MEMS) product development for a variety of markets.
Research and development expenses increased 34.9% in fiscal 1997 from
fiscal 1996 reflecting the Company's continued emphasis on developing new
products for commercial markets. Product programs included work on
silicon MEMS, stabilized platforms, and sensors for stability control
systems.
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 funding.
Interest Expense and Other Income
Interest expense was $2.9 million, $1.9 million and $2.4 million in
fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, interest
expense primarily related to the Company's line of credit. In fiscal 1997
and 1996, interest expense primarily related to the Senior Note debt
assumed by Technologies from Electronics in the Distribution.
Other income in fiscal 1998, 1997 and 1996 was comprised of royalty
income and interest income earned on highly liquid investments. Other
income as a percentage of sales was approximately 0.4% in fiscal 1998 and
has remained flat since fiscal 1995.
Income Taxes
The Company's effective tax rate was 41.8%, 37.4% and 33.0% for fiscal
1998, 1997 and 1996, respectively. The effective tax rate primarily
reflects the statutory federal tax rate and the weighted average tax rate
of the states in which the Company conducts business. The fiscal 1998
rate increased from the fiscal 1997 tax rate primarily due to an increase
in the Company's state taxes subsequent to its spin-off from Electronics.
The fiscal 1996 tax rate reflects the realization of federal and state
tax credits for research and development.
Deferred Income Taxes
At October 3, 1998, the Company had net current deferred income tax
assets of $4.8 million and net non-current deferred income tax assets of
$1.0 million. Realization of the net deferred tax assets is dependent
upon the Company generating sufficient taxable income in future years to
obtain benefit from the reversal of the underlying temporary differences.
Discontinued Operations
Income for Defense Systems was $0.1 million, $1.6 million and $1.7
million in fiscal 1998, 1997 and 1996, respectively. The fiscal 1998
income reflects the wind-down of rocket operations as a result of
discontinuing these activities. The fiscal 1997 income reflects follow-on
orders for electronics products to support customers' requirements. The
fiscal 1996 income reflects the receipt of a $3.6 million pre-tax
settlement for a prior year Hydra 70 rocket manufacturing contract (see
Note 2 to the Consolidated Financial Statements.)
Liquidity and Capital Resources
In connection with the Distribution in fiscal 1997, the Company assumed
existing indebtedness of Electronics consisting of $22.4 million of Senior
Notes. In order to support its initial funding needs, Sensors & Systems
borrowed $9.0 million from a bank on a short-term line of credit which it
transferred to Electronics prior to the Distribution to repay a portion of
amounts payable to Electronics. Subsequent to the Distribution, early in
fiscal 1998, Technologies established a $25.0 million line of credit with
the same bank under which it borrowed $13.0 million to repay the $9.0
million borrowed by Sensors & Systems and make a scheduled payment on the
Senior Notes. Subsequent to fiscal 1998 year end, on December 16, 1998,
the Company established a new $12.0 million, two-year line of credit with
a bank and terminated the borrowings under the $25.0 million line referred
to above (see Note 5 to the Consolidated Financial Statements).
During fiscal 1998, operations provided $3.1 million in cash, including
cash provided by discontinued operations of $1.1 million. Net income of
$2.7 million plus non-cash charges for depreciation and amortization of
$4.5 million and $1.8 million, respectively, and net increases in accounts
payable, accrued expenses and other liabilities of $3.3 million were
partially offset by increases in trade receivables and deferred tax assets
of $4.4 million and $1.2 million, respectively, and inventory purchases of
$5.2 million.
Investing activities in fiscal 1998 consisted primarily of the purchase
of $6.9 million in capital equipment to support new commercial product
production, primarily production of automotive sensors. An additional
$1.6 million in cash partially funded the acquisition of Ideacod, S.A., a
French sensor manufacturer, which expands the Company's European presence.
Fiscal 1998 financing activities included proceeds of $22.0 million
from long-term debt on the line of credit and proceeds of $0.8 million
from common stock issuances. Offsetting these proceeds were repayments of
$9.0 million on the short-term line of credit and $9.1 million of
scheduled principal payments on long-term debt. Dividend payments used an
additional $0.6 million of cash. Subsequent to fiscal year end 1998, on
November 16, 1998, the Company issued new senior notes, paid off the pre-
existing senior notes and paid down the outstanding borrowings on the
Company's long-term line of credit as they matured (see Note 5 to the
Consolidated Financial Statements).
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.
Year 2000 Compliance: Modification of Management Information Systems
The Company is evaluating the potential impact of what is commonly
referred to as the "Year 2000" issue, concerning the possible inability of
certain information systems to properly recognize and process dates
containing Year 2000 and beyond. If not corrected, these systems could
fail or create erroneous results. The Company has completed an assessment
of its products and, at this time, does not believe its products present
any Year 2000 issues.
The Company's management information systems primarily use software
products purchased from commercial sources without significant
modification or customization. Updates to these products are routinely
installed by the Company to upgrade its systems and correct known faults
in the software. All major systems were reviewed during the fourth
quarter of fiscal 1998 for Year 2000 issues by an outside consultant and
a report was issued to the Board. Where necessary, the requirements for
upgraded hardware and software are in the process of implementation by all
operating units and completion is expected by June 1999. One operating
unit is in the process of converting its existing manufacturing and
financial systems, including new hardware, and expects to be finished in
September 1999. Approximately $100,000 was incurred for the study and no
other significant incremental costs were identified with non-routine
updates that specifically addressed only Year 2000 compliance. Based on
currently available information, management does not believe the Year 2000
matters discussed above related to internal systems or products sold to
customers will have a material adverse impact on the Company's financial
condition or operations; however, it is uncertain to what extent the
Company may be affected by such matters. In addition, there can be no
assurance that the failure to ensure Year 2000 capability by a supplier or
another third party would not have a material adverse effect on the
Company.
Effects of Inflation
Management believes that, for the periods presented, inflation has not
had a material effect on the Company's operations.
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 and changes in the prices of marketable equity
securities held as part of a deferred compensation plan (a "Rabbi" trust).
