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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
AMENDMENT TO ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended October 3, 1998 Commission file number 0-22799
BEI TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3274498
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(State or other jurisdiction of (I.R.S. Employer
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.
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<PAGE>
NOTE
The Form 10-K/A, of which this Note forms a part, contains changes to
the Table of Contents and Item 1. "Business" to correct the inadvertent
filing on December 29, 1998, of a preliminary draft of Item 1. of the
Form 10-K for the fiscal year ended October 3, 1998.
<PAGE>
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 7a. Quantitative and Qualitative Disclosures About
Market Risk..........................................
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 .....................................................
<PAGE>
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words, "intend," "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they
relate to the Company are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements
could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to,
those discussed in Item 1, "Business" as well as Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
PART I
ITEM 1. BUSINESS
Introduction
BEI Technologies ("Technologies" or the "Company") was incorporated in
Delaware in June 1997 and became publicly held on September 27, 1997 as a
result of the 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 Form 10 "General Form for Registration of Securities," as
amended (the "Form 10"), dated September 23, 1997, filed with the
Securities Exchange Commission.
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 consisted of the rocket
manufacturing 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 and subsystems based on proprietary
technologies. Management believes that intelligent sensory input to
machine control systems and computers will be increasingly crucial to the
productive functioning of a modern economy. Accordingly, Sensors &
Systems' goal is to maintain, develop and acquire a diverse offering of
advanced sensor products, and manufacture and sell these with certain
complementary products. Finally, the Company intends to target
technology-based, high margin niche markets for subsystems and end
products in which its proprietary traditional sensors, micromachined
sensors and complementary products play an enabling role. The Company's
near term initiatives include: (a) continued 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 industrial and commercial applications for
the areas of pressure rate and position sensing and that management
believes to be promising; and (c) expansion of the product line through
synergistic acquisitions of complementary technologies.
A key feature of the Company's strategy is to be recognized worldwide
as the most capable source for the sensor categories it has selected. Its
traditional emphasis is on highly engineered motion sensing components and
assemblies. The Company believes it differentiates itself by offering (a)
superior technology to solve a customer problem (including innovative
proprietary technology); (b) quality service; and (c) engineering
expertise in recommending and prescribing technical solutions for its
customers' applications. Sensors' products are not sold as commodities.
Its strategy is to provide technical solutions and customer service that,
together with the products themselves, create value and give the customer
confidence that the product has been expertly prescribed and applied.
By way of more specific examples, the Company's engineers regularly
address the following illustrative machine control requirements of
customers:
(1) 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 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, by incorporating a linear encoder, 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, aviation, space and telecommunications applications.
The Company considers its large number of customers and the vast scope
of existing and potential applications for its products to be a source of
the Company's existing business strength and an opportunity for
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 9,000 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
three fourths 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 17% of the Company's sales in fiscal 1998, 22% in fiscal
1997 and 27% in fiscal 1996. No commercial customer accounted for more
than 10% of sales in fiscal year 1998, 1997 or 1996. The Company sold
approximately 14% of its products in international markets. The Company
acquired a European-based manufacturer whose complementary products and
established brand identity should increase the Company's penetration of
international markets in fiscal year 1999.
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 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, scanner
assemblies, electronic servo control systems, trackballs and
cryocoolers)
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.
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 steer-by-wire off-road
transportation programs.
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.
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.
Accelerometers. Accelerometers and rate sensors using traditional
mechanical technology (e.g., a moving mass suspended by a pivot and jewel
mechanism) rely on the movement of complex machined metallic parts to
measure motion.
Micromachined Sensors:
Rate Sensors and Accelerometers. These products provide precise and
reliable measurement of minute linear and angular motion for control,
guidance and instrumentation. In general, these devices operate without
need for direct linkage to the driving mechanisms. Such measurements are
required for heading and attitude reference instruments 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 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 Sensors. The Company's family of GyroChip quartz rate
sensors ("QRS"), 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 spinout prevention systems for
automobiles (the automotive quartz rate sensor or "AQRS"). GyroChip
sensors provide performance suitable for commercial applications while
offering ruggedness, longer life and smaller size at a lower cost than
military versions of quartz rate sensors.