The Company has approximately $1,700,000 (translated from French
francs at October 3, 1998) permanently invested in the assets of its
acquisition in Strasbourg, France. The potential loss in fair value
resulting from a hypothetical 10% adverse change in the foreign currency
exchange rate amounts to $170,000, 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. Since 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
October 3, September 27,
dollars in thousands except share amounts 1998 1997
- ------------------------------------------------------ ----------- ------------
ASSETS
Current assets
Cash and cash equivalents............................. $3,557 $5,034
Investments........................................... 5,419 5,446
Trade receivables:
Commercial customers, less allowance for
doubtful accounts (1998--$509; 1997--$363)...... 18,201 12,917
United States Government........................... 5,274 4,324
----------- ------------
23,475 17,241
Inventories--Note 3................................... 29,623 22,656
Deferred income taxes--Note 6......................... 4,757 4,579
Other current assets.................................. 1,078 1,039
Current assets of discontinued operations--Note 2..... -- 1,418
----------- ------------
Total current assets.................................. 67,909 57,413
----------- ------------
Property, plant and equipment--Notes 5 and 10
Land.................................................. 4,588 4,093
Structures............................................ 13,290 8,936
Equipment............................................. 50,386 41,611
Leasehold improvements................................ 1,316 1,036
----------- ------------
69,580 55,676
Less allowances for depreciation and amortization..... 38,961 30,315
----------- ------------
30,619 25,361
----------- ------------
Other assets
Tradenames, patents and related assets, less
amortization (1998--$2,700; 1997--$2,521)........... 1,583 1,753
Technology acquired under license agreements,
less amortization (1998--$5,192;
1997--$4,231)....................................... 5,015 5,977
Goodwill, less amortization (1998--$458; 1997--$393).. 1,876 654
Deferred income taxes, non-current.................... 993 --
Non-current assets of discontinued operations--Note 2. -- 1,625
Other................................................. 1,520 2,072
----------- ------------
10,987 12,081
----------- ------------
$109,515 $94,855
=========== ============
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
October 3, September 27,
dollars in thousands except share amounts 1998 1997
- ------------------------------------------------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable................................ $13,014 $6,317
Accrued expenses and other liabilities--Note 4........ 13,125 10,497
Deferred compensation liability....................... 5,419 5,446
Current portion of long-term debt--Note 5............. 227 5,628
Current liabilities of discontinued
operations--Note 2.................................. -- 2,558
----------- ------------
Total current liabilities............................. 31,785 30,446
Long-term debt, less current portion--Note 5.......... 37,157 27,508
Other liabilities..................................... 379 284
Commitments and contingencies--Notes 2, 9, 10 and 11 -- --
Stockholders' equity--Notes 7 and 8
Preferred stock
($.001 par value; authorized 2,000,000 shares;
none issued)..................................... -- --
Common stock
($.001 par value; authorized 20,000,000
shares; issued and outstanding;
1998--7,366,556; 1997--7,114,813).................. 2,132 7
Retained earnings..................................... 40,080 38,003
Accumulated other comprehensive income................ 39 --
----------- ------------
42,251 38,010
Less: Unearned restricted stock--Note 8.............. (2,057) (1,393)
----------- ------------
Total stockholders' equity............................ 40,194 36,617
----------- ------------
$109,515 $94,855
=========== ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Technologies, Inc. and Subsidiaries
Year Ended
- --------------------------------------------------------------------------------
dollars in thousands except share and per October 3, September 27, September 28,
share amounts 1998 1997 1996
- ---------------------------------------- ------------ ------------ ------------
Net sales -- Note 2................. $124,264 $101,539 $96,746
Cost of sales -- Note 2............. 85,562 65,291 60,494
------------ ------------ ------------
Gross profit........................ 38,702 36,248 36,252
------------ ------------ ------------
Selling, general and
administrative expenses......... 25,491 24,959 26,157
Research, development and
related expenses................ 6,410 4,866 3,608
------------ ------------ ------------
31,901 29,825 29,765
------------ ------------ ------------
Income from operations.............. 6,801 6,423 6,487
Other income........................ 445 304 242
Interest expense.................... (2,924) (1,942) (2,444)
------------ ------------ ------------
Income before income taxes... 4,322 4,785 4,285
Income taxes -- Note 6.... 1,807 1,788 1,412
------------ ------------ ------------
Income from continuing
operations........................ 2,515 2,997 2,873
Income from discontinued
operations, net of income
taxes -- Note 2................... 142 1,586 1,698
------------ ------------ ------------
Net income ......................... $2,657 $4,583 $4,571
============ ============ ============
Basic Earnings Per Share -- Note 15
Income from continuing
operations per common share -- Note 7 $0.36 $0.44 $0.43
Income from discontinued
operations per common share -- Note 7 0.02 0.23 0.25
------------ ------------ ------------
Net income per common share -- Note 7 $0.38 $0.67 $0.68
============ ============ ============
Shares used in computing basic earnings
per share 7,012,250 6,816,286 6,737,083
============ ============ ============
Diluted Earnings Per Share -- Note 15
Income from continuing operations per common
and common equivalent share -- Note 7 $0.35 $0.42 $0.41
Income from discontinued operations per common
and common equivalent share -- Note 7 0.02 0.22 0.24
------------ ------------ ------------
Net income per common and common
equivalent share -- Note 7 $0.37 $0.64 $0.65
============ ============ ============
Shares used in computing diluted earnings
per share -- Note 7 7,274,035 7,066,560 6,977,788
============ ============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Technologies, Inc. and Subsidiaries
Year Ended
- -------------------------------------------------------------------------------
October 3, September 27, September 28,
dollars in thousands 1998 1997 1996
- ---------------------------------------- ----------- ------------ ------------
Cash flows from operating activities:
Net income ............................ $2,657 $4,583 $4,571
Adjustments to reconcile net
income to net cash provided
by operating activities:
Discontinued operations................ 1,111 3,513 5,954
Depreciation........................... 4,537 4,304 4,204
Amortization........................... 1,789 1,636 1,711
Deferred income taxes.................. (1,171) (2,727) 675
Other.................................. 84 (672) (121)
Changes in operating assets and
liabilities:
Trade receivables...................... (4,383) (604) (835)
Inventories............................ (5,190) (3,455) (2,229)
Other current assets................... 98 886 80
Trade accounts payable, accrued
expenses and other liabilities..... 3,260 (1,744) (479)
----------- ------------ ------------
Net cash provided by operating
activities......................... 2,792 5,720 13,531
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of a business, net of cash
acquired............................ (1,627) -- --
Purchase of property, plant and
equipment........................... (6,890) (6,761) (3,624)
Other.................................. (128) 28 44
----------- ------------ ------------
Net cash used by investing activities.. (8,645) (6,733) (3,580)
----------- ------------ ------------
Cash flows from financing activities:
Borrowings on short-term debt.......... -- 9,000 --
Principal payments on short-term debt (9,000) -- --
Proceeds from long-term debt 22,017 -- --
Principal payments on long-term debt
and other liabilities.............. (9,093) (26) (75)
Proceeds from issuance of common stock 768 -- --
Tax benefit from exercised stock options 264 -- --
Payment of cash dividends (580) -- --
Decrease in payable to BEI
Electronics, Inc................... -- (11,128) (4,342)
----------- ------------ ------------
Net cash used by financing activities.. 4,376 (2,154) (4,417)
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... (1,477) (3,167) 5,534
Cash and cash equivalents at beginning
of year............................ 5,034 8,201 2,667
----------- ------------ ------------
Cash and cash equivalents at end
of year............................ $3,557 $5,034 $8,201
=========== ============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
BEI Technologies, Inc. and Subsidiaries
- --------------------------------------------------------- ------------ ------------ ---------------------
Accumulated
Other Unearned
Common Retained ComprehensiveComprehensiveRestricted
dollars in thousands Stock Earnings Income Income Stock Total
- ----------------------------------- --------- ----------- ------------ ------------ ----------- ---------
Balances at September 30, 1995...... $ -- $29,593 $ -- $ -- ($730) $28,863
Net income for 1996................. 4,571 4,571
Restricted Stock Plan--Note 8....... (188) (188)
--------- ----------- ------------ ------------ ----------- ---------
Balances at September 28, 1996...... -- 34,164 -- -- (918) 33,246
Net income for 1997................. 4,583 4,583
Restricted Stock Plan--Note 8 (475) (475)
Common stock issued in connection
with the Distribution........... 7 (7) --
Net equity transactions with BEI
Electronics, Inc--Note 15....... (737) -- (737)
--------- ----------- ------------ ------------ ----------- ---------
Balances at September 27, 1997...... 7 38,003 -- -- (1,393) 36,617
Comprehensive Income:
Net income for 1998............. 2,657 2,657 2,657
Other comprehensive income......
Foreign currency translation
gain, net of income tax of $27 39 39 39
------------
Comprehensive income $2,696
============
Restricted Stock Plan--Note 8....... 1,093 (664) 429
Stock options exercised -- Note 8 768 768
Tax benefit from exercised stock....
options -- Note 8............... 264 264
Cash dividends (580) (580)
--------- ----------- ------------ ----------- ---------
Balances at October 3, 1998......... $2,132 $40,080 $39 ($2,057) $40,194
========= =========== ============ =========== =========
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
BEI Technologies, Inc. and Subsidiaries
October 3, 1998
Note 1--Summary of Significant Accounting Policies
Basis of Presentation: BEI Technologies, Inc. ("Technologies" or the
"Company") was incorporated on June 30, 1997 in the State of Delaware, as
a wholly owned subsidiary of BEI Electronics, Inc. (Electronics). On
September 27, 1997, Electronics distributed to holders of Electronics
common stock one share of common stock of the Company for each share of
Electronics common stock held on September 24, 1997 (the "Distribution").
In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its BEI
Sensors & Systems Company, Inc. (Sensors & Systems) and Defense Systems
Company, Inc. (Defense Systems) business segments. As further described
in Note 2, on June 30, 1997, the Board of Directors of Electronics also
approved a formal plan to discontinue the operations of its Defense
Systems segment. The remaining operations of Defense Systems were
discontinued as of July 4, 1998.
The accompanying financial statements present the consolidated
financial position and results of operations of the Company and its
wholly-owned subsidiaries. The financial position and results of
operations of Sensors & Systems and Defense Systems, former subsidiaries
of Electronics and predecessor entities to the Company, are presented on
a combined basis for all dates and periods prior to the Distribution. All
intercompany accounts and transactions have been eliminated. The results
of operations of the Sensors & Systems business segment are presented as
continuing operations and those of the Defense Systems business segment
through the end of the third quarter of fiscal 1998 are presented as
discontinued operations.
The Sensors & Systems business provides sensors, engineered subsystems
and associated components which are used for controlled precision
machinery and equipment in industrial, medical, automotive, aerospace and
military applications.
Fiscal Year: The Company's fiscal year ends on the Saturday nearest
September 30. Fiscal year 1998 contained 53 weeks. Fiscal years 1997 and
1996 each contained 52 weeks.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. Actual
results could differ from these estimates.
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 is recognized generally as units are
shipped.
Inventories: Inventories are carried principally at the lower of cost
(first-in, first-out method) or fair value and do not exceed net
realizable value.
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 the accelerated or straight-line methods for equipment.
Leasehold improvements are amortized over the shorter of the lease term
or their estimated useful life.
Other Assets: Tradenames, patents and related assets are being
amortized over their remaining lives at the date of acquisition up to a
period of seventeen years.
Technology acquired under license agreements consists primarily of
the cost of exclusive rights to make, use and sell products utilizing
quartz rate sensing technology. Technology acquired is being amortized
over thirteen years, which approximates its estimated useful life from the
date of acquisition.
Goodwill consists of the excess of cost over fair value of net
tangible assets acquired in purchase acquisitions. Goodwill is amortized
by the straight-line method over 20 years.