Pressure Sensors. Pressure sensors measure absolute or differential
pressure from vacuum to 10,000 psi. Various sensing technologies are used
including silicon micromachined systems used for commercial and industrial
markets. The Company provides standard products as well as application
specific solutions to pressure measurement requirements.
Micro-Electromechanical Systems (MEMS). MEMS are a new category of
ultra small devices, usually micro-machined from crystalline materials
such as quartz or silicon. The GyroChip sensors and other quartz devices
discussed above are examples of MEMS currently being sold by Technologies.
Management expects the Company's MEMS research and development programs
to lead to new devices for sensing motion, pressure and other physical
parameters.
Engineered Subsystems:
Inertial Measurement Units (IMU'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.
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.
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.
Backlog
Backlog of the Company's continuing business, conducted by Sensors &
Systems, at October 3, 1998 and at September 27, 1997, was $58,854,000 and
$46,696,000, 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, for 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 87% of the backlog as of October 3, 1998 is
scheduled for shipment during fiscal 1999; all of the remainder of the
backlog is scheduled for shipment during fiscal 2000.
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, Danaher Corp., Honeywell, Litton, Rockwell International
and Panasonic. There are smaller or product-specific companies, some of
whose products compete, including Sensor Systems LLC, CTS Corp., Dynamics
Research Corp., Heidenhain, Kollmorgen, Kulite Semiconductor, Pacific
Scientific, Servo Magnetics Corp., Bourns, and Druck, Inc.
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. There can be no assurance that the Company will be able to
produce the required quantities on time or in sufficient amounts to
satisfy demand. Failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business - Risk Factors -- Limited Manufacturing Experience; Scale-Up
Risk; Product Recall Risk."
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 complementary products to create the
capability to electronically stabilize platforms.
The Company has also produced prototypes of future products
incorporating silicon 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 $6.4
million, $4.9 million and $3.6 million in fiscal 1998, 1997 and 1996,
respectively. In addition, customer funded research and development
expenditures charged to cost of sales were $0.9 million, $1.1 million and
$3.0 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 October 3, 1998, the units comprising Technologies had 1,107
employees, including 125 in research, development and engineering, 69 in
administration, 76 in marketing and sales, and 837 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 77 U.S. patents and 87 foreign patents with expiration
dates ranging from December 1998 to August 2015. Because many of these
patents relate to technology that is important to certain of the Company's
products, the Company considers these patents to be significant to its
business.
While management believes that the Company's intellectual property
rights are important, management also believes that because of the rapid
pace of technological change in the industries in which the Company
competes, factors such as innovative skills, technical expertise, the
ability to adapt quickly to technological change and evolving customer
requirements, product support and customer relations are of equal
competitive significance.
Environmental Matters
The Company uses certain controlled or hazardous materials in its
research and manufacturing operations and, as a result, is subject to
federal, state and local regulations governing the storage, use and
disposal of such materials. Management of the Company believes that it is
currently in compliance with such laws and regulations, and that the cost
of such compliance has not had a material effect on the Company's capital
expenditures, earnings or competitive position, and is not expected to
have a material adverse effect in the foreseeable future.
Government Regulation
The Company is subject to significant regulation by the U.S. Government
with respect to a variety of matters affecting its business, including the
matters set forth below and as discussed in the "Risk Factors--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 1998, 1997 and
1996 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
14.0%, 11.8% and 11.3% of revenues for fiscal 1998, 1997 and 1996,
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 continuing 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 quartz rate sensor in the Concord, California facility.
The Company has encountered difficulties in scaling up production of the
AQRS, including problems involving production yields, component supplies
and shortages of qualified personnel. There can be no assurance that
future manufacturing difficulties or product recalls, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations, will not occur.
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.; four types of ASIC's, supplied by National Semiconductor
Corporation, Orbit Semiconductor, 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.