Long-Lived Assets: The Company accounts for any impairment of its
long-lived assets using Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121 ("FAS 121") Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of. The Company recognizes impairment losses on long-lived
assets, including property, plant and equipment and other assets, 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 in accordance with Statement of Financial
Accounting Standards No. 2 "Accounting for Research and Development
Costs", which establishes accounting and reporting standards for research
and development.
Recent Accounting Pronouncements: Statement of Financial Accounting
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation,"
established a fair-value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
who elect not to adopt the new method of accounting. The Company has
adopted the disclosure-only alternative as described in FAS 123 in fiscal
year 1997. The Company accounts for employee stock awards using the
intrinsic value method in accordance with APB Opinion No. 25.
As of December 27, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128"), "Earnings per Share". All prior
earnings per share data have been restated to conform to the provisions of
this statement. Basic earnings per share is computed using the weighted
average number of share outstanding. Diluted earnings 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 shares
method. The impact on the calculation of earnings per share in prior
periods was not material.
As of October 3, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income." FAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or shareholders'
equity. FAS 130 requires disclosure of other comprehensive income which
includes foreign currency translation adjustments, which prior to
adoption, were reported separately in stockholders' equity.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). The Company is required to adopt this Statement
in fiscal year 1999. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of the Statement is expected to
have no impact on the Company's consolidated financial position, results
of operations or cash flows.
The Company has a grantor trust to fund deferred compensation for
certain employees (a "Rabbi Trust".) The
assets in the trust, consisting of cash equivalents and debt and equity
securities, are quoted at current market prices as determined by the
trustee, principally based upon national exchange and over-the-counter
markets, and are available to satisfy claims of the Company's general
creditors in the event of its bankruptcy. Previously, these assets were
not consolidated in the Company's financial statements. During 1998, the
Emerging Issues Task Force of the Financial Accounting Standards Board
issued EITF 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested." This
pronouncement states that assets held by a Rabbi trust and the related
deferred compensation obligation should be consolidated with those of the
employer. The trust's assets and the corresponding deferred compensation
obligation are included in the accompanying balance sheets at October 3,
1998 and September 27, 1997.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial accounting Standards No. 132, "Employers
Disclosures about Pensions and other Postretirement Benefits" ("FAS 132"),
effective for financial statements for periods beginning after December
15, 1997. FAS 132 revised employers' disclosures about pension and other
postretirement benefit plans but does not change measurement or
recognition of those plans. Also, FAS 132 requires additional information
on changes in the benefit obligations and fair values of plan assets.
Presently, the Company does not offer a postretirement benefit plan. The
Company believes the adoption of FAS 132 will have no effect on the
financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments ("FAS 133"), effective for financial statements for
periods beginning after December 15, 1997. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. FAS 133 requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair market
value. Under certain circumstances, a portion of the derivative's gain or
loss is initially reported as a component of income when the transaction
affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. Presently, the Company does not use derivative instruments either
in hedging activities or as investments. Accordingly, the company
believes that adoption of FAS 133 will have no impact on its financial
position or results of operations.
Earnings (loss) Per Share: For periods prior to the Distribution,
basic and diluted net income per share is based on the weighted average
number of shares of outstanding Electronics common stock and dilutive
equivalent shares from unvested stock and stock options (using the
treasury stock method) based on the distribution of one share of
Technologies common stock for each share of Electronics common stock.
Acquisition: On August 7, 1998, Sensors & Systems acquired Ideacod,
S.A., a sensor manufacturer located in Strasbourg, France, for $1,627,000
in cash and the assumption of $3,735,000 in liabilities, in a transaction
accounted for as a purchase. The results of Ideacod since the date of
acquisition are included in the accompanying consolidated financial
statements. The impact of the acquisition was not material in relation to
the Company's results of operations, therefore, no pro forma information
is presented.
The financial statements of Ideacod, S.A. have been translated into
U.S. dollars on the acquisition date and 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 separate component of
stockholders' equity and of other comprehensive income.
Reclassification: Certain reclassifications have been made to the
1997 and 1996 consolidated financial statements to conform with current
year presentations.
Note 2--Discontinued Operations
On June 30, 1997, the Board of Directors of Electronics announced a
formal plan to discontinue the operations of the Defense Systems segment.
Accordingly, the results of operations of the segment have been presented
as discontinued operations for all periods presented and the assets and
liabilities of the segment have been segregated in the consolidated
balance sheets. Previously, in September 1995, Electronics had reached a
decision to exit the HYDRA 70 (H 70) rocket manufacturing line of business
which made up a substantial portion of the Defense Systems segment.
Additional products of the segment included weapons management systems and
sales under a cost-plus fee advanced rocket development contract.
As result of the decision to exit the rocket line of business, the
Company has incurred costs relating to employee severance and the closure
and withdrawal from the leased facility in Camden, Arkansas and similar
costs related to its owned facility in Euless, Texas. At the end of
fiscal year 1996, the balance in the reserve account consisted of $374,000
and $500,000 for employee severance and facility closure costs,
respectively. During fiscal year 1997, the Company accrued an additional
$33,000 for employee severance costs. Costs incurred during the period
for severance and facilities closure of $362,000 and $362,000,
respectively, were charged against the reserve. The balance in the
reserve at the end of fiscal 1997 consisted of $45,000 for employee
severance and $138,000 for facilities closure costs. The remaining
reserves were used during fiscal 1998. At the end of fiscal 1998, all
inventory and equipment assets of the rocket business had been written off
or disposed of and the operations of the Defense Systems segment had been
shut down.
Net sales of the Defense Systems segment were as follows:
Year Ended
--------------------------------------
October 3, September 27, September 28,
1998 1997 1996
----------- ------------ ------------
(dollars in thousands)
Sales--HYDRA 70 ................ $341 $2,160 $37,927
Other .......................... 2,851 6,889 4,708
----------- ------------ ------------
$3,192 $9,049 $42,635
=========== ============ ============
Note 3--Inventories
October 3, September 27,
1998 1997
------------ ------------
Finished products ................................. $1,460 $557
Work in process ................................... 10,183 7,412
Materials ......................................... 16,051 12,302
Costs incurred under long-term contracts,
including U.S. Government contracts ............ 1,929 2,385
------------ ------------
Inventories ....................................... $29,623 $22,656
============ ============
Note 4--Accrued Expenses and Other Liabilities
October 3, September 27,
1998 1997
------------ ------------
(dollars in thousands)
Employee compensation .............................. $2,255 $1,923
Vacation ........................................... 2,003 1,648
Accrued taxes ...................................... 1,454 1,166
Contract costs ..................................... 1,153 578
Accrued professional fees .......................... 1,003 784
Insurance .......................................... 954 690
Royalties and related costs ........................ 950 806
Customer advances 893 251
Commissions ........................................ 614 700
Other .............................................. 1,846 1,951
------------ ------------
Accrued Expenses and Other Liabilities ............. $13,125 $10,497
============ ============
Note 5--Long-Term Debt
October 3, September 27,
1998 1997
------------ ------------
(dollars in thousands)
7.23% Series A Senior Notes; due in annual
installments of $3,360 from October 1, 1996
through October 1, 2000 ......................... $6,720 $13,440
7.23% Series B Senior Notes; due in annual
installments of $2,240 from November 15,
1996 through November 15, 2000 .................. 6,720 8,960
Borrowings under bank line of credit ............... 22,000 9,000
Mortgage note payable with interest at 7.96%;
due in monthly installments of principal
and interest of $14 until 1999 when the
remaining balance of approximately $1,700
is due; collateralized by certain real
property ........................................ 1,708 1,736
Capitalized equipment lease obligations............. 236 --
------------ ------------
37,384 33,136
Less current portion ............................... 227 5,628
------------ ------------
$37,157 $27,508
============ ============
The Senior Notes, which were obligations of Electronics, were assumed
by Technologies in connection with the Distribution at an interest rate of
7.23% for years subsequent to fiscal year 1997. The interest expense
associated with the Senior Notes from periods prior to the Distribution
was allocated to Technologies in the results of operations for those
periods. The Senior Note Agreement contains covenants concerning certain
financial ratios, dividend payments and minimum balances of net worth. At
October 3, 1998, Technologies was in compliance with these covenants. As
noted below, these Notes were paid in full subsequent to fiscal year end
1998 in an early extinguishment of debt.
On September 28, 1997, Technologies entered into an agreement with a
bank for a $25.0 million unsecured line of credit expiring in September
2000. On September 29, 1997, the Company borrowed $13.0 million under the
line of credit and used the funds to repay the $9.0 million of outstanding
borrowings and accrued interest on the prior Sensors & Systems' line of
credit and to make a scheduled principal payment on the Senior Note
obligations. Accordingly, the borrowings under the bank line of credit at
September 27, 1997 in the amount of $9.0 million were classified as a non-
current liability in the accompanying consolidated financial statements
for fiscal year 1997.
The agreement described in the preceding paragraph also provided that
up to $3.0 million of the line of credit could be used to fund letters of
credit issued on behalf of the Company. At October 3, 1998, the Company
had four letters of credit in the amount of $1.1 million outstanding. The
credit line contained certain financial covenants that require the Company
to meet certain financial ratios and net worth balances. At October 3,
1998, the Company was in compliance with these covenants. As noted below,
a new line of credit was established subsequent to fiscal year end 1998
and terminated the borrowings under the old facility .
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 new note agreement contains
covenants regarding certain operating ratios, limitations on debt,
dividend payments and minimum net worth. The proceeds from the new 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.
Accordingly, the current portion of the existing senior notes has been
reclassified to long-term on the consolidated balance sheet at October 3,
1998 in accordance with the maturity dates of the new note agreement. The
prepayment penalty and the remaining unamortized loan fees of $324,000,
net of the related tax benefit, were charged to the first quarter of
fiscal 1999 as an extraordinary loss on the early extinguishment of the
debt.
On December 13, 1998, the mortgage note payable was refinanced with the
original lender and the due date extended. The mortgage now has an
interest rate of 6.87% and matures December 1, 2003. Principal and
interest payments of $14,000 are due monthly through December 13, 2003
when the remaining balance of unpaid principal is due. Accordingly, the
current portion of the existing mortgage note payable has been
reclassified to long-term on the consolidated balance sheet at October 3,
1998, in accordance with the maturity dates of the new note agreement.
On December 16, 1998, the Company established a new $12.0 million two
year line of credit with a bank and terminated the borrowings under the
$25.0 million facility in place at the end of fiscal 1998.
Maturities of long-term debt, adjusted for the effect of the new senior
notes and the mortgage refinancing and excluding capitalized equipment
lease obligation (see Note 10), are as follows: 1999C$145,000;
2000C$145,000; 2001C$7,585,000; 2002C$7,145,000; 2003C$8,128,000;
thereafter--$14,000,000.
Interest of approximately $2,535,000, $1,942,000, and $2,202,000 was
paid during fiscal years 1998, 1997 and 1996, respectively.
Note 6--Income Taxes
The Company was included in the consolidated federal income tax returns
of Electronics for fiscal years 1997 and prior, in accordance with the tax
allocation arrangement between the companies. Income taxes were accrued
at estimated tax rates by each of the former subsidiaries of Electronics
and settlement of fiscal year 1997 tax liabilities was estimated using
these tax rates. Subsequent to fiscal year 1997, the Company is no longer
part of Electronics' consolidated group.
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rates and laws known at
this time and that will be in effect when the differences are expected to
reverse.