Dependence Upon Key Customers
Approximately 10% of the net sales of the Company in fiscal 1998 were
to two customers for the automotive quartz rate sensor product used in
automobile stability systems. This concentration is expected to expand in
fiscal 1999 and beyond under contracts with these two customers. The
Company continues to increase production of the AQRS (see "Business - Risk
Factors - Limited Manufacturing Experience; Scale-Up Risk; Product Recall
Risk") to meet the requirements of these contracts. There can be no
assurance that the Company will be able to retain these contracts or that
the product will continue to achieve continuing growth beyond the end of
the current contracts, either of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Contracting with the U.S. Government
Approximately 17%, 22% and 27% of the net sales of units comprising the
continuing operations of Technologies in fiscal 1998, 1997 and 1996,
respectively, were derived from contracts with the U.S. Government or
under subcontract to other prime contractors to the U.S. Government.
Because a significant portion of Technologies' business is derived from
contracts with the Department of Defense or other agencies of the U.S.
Government, the Company's business is sensitive to changes in U.S.
Government spending policies 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 U.S. Government procurement policies or
reductions in U.S. Government expenditures for products furnished by the
Company.
Under applicable regulations, various audit agencies of the U.S.
Government conduct regular audits of contractors' compliance with a
variety of U.S. Government regulations. The U.S. Government also has the
right to review retroactively the cost records under most U.S. Government
contracts. Contract prices may be adjusted in the event the U.S.
Government determines that the Company submits incomplete, inaccurate or
obsolete cost or pricing data. Government contracts and subcontracts
generally provide for either a fixed price, negotiated fixed price or
cost-plus-fixed-fee basis for remuneration. The majority of the contracts
with the U.S. Government are competitive fixed price or negotiated fixed
price contracts, although cost-plus-fixed-fee contracts were approximately
3% of the Company's net sales from continuing operations in fiscal 1998.
For fixed price contracts, the Company bears the risk of cost overruns
and derives the benefits from cost savings. As a result, greater risks
are involved under fixed price contracts than under cost-plus contracts
because failure to anticipate technical problems, estimate costs
accurately or control costs during contract performance may reduce or
eliminate the contemplated profit or may result in a loss.
All U.S. Government contracts contain termination clauses that allow
the contract to be terminated either for contractor default or for the
convenience of the U.S. Government. In the event of termination for the
convenience of the Government, the clause typically provides that the
contractor will receive payment for work-in-progress, including profit.
To date, termination of Sensors & Systems' contracts by the U.S.
Government has not had any significant effect on the Company's financial
results. However, no assurance can be given that such terminations will
not have a materially adverse effect on the Company's results of
operations in the future.
Portions of the Company's government business are sometimes classified.
As a result, the Company may be prohibited from disclosing the substance
or status of such business.
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.
<PAGE>
SIGNATURES
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- --------------------------------------- ---------------
<S> <C> <C>
* President, Chief Executive January 5, 1999
- --------------------------- Officer and Chairman of the Board of
(Charles Crocker) Directors (Principal Executive Officer)
* Director January 5, 1999
- ---------------------------
(Richard M. Brooks)
* Director January 5, 1999
- ---------------------------
(George S. Brown)
/s/ Robert R. Corr Secretary, Treasurer & Controller January 5, 1999
- --------------------------- (Principal Accounting Officer)
(Robert R. Corr)
* Director January 5, 1999
- ---------------------------
(C. Joseph Giroir, Jr.)
* Director January 5, 1999
- ---------------------------
(William G. Howard, Jr.)
* Director January 5, 1999
- ---------------------------
(Asad M. Madni)
* Director January 5, 1999
- ---------------------------
(Robert Mehrabian)
/s/ Gary D. Wrench Senior Vice President, Chief January 5, 1999
- --------------------------- Financial Officer and Director
(Gary D. Wrench)
* By: /s/ Gary D. Wrench January 5, 1999
----------------------
(Gary D. Wrench)
ATTORNEY-IN-FACT
</TABLE>
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