The provision for income tax expense consists of the following (in thousands):
Year Ended
--------------------------------------
October 3, September 27, September 28,
1998 1997 1996
----------- ------------ ------------
Current
Federal ................... $2,581 $4,688 $1,716
State ..................... 496 799 47
----------- ------------ ------------
Total Current ........ 3,077 5,487 1,763
----------- ------------ ------------
Deferred
Federal ................... (1,038) (2,330) 408
State ..................... (133) (397) 267
----------- ------------ ------------
Total Deferred ....... (1,171) (2,727) 675
----------- ------------ ------------
Total income tax provision $1,906 $2,760 $2,438
=========== ============ ============
Income tax expense
attributable to continuing
operations ................... $1,807 $1,788 $1,412
Income tax expense
attributable to discontinued
operations ................... 99 972 1,026
----------- ------------ ------------
Total income tax provision
(benefit) .................... $1,906 $2,760 $2,438
=========== ============ ============
Significant components of the Company's net deferred tax assets are as
follows (in thousands):
October 3, September 27,
1998 1997
------------ ------------
Deferred tax assets
Accrued expenses ................................... $4,033 $3,930
Inventory valuation ................................ 2,807 1,862
Contract reserves .................................. 455 124
Other .............................................. 390 820
------------ ------------
Total deferred tax assets .................. $7,685 $6,736
------------ ------------
Deferred tax liabilities
Depreciation and property basis difference ......... $1,448 $1,694
Other .............................................. 487 463
------------ ------------
Total deferred tax liabilities ................ 1,935 2,157
------------ ------------
Net deferred tax assets ....................... $5,750 $4,579
============ ============
The provision for income taxes differs from the income tax determined by
applying the applicable U.S. statutory federal income tax rate as a result of
the following differences (in thousands):
Year Ended
--------------------------------------
October 3, September 27, September 28,
1998 1997 1996
----------- ------------ ------------
Income tax (credit) at the statutory
rate of 34% ......................... 1551 $2,497 $2,383
Federal income tax effect of state
income taxes ........................ 240 265 208
Goodwill amortization ................. 18 18 19
Research and development and
related credits ..................... -- -- (246)
Other ................................. 97 (20) 74
----------- ------------ ------------
Provision (credit) for income taxes ... 1,906 2,760 2,438
=========== ============ ============
Pursuant to the tax sharing agreement with Electronics, the Company's
income taxes prior to fiscal year 1998 were paid by Electronics. Cash
paid for income taxes in fiscal year 1998 was $3,613,000.
Realization of the net deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years to obtain
benefit from the reversal of the underlying temporary differences.
Note 7--Stockholders' Equity
The authorized capital stock of Technologies consists of 2,000,000
shares of preferred stock ($.001 par value) and 20,000,000 shares of
common stock ($.001 par value). In connection with the Distribution,
7,114,813 shares of Technologies common stock were issued to holders of
Electronics common stock. Prior to the incorporation of Technologies and
the Distribution, all of the capital stock of Sensors & Systems and
Defense Systems was held by Electronics.
Note 8--Equity Incentive Plans
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 1,139,445 shares of common stock for
issuance under the Incentive Plan, including shares for substitute options
granted to the option holders of Electronics in connection with the
Distribution.
Under the terms of Distribution, holders of vested stock options to
purchase Electronics common stock were entitled to exercise such options
prior to the Distribution and receive an equivalent number of shares of
the Company's common stock in the Distribution. Unexercised vested and
unvested Electronics stock options were converted to options to purchase
the Company's common stock under the Incentive Plan based on a conversion
formula that retained the same intrinsic value of the options and the same
ratio of exercise price per option to market value per share of common
stock as prior to the Distribution, without any additional benefits to the
holders.
Option activity under the Electronics' 1987 Incentive Stock Option Plan
prior to the Distribution and option activity under the Technologies
Incentive Plan subsequent to the Distribution are summarized below:
Weighted
Average
Number Exercise
of Common Price
Shares Per Share
------------ ------------
Electronics options outstanding at September 30, 1995 610,395 $5.71
Granted .............................. 11,000 $6.42
Exercised ............................ (115,922) $6.27
Terminated ........................... (48,511) $7.80
------------ ------------
Electronics options outstanding at September 28, 1996 456,962 $5.36
Exercised ............................ (137,200) $5.33
Terminated ........................... (3,500) $7.95
------------ ------------
Electronics options outstanding at September 27, 1997
prior to the Distribution ....................... 316,262 $5.35
Distribution adjustment ............................. 23,183 --
------------ ------------
Technologies adjusted options outstanding
at September 27,1997............................ 339,445 $4.98
Granted .............................. 2,000 $16.69
Exercised ............................ (168,293) $4.33
------------ ------------
Technologies options outstanding at October 3, 1998 173,152 $5.61
============ ============
Weighted Weighted
Average Average
Remaining Exercise
Number Contractual Price
Exercise Prices Outstanding Life (Years) Per Share
- ----------------- ----------- ------------ ------------
$4.08 ................................. 87,502 0.7 $4.08
$4.66 ................................. 15,381 6.2 $4.66
$5.71 ................................. 1,073 5.5 $5.71
$5.94 ................................. 15,992 4.7 $5.94
$6.75 ................................. 2,147 4.1 $6.75
$7.92 ................................. 39,396 2.7 $7.92
$8.50 ................................. 9,661 3.7 $8.50
$16.69................................. 2,000 9.5 $16.69
----------- ------------ ------------
$4.08 - $16.69 ......................... 173,152 3.3 $5.55
=========== ============ ============
As of October 3, 1998, options for 171,152 shares were vested and
exercisable.
Under the 1992 Restricted Stock Plan of Electronics, 700,000 shares of
Electronics common stock were authorized to be issued to certain key
individuals who have become employees of Technologies, 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. The market value of shares granted is
amortized to compensation expense over the vesting periods. As of October
3, 1998, 511,326 shares had been granted, of which 435,501 shares are
outstanding, and 184,618 shares have fully vested. Compensation expense
of $429,000, $274,000 and $406,000 was recorded in fiscal years 1998, 1997
and 1996, respectively.
The impact on the calculation of proforma results of operations and
earnings (loss) per share required by FAS 123 was determined to be
immaterial for fiscal years 1998, 1997 and 1996.
Note 9--Employee Benefit Plan
The Company has a 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
1998, 1997 and 1996 were approximately $780,000, $626,000, and $622,000
respectively.
Note 10--Lease Commitments
Operating leases consist principally of leases for real properties and
land. Certain of the operating leases contain various options for renewal and/or
purchase of the related assets for amounts approximating their fair market value
at the date of exercise of the option. Capital leases were assumed as part of
the acquisition of a business. Assets recorded under capital leases consist
of land, buildings and equipment of $1,121,000, net of accumulated amortization
of $112,000. The future minimum payments for operating and capital leases
consist of the following at October 3, 1998 (in thousands):
Capital Operating
Fiscal Year Leases Leases
1999............................ $110 $2,132
2000............................ 91 2,499
2001............................ 82 1,469
2002............................ 20 765
2003............................ -- 601
Thereafter...................... -- 400
----------- ------------
Total minimum lease payments 303 $7,866
Less amounts representing interest 67 ============
-----------
Amounts included in long-term debt $236
===========
Total rental expense amounted to approximately $1,694,000, $1,616,000 and
$1,530,000 for fiscal years 1998, 1997 and 1996, respectively.
Note 11--Contingencies and Litigation
Claim against U.S. Government
The Company believes that its subsidiary, Defense Systems Company (DSC),
suffered substantial monetary damages due to actions of the U. S.
Government in connection with the parties' H 70 contract in effect during
the 1992-1996 timeframe. As a result, DSC filed a substantial claim
before the Armed Services Board of Contract Appeals. Due to the
uncertainties inherent in the formal claims process, the Company has not
recorded any recovery of these claims in the accompanying financial
statements.
Other
The Company has pending various legal actions arising in the normal
course of business. Management believes that none of these legal actions
will have a material impact on the Company's financial condition or
operating results.
Note 12--Sales
Net sales from continuing operations to customers in foreign countries
amounted to $17,392,000, $11,998,000 and $10,938,000 in fiscal years 1998,
1997 and 1996, respectively. In fiscal years 1998, 1997 and 1996, foreign
sales did not exceed 10% of consolidated net sales in any individual
geographic area.
Net sales to the U.S. Government for the Sensors and Systems segment=s
products amounted to $21,046,000, $22,479,000 and $25,986,000 in fiscal
years 1998, 1997 and 1996, respectively. Net sales to the U.S. Government
for the discontinued Defense Systems segment were $3,153,000, $8,323,000
and $41,219,000 for fiscal years 1998, 1997 and 1996, respectively.
Note 13--Quarterly Results of Operations (Unaudited)
The tables below present unaudited quarterly financial information for
fiscal years 1998 and 1997:
Continuing Operations
Three months ended
----------------------------------------------------
December 27, April 4, July 4, October 3,
1997 1998 1998 1998
------------ ----------- ----------- ------------
(dollars in thousands except per share amounts)
Net sales .................................... $28,256 $30,848 $29,897 $35,263
Gross profit ................................. 9,622 9,918 9,403 9,759
Income from continuing operations ............ 878 779 704 154
Income from discontinued operations .......... 81 10 50 --
Net income ................................... 959 789 754 154
Basic Earnings Per Share
Earnings from continuing operations per common
share....................................... $0.13 $0.11 $0.10 $0.02
Earnings from discontinued operations per common
share....................................... $0.01 -- $0.01 --
Earnings per common share..................... $0.14 $0.11 $0.11 $0.02
Diluted Earnings Per Share
Earnings from continuing operations per
common and common equivalent share.......... $0.12 $0.11 $0.10 $0.02
Earnings from discontinued operations per
common and common equivalent share.......... $0.01 -- $0.01 --
Earnings per common and common equivalent shar $0.13 $0.11 $0.11 $0.02
December 28, March 29, June 28, September 27,
1996 1997 1997 1997
------------ ----------- ----------- ------------
Net sales .................................... $22,903 $24,710 $26,824 $27,102
Gross profit ................................. 7,767 8,810 9,477 10,194
Income (loss) from continuing operations ..... (359) 957 1,196 1,202
Income from discontinued operations .......... 394 495 500 198
Net income ................................... 35 1,452 1,696 1,400
Basic Earnings Per Share
Earnings (loss) from continuing operations
per common share............................ ($0.05) $0.14 $0.18 $0.18
Earnings from discontinued operations
per common share............................ $0.06 $0.07 $0.07 $0.03
Earnings per common share..................... $0.01 $0.21 $0.25 $0.21
Diluted Earnings Per Share
Earnings (loss) from continuing operations
per common and common equivalent share...... ($0.05) $0.13 $0.17 $0.17
Earnings from discontinued operations per
common and common equivalent share.......... $0.06 $0.07 $0.07 $0.03
Earnings per common and common equivalent share $0.01 $0.20 $0.24 $0.20
------------ ----------- ----------- ------------
Net income per common and common
equivalent share......................... $0.00 $0.00 $0.00 $0.00
============ =========== =========== ============
Note 14--Fair Value of Financial Instruments
Statement of Financial Accounting Standards 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
October 3, 1998 and as of September 27, 1997.
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 their 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 $31,001,000 and $27,570,000
compared with the carrying amounts of $31,674,000 and $27,508,000 at
October 3, 1998 and September 27, 1997, respectively.
Note 15--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
common share from continuing operations:
Year Ended
---------------------------------------
October 3, September 27, September 28,
1998 1997 1996
------------ ------------ ------------
(in thousands except per share amounts)
Numerator
Income from continuing
operations, net of income taxes. $2,515 $2,997 $2,873
============ ============ ============
Denominator
Denominator for basic earnings
per share --
Weighted average shares, net
of nonvested shares
(FY 1998 -- 223 shares;
FY 1997 -- 164 shares;
FY 1996 -- 154 shares)........ 7,012 6,816 6,737
Effect of dilutive securities:
Nonvested shares................ 108 86 86
Employee stock options.......... 154 165 155
------------ ------------ ------------
Denominator for diluted
earnings per share............. 7,274 7,067 6,978
============ ============ ============
Basic earnings per share from
continuing operations.......... $0.36 $0.44 $0.43
Listing of Exhibits
Diluted earnings per share from
continuing operations.......... $0.35 $0.42 $0.41
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. as of October 3, 1998 and September 27, 1997, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended October 3,
1998. 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 generally accepted auditing
standards. 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 financial position of BEI Technologies, Inc.
at October 3, 1998 and September 27, 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the
period ended October 3, 1998 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
San Francisco, California
November 2, 1998,
except for Note 5 as to which the date is
December 16, 1998
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 1999 Annual Meeting of
Stockholders to be filed by the Company with the Securities
and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the sections entitled "Executive Compensation"
and "Certain Transactions" of the Company's Definitive Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein
by reference to the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Company's
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference to the sections entitled "Certain Transactions"
and "Compensation Committee Interlocks and Insider
Participation" of the Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K.
(a)(1) Index to Consolidated Financial Statements.
-------------------------------------------
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
Consolidated Balance Sheets -
October 3, 1998 and September 27, 1997
Consolidated Statements of Operations -
Years ended October 3, 1998, September 27, 1997
and September 28, 1996
Consolidated Statements of Cash Flows -
Years ended October 3, 1998, September 27, 1997
and September 28, 1996
Consolidated Statements of Stockholders' Equity -
Years ended October 3, 1998, September 27, 1997
and September 28, 1996
Notes to Consolidated Financial Statements -
October 3, 1998
(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
October 3, 1998 is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts
Report of Ernst & Young LLP, Independent Auditors
as to Schedule
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. i
and BEI Technologies, Inc.
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
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
10.3 Assumption Agreement--Series A and Series B Senior
Notes dated September 15, 1997 by and between BEI i
Technologies, Inc., Principal Mutual Life Insurance
Company, Berkshire Life Insurance Company and
TMG Life Insurance Company
10.4 Credit Agreement dated as of September 27, 1997 i
among BEI Technologies, Inc., BEI Sensors & Systems
Company, Inc., Defense Systems Company, Inc., CIBC,
Inc., Canadian Imperial Bank of Commerce and CIBC
Wood Gundy Securities Corp.
10.5 Note Purchase Agreement dated November 16, 1998, by
and between BEI Technologies, Inc., BEI Sensors &
Systems Company, Connecticut General Life
Insurance Company and Allstate Life Insurance
Company
10.6 Amendement to Tax Allocation and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies,
Inc.
10.7 Credit Agreement dated December 16, 1998, by and
between BEI Technologies, Inc., BEI Sensors &
Systems Company, Inc. and Wells Fargo Bank,
National Association
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule
99.1 BEI Technologies, Inc. Information Statement dated
September 24, 1997 i
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
(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.
i
* Items which are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to Item 14(c)
of Form 10-K.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended October 3, 1998.
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
Secretary, Treasurer and Controller
December 22,1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles Crocker and Gary D. Wrench, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------- --------------------------------------- ---------------
/s/ Charles Crocker President, Chief Executive December 22, 1998
- --------------------------- Officer and Chairman of the Board of
(Charles Crocker) Directors (Principal Executive Officer)
/s/ Richard M. Brooks Director December 22, 1998
- ---------------------------
(Richard M. Brooks)
/s/ George S. Brown Director December 22, 1998
- ---------------------------
(George S. Brown)
/s/ Robert R. Corr Secretary, Treasurer & Controller December 22, 1998
- --------------------------- (Principal Accounting Officer)
(Robert R. Corr)
/s/ C. Joseph Giroir, Jr. Director December 22, 1998
- ---------------------------
(C. Joseph Giroir, Jr.)
/s/ William G. Howard, Jr. Director December 22, 1998
- ---------------------------
(William G. Howard, Jr.)
/s/ Asad M. Madni Director December 22, 1998
- ---------------------------
(Asad M. Madni)
/s/ Robert Mehrabian Director December 22, 1998
- ---------------------------
(Robert Mehrabian)
/s/ Gary D. Wrench Senior Vice President, Chief December 22, 1998
- --------------------------- Financial Officer and Director
(Gary D. Wrench)
SCHEDULE II
BEI TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------------------------- ---------- --------------------- --------- ---------
Additions
---------------------
Charged to
Balance at Charged to Other Balance at
Description Beginning Costs and Accounts Deductions End of
of Period Expenses Describe Describe Period
---------- ----------- --------- --------- ---------
(in thousands)
Year ended October 3, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts ........ $363 $101 $98 (D) $53 (C) $509
========== =========== ========= ========= =========
Year ended September 27, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts ........ $607 $75 $-- $319 (C) $363
Valuation allowance for deferred
tax assets .......................... 94 -- (94)(B) -- --
---------- ----------- --------- --------- ---------
Total ............................. $701 $75 ($94) $319 $363
========== =========== ========= ========= =========
Year ended September 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts ......... $395 $282 $-- $70 (A) $607
Valuation allowance for deferred tax
assets ............................... 143 -- (49)(B) -- 94
---------- ----------- --------- --------- ---------
Total .............................. $538 $282 ($49) $70 $701
========== =========== ========= ========= =========
(A) Miscellaneous adjustments to the allowance
(B) Adjustment based on the evaluation of uncertainties in the realization of
state net operating loss carryovers
(C) Write-offs of uncollectible accounts
(D) Received from an acquisition
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE
The Board of Directors and Shareholders
BEI Technologies, Inc.
We have audited the consolidated financial statements of BEI Technologies,
Inc. as of October 3, 1998 and September 27, 1997, and for each of the
three years in the period ended October 3, 1998, and have issued our
report thereon dated November 2, 1998 except for Note 5 as to which the
date is December 16, 1998. Our audits also included the financial
statement schedule listed in Item 14(a) of this Form 10-K. This schedule
is the responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects, the
information set forth therein.
Ernst & Young LLP
San Francisco, California
November 2, 1998,
except for Note 5, as to which the date is
December 16, 1998
S-2
INDEX TO EXHIBITS
Exhibit
Number Description
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, Inc. and Allstate
Life Insurance Company
10.6 Amendment to Tax Allocation and Indemnity Agreement between
BEI Electronics, Inc. and BEI Technologies, Inc.
10.7 Credit Agreement dated December 15, 1998, by and between
BEI Technologies, Inc., BEI Sensors & Systems Company, Inc. and
Wells Fargo Bank, National Association
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedule