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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
JUNE 30, 2000 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10981
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SBS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEW MEXICO 85-0359415
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2400 LOUISIANA BLVD. NE
AFC BUILDING 5, SUITE 600
ALBUQUERQUE, NEW MEXICO 87110
(Address of principal executive offices including zip code)
(505) 875-0600
(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:
TITLE OF EACH CLASS
COMMON STOCK, NO 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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on
September 1, 2000 as reported on The Nasdaq Stock Market-Registered Trademark-
was approximately $264,280,629. Shares of Common Stock held by each officer and
director as of August 16, 2000 and by each person who owns 5% or more of the
outstanding Common Stock according to filings with the Securities and Exchange
Commission dated June 30, 2000 have been excluded because these persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 1, 2000, Registrant had 13,554,998 shares of Common Stock
outstanding (adjusted for the two-for-one stock-split declared August 18, 2000
and payable September 20, 2000)
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into
Part III of this Form 10-K Report: (1) Definitive Proxy Statement for
Registrant's 2000 Annual Meeting of Shareholders to be held November 9, 2000.
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SBS TECHNOLOGIES INC. AND SUBSIDIARIES
FORM 10-K FOR THE YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 1
Item 2. Facilities.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 18
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 32
Item 8. Financial Statements and Supplementary Data................. 32
Independent Auditors' Report................................ 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Changes in Stockholders'
Equity...................................................... 36
Consolidated Statements of Cash Flows....................... 37
Notes To Consolidated Financial Statements.................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 55
PART III
Items 10-13. (Incorporated by reference to the Company's definitive proxy
statement).................................................. 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 57
Signatures.................................................. 58
Independent Auditors' Report................................ 59
Schedule II--Valuation and Qualifying Accounts.............. 60
Index to Exhibits........................................... 61
PART I
ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND SBS' FINANCIAL STATEMENTS AND NOTES THERETO.
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, THAT ADDRESS ACTIVITIES,
EVENTS OR DEVELOPMENTS THAT SBS OR MANAGEMENT INTENDS, EXPECTS, PROJECTS,
BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE ARE FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE BASED UPON CERTAIN ASSUMPTIONS AND ASSESSMENTS
MADE BY MANAGEMENT OF SBS IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF
HISTORICAL TRENDS, CURRENT CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER
FACTORS IT BELIEVES TO BE APPROPRIATE. THE FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS FORM 10-K ARE ALSO SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE, SUPPLY AND DEMAND,
GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING SBS' OPERATIONS, MARKETS,
PRODUCTS, SERVICES, PRICES, AND OTHER RISK FACTORS LISTED IN THIS 10-K. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ACTUAL
RESULTS; DEVELOPMENTS AND BUSINESS DECISIONS MAY DIFFER FROM THOSE EXPRESSED OR
IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
INTRODUCTION
SBS Technologies, Inc. ("SBS") is a leading designer and manufacturer of
open-architecture, standard bus embedded computer components that system
designers can easily utilize to create a custom solution specific to the user's
unique application. SBS embedded computer components are used in OEM
applications such as telecommunications base stations and routers, medical
imaging machines, automation and control equipment, and aerospace devices. SBS
has three operating segments: the Communications Group, the Computer Group, and
the Aerospace Group. SBS' product lines include CPU
(Pentium-Registered Trademark- and PowerPC-TM-) boards, input/output ("I/O")
modules, avionics modules and analyzers, computer connectivity products,
expansion units, real-time networks, telemetry boards, DIN-rail embedded PCs,
and industrial-grade computers. It is SBS' objective to continue to capitalize
on its design expertise and customer service capabilities to enhance product
quality and reduce time to market for OEM customers. SBS has grown, and intends
to continue to do so, through a combination of internal growth and acquisitions.
SBS achieves internal growth by expanding its existing product lines through new
product development, through increasing penetration of its existing customer
base, and by adding new customers.
On August 18, 2000, SBS declared a two-for-one stock split for stockholders
of record on September 5, 2000, payable on September 20, 2000. All references to
net income per common share, net income per common share--assuming dilution,
common stock, and stockholders' equity have been restated as if the stock split
occurred as of the earliest period presented.
SBS entered the embedded computer market in 1988 with the development of its
avionics interface board, which is used in ground-based avionics systems
development and test applications. Today SBS is a leading provider of
MIL-STD-1553 and ARINC 429/575 interface modules and bus analysis systems for
military, space and commercial avionics applications. SBS' products are the
industry standard for quality and innovation and have been selected for major
military programs, including the F-22, F-16, and B-2 aircraft, as well as in
aerospace projects such as the International Space Station.
In 1992, SBS added a second embedded computer product line with the
acquisition of SBS Technologies, Inc., Telemetry and Communications Products
(formerly Berg Systems International) ("Telemetry"), a developer of telemetry
interface circuit boards. Telemetry provides open architecture telemetry boards
for aircraft, spacecraft, and launch-vehicle telemetry programs. Telemetry
pioneered the concept of single-board telemetry solutions nearly a decade ago.
The product line currently consists of telemetry receivers, downconverters,
BPSK/QPSK modems, bit synchronizers, PCM decommutators, and PCM simulators.
Telemetry was merged into SBS effective June 23, 2000.
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In 1995, SBS added a third embedded computer product line with the
acquisition of SBS Technologies, Inc., Modular I/O (formerly GreenSpring
Computer Corporation) ("Modular I/O"). Modular I/O designs, manufactures and
markets modular I/O solutions using mezzanine standards such as
IndustryPack-Registered Trademark-, PC-MIP-TM-, and PMC for use with PCI,
CompactPCI, VME, ISA, STD32, PC/104 and stand-alone embedded platforms.
Currently, Modular I/O offers over 125 I/O modules for communications
applications, network interface, video controller, digital I/O, analog I/O,
motion control, field bus, temperature measurement and memory applications. In
addition, Modular I/O has a line of conduction cooled mezzanine I/O boards for
use in non-air cooled, rugged environments.
In August 1996, SBS acquired SBS Technologies, Inc., Embedded Computers
(formerly Logical Design Group, Inc.) ("Embedded Computers"), a manufacturer of
Intel processor-based CPU boards. This acquisition positioned SBS to take
advantage of the growth in the use of both Intel processors and Microsoft
software in the embedded computer market that utilizes the VME computer bus
architecture.
In November 1996, SBS acquired SBS Technologies, Inc., Connectivity Products
(formerly Bit 3 Computer Corporation) ("Connectivity Products"), a provider of
high-performance, low latency bus connectivity products that include bus-to-bus
adapters, bus expansion units, and real-time coherent memory networks designed
to operate in the most demanding applications.
SBS Technologies, Inc., Industrial Computers (formerly Micro
Alliance, Inc.) ("Industrial Computers") was added in November 1997 and
specializes in the design and manufacture of rugged, special-purpose PC, and
CompactPCI industrial and telecommunications platforms, enclosures and turnkey
systems. It offers a variety of Intel and PowerPC CPU boards and system
enclosures, including rackmount, benchtop, workstation and portable systems.
On July 1, 1998, SBS acquired, through its newly formed subsidiary, SBS
Technologies Holding GmbH, a 50.1% interest in OR Industrial Computers GmbH
("OR"), a leading European designer of CPU boards utilized in a wide range of
embedded computer applications. Based in Augsburg, Germany, OR designs,
manufactures and markets CPU boards based on Intel computer architecture
available in the VME, CompactPCI, and PCCompact form factors, as well as VME CPU
boards based on the Motorola 680X0 series processors and a series of computer
I/O boards. As part of this acquisition, SBS acquired, through its newly formed
subsidiary, SBS Technologies Holding GmbH, a 50.2% interest in ORTEC Electronic
Assembly GmbH, ("ORTEC") based in Mindelheim, Germany, a related company which
manufactures OR's commercial products and electronic products for other
customers. SBS also acquired, through its wholly-owned subsidiary Embedded
Computers, based in Raleigh, NC, 100% of the shares of OR Computers, Inc., which
was the U.S. marketing support organization for the OR product line and was
subsequently merged into Embedded Computers. SBS purchased the remaining shares
in OR and ORTEC in December 1998.
On August 12, 1998, SBS purchased 100% of the outstanding shares of SBS
Technologies, Inc., Communications Products (formerly V-I Computer)
("Communications Products"). Based in Carlsbad, California, Communications
Products designs, manufactures and markets CPU boards based on the PowerPC
processor for embedded computer applications based on the VME, CompactPCI, PMC
and standalone bus architecture standards.
On December 20, 1999, SBS acquired SciTech, Inc. ("SciTech"), a Madison,
Wisconsin based designer and manufacturer of communications network I/O products
based on PMC and PCI form factors. SciTech was subsequently merged into
Communications Products.
On April 12, 2000, SBS purchased 100% of the outstanding shares of SDL
Communications, Inc. ("SDL"). Based in Mansfield, Massachusetts, SDL specializes
in WAN I/O for the telecommunications and data communications market. SDL
designs, manufactures and markets T1/E1, T3/E3, HSSI and OC3 products based on
the PCI, CompactPCI and PMC form factors and supporting protocols such as Frame
Relay, HDLC, PPP, X.25 and ATM. SDL's products support the operating systems
most commonly used in communications applications.
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SBS was incorporated in New Mexico in November 1986 and began operations in
September 1987. SBS' executive offices are located at 2400 Louisiana Boulevard,
NE, AFC Building 5, Suite 600, Albuquerque, New Mexico, 87110, and its telephone
number is (505) 875-0600. References to "SBS" are to SBS Technologies, Inc. and
its consolidated subsidiaries. As of June 30, 2000, SBS had seven subsidiaries:
Modular I/O, Embedded Computers, Connectivity Products, Industrial Computers,
Communications Products, SDL and SBS Technologies, Inc. Foreign Holding Company.
SBS Technologies Holding GmbH is a subsidiary of SBS Technologies, Inc. Foreign
Holding Company. ORTEC is a subsidiary of SBS Technologies Holding GmbH. In
June 1999, SBS formed, through SBS Technologies Holding GmbH, SBS Technologies
Europe GmbH, to function as a sales and marketing agent in Europe. In August,
1999, SBS formed a partnership between SBS Technologies Holding GmbH, OR, and
the newly formed general partner, SBS OR Computers Verwaltungs GmbH.
IndustryPack-Registered Trademark- is a registered trademark of SBS.
PC-MIP-TM- is a trademark of MEN Micro, Inc. of Carrollton, Texas, and SBS
Technologies, Inc. SBS has filed trademark applications for K2, Denali, Cascade,
Palomar, Omnispan, Reliaspan, and dataBLIZZARD. All other trademarks or
tradenames referred to in this document are the property of their respective
owners.
SBS' OPERATING SEGMENTS AND PRODUCTS
The Company operates internationally through three operating segments, the
Communications Group, the Computer Group, and the Aerospace Group. These
segments are based on the markets that are served, the products that are
provided to those markets, and have managers who report directly to the chief
operating decision-maker. The Company designs and manufacturers a wide range of
products divided into general-purpose products, marketed and sold primarily by
the Communications Group and the Computer Group, and special purpose products,
marketed and sold primarily by the Aerospace Group.
COMMUNICATIONS GROUP PRODUCTS
The Communications Group designs, manufactures and markets high performance
OEM telecommunications platforms and sub-systems that provide complete WAN
interface and enabling communications software protocol support for CompactPCI,
PMC and PCI form factors. The Communications Group's telecommunication platforms
target fault-tolerant capability and feature WAN interfaces supporting T1/E1,
T3/E3, HSSI, and OC3. The Communications Group's OEM platforms based on the
Intel and PowerPC CPU architecture enable the convergence of voice, video and
data using protocols such as PPP, Frame Relay, ATM and SS7. The Communications
Group provides OEM sub-system telecommunications products for CompactPCI, PMC
and PCI including stand-alone single board computers, WAN adapters, enclosures,
and systems. In fiscal years 2000, 1999 and 1998, sales of these products
comprised approximately 34.3%, 18.2%, and 6.5%, respectively, of SBS' total
sales. As of September 1, 2000, 1999 and 1998, backlog orders were
$40.0 million, $6.8 million and $2.8 million, respectively. All backlog orders
are expected to be filled within the current fiscal year.
COMPUTER GROUP PRODUCTS
The Computer Group designs, manufactures and markets open-architecture
computer components and systems for CompactPCI, PCI, PMC, VME, and PC/104
standard bus architectures. The Computer Group's product lines include Intel and
PowerPC architecture CPU boards, serial and networking modules, analog and
digital I/O modules, computer interconnection and expansion units, and complete
computer systems. These products support OEM applications in communications,
industrial automation, medical imaging, military and aerospace, and the general
embedded computer market. In fiscal years 2000, 1999 and 1998, sales of these
products comprised approximately 45.3%, 51.7% and 54.3%, respectively, of SBS'
total sales. As of September 1, 2000, 1999 and 1998, backlog of orders were
3
$18.8 million, $10.4 million and $4.7 million, respectively. All backlog orders
are expected to be filled within the current fiscal year.
AEROSPACE GROUP PRODUCTS
The Aerospace Group's avionics products interface an embedded computer
system with the MIL-STD-1553 avionics bus or analyze the performance of the bus
used in a wide variety of military and space applications including aircraft,
missiles, ground vehicles, the International Space Station, the Space Shuttle
and naval vessels. Over the past several years, the Company has expanded its
product line to include ruggedized interface products that are used in
operational systems, and monitor and test systems that can be used as diagnostic
tools for operational systems. The Aerospace Group's telemetry interface
products allow computers to receive, interpret and process telemetry data.
Telemetry is often used to transmit data from an object under test, such as an
aircraft, to a receiving station while the test is underway. This allows
engineers to monitor test performance in real time, often decreasing total test
costs and enhancing test safety. Use of this technology has expanded to include
continuous monitoring of remote sites and transmission of digital data from
satellites to the earth. The Aerospace Group pioneered the concept of using
boards specially designed for telemetry interface, which would be added to
standard ground station computers. The Aerospace Group has expanded its product
offerings to include specialized equipment designed to receive and process
satellite data. In fiscal years 2000, 1999 and 1998, sales of these products
comprised approximately 20.4%, 30.1% and 39.2%, respectively, of the Company's
total sales. As of September 1, 2000, 1999, and 1998, backlog orders were
$5.7 million, $3.5 million and $3.4 million, respectively. All backlog orders
are expected to be filled within the current fiscal year.
SEGMENT FINANCIAL DATA
See Notes 13 and 14 to SBS' Consolidated Financial Statements for
information about SBS' industry segments, geographic areas, and major customers.
CUSTOMERS AND APPLICATIONS
SBS' broad range of products support a wide range of applications. In fiscal
2000, 1999 and 1998, no one customer exceeded 10% of SBS' sales. The following
table highlights, by operating segment, some of SBS' representative customers
and their applications utilizing SBS' products.
COMMUNICATIONS GROUP
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
Base Station Controllers Ericsson CPU
Optical Switch Cienna CPU
Terabit Router Avici CPU
Router Lucent I/O
Networking Motorola I/O
Network Security Appliance Nokia WAN I/O
Network Switching Platform Netrix Systems
Network Monitoring Netscout WAN I/O
Network Test Equipment GN Nettest CPU
DSL Equipment Tollbridge CPU, I/O
Voice over IP Nortel WAN I/O
Network Monitoring Network Associates WAN I/O
Router Virtual Access WAN I/O
Intrusive Network Monitoring Visual Networks WAN I/O
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COMPUTER GROUP
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
Aircraft Simulation FlightSafety International I/O, Connectivity
Color Proof Copier Eastman Kodak I/O
Currency Inspection System Currency Systems CPU
DVD Authoring Sonic Solutions Expansion Units
Library Material Flow 3M Systems
Management
License Plate Readers Perceptics Connectivity
Nuclear Measurement System Aquila CPU
Semiconductor Mfg Equipment Delta Design I/O
Semiconductor Mfg Equipment Applied Materials I/O, CPU
Semiconductor Mfg Equipment Silicon Valley Group CPU
Semiconductor Mfg Equipment GSI Lumonics Connectivity
Semiconductor Mfg Equipment Lamm Research I/O
MRI Imaging Accuimage Connectivity
Turbine Control System GE Motors CPU
Automotive Brake Tester Burke Porter Machinery CPU
Automotive Painting Systems Behr Systems Connectivity
Nuclear Power Plant Controls Bechtel Bettis Connectivity
Factory Automation General Electric CPU
Programmable Logic Controller Reliance Electric Connectivity
CT/MRI Toshiba Medical Connectivity &
Expansion Units
DNA Analyzer Applied Biosystems CPU
Electronic Scanning Microscopes EDAX Expansion Units
MRI GE Medical Connectivity &
Expansion Units
MRI Hitachi Medical Connectivity
ABL Raytheon I/O
Medical Imaging Advent Cable Technologies Connectivity
Rocket Launch Controller Orbital Sciences CPU
Extruder Krauss Maffei CPU
Test & Measurement Celerity Systems CPU
Sonar System STN Atlas CPU
Simulation & Radar Compaq Tandem Connectivity
Flight Equipment BAE Systems Aerospace CPU
Communications Test Celerity Systems CPU
Equipment
Air Traffic Control Litton CPU
Medical Imaging Elscint Expansion Units
Wafer Assembly ETEC Systems Connectivity
Communications Testing NSA CPU
Electron Microscopy JOEL Connectivity
Medical Imaging Siemens Expansion Units
Semiconductor Manufacturing KLA Tencor CPU
Military Ground Vehicles Litton I/O
Mini-DAMA Titan Linkabit I/O
Machine Control Electro Scientific Systems
Automotive Test Systems DaimlerChrysler CPU
5
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
Automated Plasma Processing Systems Unaxis Systems
Space Station On-Board Matra Marconi Space CPU
Computers
AEROSPACE GROUP
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
Avionics Test Stands Aerospatiale Avionics
Communications Satellite TRW Telemetry
Testing
Joint Strike Fighter Boeing Avionics
Military Ground Vehicles General Dynamics Avionics
Test Equipment Litton Avionics
Ariane V Test Support Lockheed Martin Telemetry
B-2 Flight Testing Northrop Grumman Telemetry
C-17 Aircraft Testing & Flight Boeing Avionics
Equipment
F-14 Northrop Grumman Avionics
F-14, F-15, F-16 U.S. Government Avionics
F-16, F22, C-130 Lockheed Martin Avionics
Flight Test/Satellite Integration & Boeing Telemetry
Test
Flight Test/Shuttle Command Launch NASA Telemetry
Control System
Test Equipment BAE Systems Aerospace Avionics
Military Satellite Telemetry Lockheed Martin Telemetry
Tracking & Control/Missile Test
J Stars Northrop Grumman Avionics
Missile Systems, F-15, F-18 Raytheon Avionics
Missile Test Raytheon Telemetry
Missile and Aircraft Test NAWC Telemetry
Missile and Aircraft Test Lockheed Martin Telemetry
Missile and Aircraft Test Boeing Telemetry
Flight Simulation Applied Dynamics Telemetry
Satellite Telemetry Tracking & Real Time Logic Telemetry
Control/ Satellite Integration
Test
Helicopter Test & Simulation Sikorsky Avionics
SBIRS Ground Stations Lockheed Martin Telemetry
V-22 Test Support Bell Helicopter Avionics
Military Ground Vehicles United Defense Avionics
Commercial Avionics System Test Honeywell Avionics
SALES AND MARKETING
SBS markets its products both domestically and internationally utilizing a
combination of direct employee sales personnel, independent manufacturers'
representatives and distributors. As of September 1, 2000, SBS had 114
employees, who typically hold engineering degrees, in sales, marketing and
customer relations, 22 U.S. based independent manufacturers' representatives and
50 distributors located outside the U.S. The Computer Group and Aerospace Group
have a common sales force, separate from the Communications Group sales force,
each supporting its respective product lines, although employee sales personnel
are educated about each of SBS' product lines and refer
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opportunities to appropriate product line managers. Primary sales methods vary
among SBS' operating segments. The Aerospace Group products generally have the
most complex applications and leads are generally identified and sales closed by
field sales personnel or independent manufacturers' representatives. In the case
of the Computer Group and Communications Group, sales in the United States are
either closed by the respective Group's sales force or independent
manufacturers' representatives, or are the result of catalog sales.
Internationally, sales are either closed by the respective Group's direct sales
employees or received directly from a distributor, although all quoting, pricing
and final order acceptance of international sales of United States built
products is controlled domestically. In each of the SBS' operating segments,
sales employees generally pursue "design in" applications where the SBS'
products are included as part of a system.
SBS maintains its primary sales offices in Albuquerque, New Mexico for its
avionics interface and telemetry products, in Raleigh, North Carolina, Augsburg,
Germany, Newark, California, and St. Paul, Minnesota for its CPU products,
modular I/O products, and computer connectivity and expansion unit products, and
in Carlsbad, California and Mansfield, Massachusetts for its CPU processor
boards, WAN I/O, network I/O, and computer systems and enclosures. SBS' domestic
field sales employees are located throughout the United States. SBS also
maintains international sales offices in the United Kingdom, Germany and Sweden.
Sales and sales leads are generated through a range of activities, including
direct sales calls, identification of participants in key defense and government
related programs, participation in numerous trade shows, direct mail catalogs,
advertisements in leading trade publications, and SBS' web site on the Internet.
RESEARCH AND DEVELOPMENT
SBS invests in research and development programs to develop new products in
related markets and to integrate state of the art technology into existing
products. As of September 1, 2000, SBS had approximately 153 employees engaged
in research and development activities. Of these employees, 71 have technical
degrees and 32 have advanced degrees. SBS seeks to combine special-purpose
hardware, firmware and software in its products to provide its customers with
the desired functionality. SBS' research and development expense was
$15.9 million, $14.4 million and $8.0 million in fiscal 2000, 1999 and 1998,
respectively, corresponding to 12.5%, 13.5% and 10.8% of sales, respectively.
During fiscal 2000, research and development efforts continued in each of
SBS' operating segments.
The Communications Group's research and development efforts concentrated on
developing next generation products for the telecommunications market. This
included standard and custom communications controllers based on the PowerPC 750
and 8260 microprocessors, an intelligent 24 port Ethernet switch, multiple port
T1/E1 interface modules, OC-3 transition modules and high availability systems
and associated controllers and alarm modules. The Communications Group also
invested in the development of a next generation WAN engine which allows for
modularity and scalability over the high bandwidth broadband spectrum at speeds
up to OC-3, serving applications such as ATM switches, integrated access devices
and optical switching platforms. In addition, the Communications Group developed
a next generation high-density WAN interface I/O module for computer telephony
and voice-over-IP applications and a cost reduced T/3 WAN interface module to
serve applications such as remote access devices, high-end routers, and VPN
gateways to public and private networks.
The Computer Group's research and development efforts concentrated on
evolutionary improvement of existing technology targeted at the
commercial/industrial and military sectors of the embedded computer market.
Research and development efforts of the Computer Group's processor products
focused on evolutionary improvement of its Intel-based CPU product line. The
Computer Group made significant enhancements to its bus adapter and PCI
expansion product offerings. The bus adapter product line was significantly
enhanced with new features specifically targeting applications for
7
connecting systems based upon PCI bus architecture. The result of these
developments was the introduction of the dataBlizzard family of high bandwidth
connectivity products. The PCI expansion products added 64-bit capability with
the release of the Omnispan line of expansion systems and included improvements
in the cable interface allowing for greater cable distances between the host
computer and the expansion chassis. Also, the Computer Group introduced the
Reliaspan family of Compact PCI expansion systems that include features required
for high availability server applications. The Computer Group also introduced
new serial I/O and Ethernet products. The new serial I/O products offer
increased data throughput and are being deployed by customers building wireless
base station equipment, central office switches, and high-speed communications
for factory floor applications. During the year, the Computer Group broadened
its offering of PC-MIP products with the introduction of eleven new modules.
The Aerospace Group's research and development efforts concentrated on
evolutionary product enhancements. A new high-end avionics interface module was
developed to take advantage of the latest technology providing more performance
and flexibility to the end user. In addition, the Aerospace Group continued to
redesign many of its existing products, traditionally used in laboratory and
test environments, for use in rugged and conduction-cooled environments.
SBS cannot assure that it will be successful in developing and bringing to
market any products as a result of its research and development efforts.
SUPPLIERS
SBS uses contract manufacturing to produce substantially all of its U. S.
built board-level products. SBS obtains parts from large electronics parts
suppliers and printed circuit boards from printed circuit board manufacturers
and provides these parts and boards as kits to contract manufacturing companies
that fabricate SBS' products. Following manufacturing, SBS performs test,
packaging and support functions for its products. SBS reduces dependence on a
particular contract manufacturer by using multiple contract manufacturers for
each of SBS' product lines. However, SBS may choose in the future to consolidate
its contract manufacturing to gain economies of scale and to shift its inventory
control to the contract manufacturer. If SBS did this it would become
increasingly dependent on a smaller number of manufacturers for the continued
timely and efficient production of all of its inventory. SBS' industrial
computer systems and enclosure business purchases all components from third
party vendors. SBS performs all assembly, test, packaging and support functions
for these products.
SBS' German operation manufactures approximately 90% of its board-level
products at its Mindelheim facility, using contract manufacturing for the
balance, in order to meet certain rugged and military applications.
Many of SBS' products consist in part of state-of-the-art digital electronic
components. SBS is dependent upon third parties for the continuing supply of
many of these components. Some of the components are obtained from a sole
supplier or a limited number of suppliers, for which alternate sources may be
difficult to locate. SBS has experienced and expects to continue to experience
component part shortages. In order to help prevent shortages of critical
components, SBS has begun to build inventory of these components. To date, the
shortages have had minimal impact on SBS' results of operations. Moreover,
suppliers may discontinue or upgrade some of the products incorporated into SBS'
products, which could require SBS to redesign a product to incorporate newer or
alternative technology. Although SBS believes that it has arranged for an
adequate supply of components to meet short-term requirements, SBS does not have
contracts for all components which assure availability and price. However, SBS
has negotiated cash discount terms for prompt payment. If sufficient components
are not available when SBS needs them, SBS' product shipments could be delayed,
which could affect SBS' sales during certain periods as well as lead to customer
dissatisfaction. If enough components are not available, SBS might have to pay
premiums for parts in order to make shipment deadlines. Paying
8
premiums for parts would lower or eliminate SBS' profit margin, or cause SBS to
increase its inventory of scarce parts and thus affect SBS' cash flow. There is
no assurance that SBS will continue to be able to obtain all of the components
it requires or that the price of certain components in short supply will not
materially and adversely affect its business, financial condition or results of
operations.
COMPETITION
The standard bus embedded computer industry is highly-competitive and
fragmented, and SBS' competitors differ depending on product type, company size,
geographic market and application type. SBS faces competition in each of its
operating segments. SBS believes that because of the diverse nature of SBS'
products and the fragmented nature of the embedded computer market, there is
little overlap of competitors for each operating segment. Competition in all of
SBS' operating segments is based on performance, time to market, customer
support, product longevity, supplier stability, breadth of product offerings and
reliability. Many of SBS' existing and potential competitors are bigger
companies that have financial, technological and marketing resources
significantly greater than that of SBS, which may give them a competitive
advantage. They and other competitors may have established relationships with
customers or potential customers which can make it harder for SBS to sell its
products to those customers. SBS cannot assure that it will be able to compete
effectively in its current or future markets. Also, competitive pressures might
significantly adversely affect SBS' marketing and sales, and financial
condition.
The Communications Group's CPU product line competes against other suppliers
of CPU boards based on PowerPC and Intel microprocessor technology, including
Motorola, Inc., Force Computers, Inc (a wholly-owned subsidiary of Solectron
Corporation), RadiSys Corporation, Artesyn Technologies, Inc., Ziatech
Corporation and others. The WAN I/O products compete with other suppliers of
similar products supplying the telecommunications and data communications
segment of the embedded computer market. They include companies such as
Performance Technologies, Incorporated, Digi International, Inc.,
Brooktrout Inc., RadiSys Corporation, and Dialogic (a subsidiary of Intel
Corporation). The Communications Group systems and enclosure products compete
with other suppliers of special purpose PC and CompactPCI platforms, enclosures
and turnkey systems, such as I-Bus, a subsidiary of Maxwell Technologies,
RadiSys Corporation and Industrial Computer Source.
The Computer Group's IP, PMC and PC-MIP I/O modules have two classes of
competition. The first class includes companies that compete directly by selling
these products. The second class includes companies that compete with these
products using a different implementation to provide functionally equivalent
products. Competitors in each of these classes include Acromag, Inc.,
Systran, Inc. and VMIC, Inc. The Computer Group's computer connectivity and
expansion unit product line competes with personal computer manufacturers that
offer computer motherboards with multiple PCI slots and with companies that have
similar product lines. There is no significant direct competitor in this market.
The Computer Group's CPU products primarily compete with other suppliers of CPU
boards based on Intel microprocessor technology serving the industrial segment
of the embedded computer market such as Force Computer, Inc. (a wholly-owned
subsidiary of Solectron), RadiSys Corporation, VMIC, Inc. and XYCOM, Inc.
The Aerospace Group's avionics interface products compete with a number of
other companies that produce similar products. These competitors include Ballard
Technologies, Inc., Data Devices Corporation, Excalibur Technologies
Corporation, Condor Engineering and Gesellschaft Fur Angewandte Informatik und
Mikroelekemik GmbH. The Aerospace Group's telemetry products compete with
suppliers such as AVTECH Systems, Inc., L3 Communications, Inc. and Veridian
Systems.
9
EMPLOYEES
As of September 1, 2000, SBS had approximately 522 employees at its nine
locations: Albuquerque, New Mexico; Carlsbad, California; Newark, California;
Raleigh, North Carolina; St. Paul, Minnesota; Madison, Wisconsin; Mansfield,
Massachusetts; and Augsburg and Mindelheim, Germany. Of these employees, 54 were
in executive and administrative positions; 114 were in sales, marketing and
customer relations; 153 were in research and development; 42 were clerical, and
159 were employed in support of ongoing production.
RISK FACTORS
Statements in this Report about SBS' outlook for its business and markets,
such as projections of future performance, statements of management's plans and
objectives, forecasts of market trends and other matters, are forward-looking
statements that involve risks and uncertainties. SBS' actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that may cause such a difference include, but are not limited to, those
discussed below:
A MAJOR PART OF SBS' GROWTH STRATEGY IS TO ACQUIRE BUSINESSES, WHICH IT MAY
NOT BE ABLE TO IDENTIFY, OR IF ACQUIRED, TO INTEGRATE EFFECTIVELY. A major
element of SBS' business strategy is to continue to pursue acquisitions that
either expand or complement its business. In the future, SBS might not be able
to identify or acquire acceptable acquisition candidates on terms favorable to
SBS, and in a timely manner. SBS anticipates that one or more potential
acquisition opportunities, including some that could be material, may become
available in the near future. If and when appropriate acquisition opportunities
become available, SBS intends to pursue them actively. SBS has increased the
scope of its operations through the acquisition of nine businesses and product
lines since 1992 (see "Introduction" above). SBS' management and financial
controls, personnel, and other corporate support systems might not be adequate
to manage the increase in the size and the diversity of scope of SBS' operations
as a result of the recent acquisitions or any future acquisitions. In addition,
SBS' acquisitions might not increase earnings and the companies acquired might
not continue to perform at their historical levels.
SBS COULD USE A SUBSTANTIAL PORTION OF ITS CAPITAL RESOURCES FOR
ACQUISITIONS. Consequently, SBS may require additional debt or equity financing
for future acquisitions. This financing may not be available on terms favorable
to SBS, if at all.
SBS' EARNINGS COULD BE ADVERSELY AFFECTED BECAUSE OF CHARGES RESULTING FROM
ACQUISITIONS. As part of its strategy for growth, SBS acquires compatible
businesses. Not infrequently, in accounting for a newly acquired business, SBS
is required to amortize, over a period of years, intangible assets, including
goodwill. Although usually the acquired business' current operating profit
offsets the amortization expense, SBS cannot assure that an acquired business'
operations will remain at their current levels. A decrease in the acquired
business' operating profit could reduce SBS' overall net income and earnings per
share. In addition, SBS cannot assure that changes in future markets or
technologies will not require faster amortization of goodwill and other
intangible assets in such a way that the overall financial condition or results
of operations of SBS would be adversely affected. SBS may also be required,
under generally accepted accounting principles, to charge against earnings upon
consummation of an acquisition the value of an acquired business' technology
which does not meet the accounting definition of "completed technology."
SBS' OPERATING RESULTS CAN FLUCTUATE AND CAN AFFECT THE MARKET PRICE FOR
SBS' COMMON STOCK. SBS has experienced fluctuations in its operating results in
the past and may experience those fluctuations in the future. Sales, on both an
annual and a quarterly basis, can fluctuate as a result of a variety of factors,
many of which are beyond SBS' control. These factors include the timing of
customer orders, manufacturing delays, delays in shipment due to component
shortages, cancellations of orders, the mix of products sold, cyclicality or
downturns in the markets served by SBS' customers, including significant
reductions in defense spending affecting certain of SBS' customers, and
regulatory changes. Because
10
those fluctuations can happen, SBS believes that comparisons of the results of
its operations for preceding quarters are not necessarily meaningful and that
investors should not rely on the results for any one quarter as an indication of
how SBS will perform in the future. Investors should also understand that, if
SBS' sales or earnings for any quarter are less than the level expected by
securities analysts or the market in general, the market price for SBS' Common
Stock could immediately and significantly decline.
SBS' BUSINESS MIGHT BE MATERIALLY ADVERSELY AFFECTED IF DEFENSE SPENDING
DECREASES. In each of fiscal 2000, 1999 and 1998, although no one customer or
group of entities known to be under common control exceeded 10% of SBS' sales,
SBS derived a significant portion of its sales directly or indirectly from the
U.S. Department of Defense. SBS expects that the Department of Defense will
continue to be a significant source of sales. Changes in the geopolitical
environment or in national policy might result in significantly reduced defense
spending. Reduced spending could significantly reduce SBS' marketing
opportunities and sales, and, therefore, materially adversely affect its
financial condition, results of operations, or liquidity. Also, SBS believes
that many of its potential customers will rely on U.S. government funding for
the purchase of SBS' products. Sales to these customers may be reduced if those
funds are unavailable or delayed because of budget constraints or bureaucratic
processes.
CHANGES IN INDUSTRY STANDARDS, CUSTOMERS PREFERENCES, OR COMPETITORS'
PRODUCTS TECHNOLOGY COULD REQUIRE SBS TO EXPEND SUBSTANTIAL FUNDS TO REDESIGN
ITS TECHNOLOGY. Most of SBS' products are developed to meet certain industry
standards, which define the basis of compatibility in operation and
communication of a system supported by different vendors. These standards are
continuing to develop and can change. If these standards are eliminated or
changed, the design, manufacture or sale of SBS' products could be inappropriate
or obsolete and could require costly redesign to meet new or emerging standards.
SBS also believes that its success will depend in part on its ability to develop
products that evolve with changing industry standards and customer preferences.
SBS may or may not be successful in developing those products in a timely
manner, or in selling the products it develops. SBS' delay or failure to adapt
to changing industry standards or customer preferences could significantly and
adversely affect its marketing and sales, and financial condition.
Many of SBS' product designs rely on state of the art digital technology.
Future advances in technology might render SBS' existing product lines obsolete,
which would require SBS to undertake costly redesign of its products to maintain
its competitive position. SBS might not be able to incorporate the new
technology into its existing products or to redesign its existing products in
order to compete effectively.
SBS' competitors are continually introducing new and enhanced products and
solutions for business needs. These products and solutions will most likely
affect the competitive environment in the markets in which they are introduced.
The development of new products and technologies, or the adaptation of existing
products and technologies in response to them, requires commitments of financial
resources, personnel and time well in advance of sales. Decisions with respect
to those commitments must accurately anticipate both future demand and the
technology that will be available to meet that demand. SBS might not be able to
adapt to future technological changes. If it does not, SBS' business might
significantly decline.
SBS' PRODUCT MARKETS MIGHT NOT DEVELOP. Many of SBS' potential customers
design and manufacture standard bus embedded computers internally. Increased
market acceptance of SBS' products and services depends in part on these
customers relying on SBS instead of themselves to provide embedded computer
components. SBS believes that increased market acceptance of its products will
also depend on a number of factors. These factors include the quality of SBS'
design and production expertise, the increasing use and complexity of embedded
computer systems in new and traditional products, the expansion of markets that
are served by standard bus embedded computers, time-to-market requirements of
SBS' actual and potential products, the assessment of direct and indirect cost
savings, and customers' willingness to rely on SBS for mission-critical
applications. SBS believes that in many
11
customer applications, the cost of its products may exceed or be perceived to
exceed the cost of internal development. SBS will not be able to achieve its
business growth objectives if market acceptance of its products does not
increase.
SBS HAS SIGNIFICANT COMPETITION IN MOST OF ITS MARKETS. The standard bus
embedded computer industry is highly competitive and fragmented, and SBS'
competitors differ depending on product type, company size, geographic market
and application type (see "Competition" above). SBS faces competition in each of
its operating segments. SBS believes that because of the diverse nature of SBS'
products and the fragmented nature of the embedded computer market, there is
little overlap of competitors for each operating segment. Competition in all of
SBS' operating segments is based on: performance, time-to market, customer
support, product longevity, supplier stability, breadth of product offerings and
reliability. For the 2000 fiscal year, SBS had sales of $128.2 million and net
income of $8.9 million. Many of SBS' existing and potential competitors are
bigger companies that have financial, technological and marketing resources
significantly greater than that of SBS, which may give them a competitive
advantage. They and other competitors may have established relationships with
customers or potential customers, which can make it harder for SBS to sell its
products to those customers. SBS cannot assure that it will be able to compete
effectively in its current or future markets. Also, competitive pressures might
significantly adversely affect SBS' marketing and sales, and financial
condition.
SBS PURCHASES MANY OF THE COMPONENTS IT USES FROM THIRD PARTIES, AND ITS
BUSINESS COULD BE ADVERSELY AFFECTED IF SOME OF THOSE COMPONENTS ARE NOT
AVAILABLE ON TIME OR MUST BE PURCHASED AT A PREMIUM. Many of SBS' products
contain state of the art digital electronic components. SBS is dependent upon
third parties for the continuing supply of many of these components. Some of the
components are obtained from a sole supplier or a limited number of suppliers,
for which alternate sources may be difficult to locate. SBS has experienced and
expects to continue to experience component part shortages. In order to help
prevent shortages of critical components, SBS has begun to build inventory of
these components. Moreover, suppliers may discontinue or upgrade some of the
products incorporated into SBS' products, which could require SBS to redesign a
product to incorporate newer or alternative technology. Although SBS believes
that it has arranged for an adequate supply of components to meet its short-term
requirements, SBS does not have contracts for all components which would assure
availability and price. If sufficient components are not available when SBS
needs them, SBS' product shipments could be delayed, which could affect SBS'
sales during certain periods as well as lead to customer dissatisfaction. If
enough components are not available, SBS might have to pay premiums for parts in
order to make shipment deadlines. Paying premiums for parts would lower or
eliminate SBS' profit margin and hurt its business and financial condition, or
cause SBS to increase its inventory of scarce parts, which would adversely
affect SBS' cash flow.
SBS IS DEPENDENT ON QUALIFIED EMPLOYEES. SBS' ability to maintain its
competitive position and to develop and market new products depends, in part,
upon its ability to retain key employees and to recruit and retain additional
qualified personnel, particularly engineers. If SBS is unable to retain and
recruit key employees, its product development and marketing and sales could be
materially impaired, revenues could decline materially, and business condition
could suffer materially.
SBS HAS LIMITED PATENT PROTECTION ON ITS TECHNOLOGY. SBS MAY NOT BE ABLE TO
ENFORCE OR DEFEND ITS PROPRIETARY RIGHTS, AND DISPUTES COULD BE
EXPENSIVE. Although SBS believes that some of its processes and equipment may
be proprietary, SBS has sought limited patent protection for its technology. SBS
has relied upon trade secret laws, industrial know-how and employee
confidentiality agreements. SBS' processes and equipment might not provide it
with a sufficient competitive advantage to overcome its lack of patent
protection. Others could independently develop equivalent or superior products
or technology. Also, SBS might not be able to establish trade secret protection,
and secrecy obligations might not be honored. If consultants, employees and
other parties apply technological information
12
developed independently, by them or others, to SBS projects, disputes may arise
as to the proprietary rights to that information. Those disputes may not be
resolved in favor of SBS.
SBS could have to litigate to enforce its proprietary rights, protect its
trade secrets, determine the validity and scope of the intellectual property
rights of others or defend against claims of infringement. That litigation could
be very expensive and could divert resources that SBS could otherwise use in its
business, which could hurt SBS and its business.
Patent applications in the United States are not publicly disclosed until
the patent is issued, so patent applications that relate to SBS' products and
technology may have been filed by someone else. SBS does not believe that it
infringes any patents of which it is aware, but someone could make a patent
infringement claim against SBS. Such a claim might significantly hurt SBS and
its business. If someone asserts infringement or invalidity claims against SBS,
SBS might have to litigate to defend itself against those claims. In certain
circumstances, SBS might try to obtain a license under the claimant's
intellectual property rights. The claimant might not be willing to give SBS a
license at all or on terms acceptable to SBS.
SBS COULD HAVE SIGNIFICANT PRODUCT LIABILITY. SBS' products and services
could be subject to product liability or government or commercial warranty
claims. SBS maintains primary product liability insurance for its non-aviation
products with a general aggregate limit of $1.0/$2.0 million per occurrence, a
$10.0 million lead umbrella policy, and a $40.0 million excess umbrella policy.
SBS maintains, for its aviation products, a $100.0 million liability insurance
policy, per occurrence. SBS' products are widely used in a variety of
applications. If a claim is made against SBS, SBS' insurance coverage might not
be adequate to pay for its defense or to pay for any award, in which case SBS
would have to pay for it. Also, SBS might not be able to continue that insurance
in effect for premiums acceptable to SBS. If a litigant were successful against
SBS, a lack or insufficiency of insurance coverage could significantly impair
SBS' financial condition.
SBS' INTERNATIONAL SALES SUBJECT IT TO ADDITIONAL RISKS. SBS sells its
products in countries throughout the world from its United States and European
based operations. These sales subject SBS to various governmental regulations,
export controls, and the normal risks involved in international sales. Sales of
products internationally are subject to political, economic and other
uncertainties, including, among others, risk of war, revolution, expropriation,
renegotiation or modification of existing contracts, standards and tariffs, and
taxation policies. They are also subject to international monetary fluctuations
that may make payment more expensive for foreign customers who may, as a result,
limit or reduce purchases.
EXCHANGE RATE FLUCTUATIONS COULD REDUCE SBS' EARNINGS WHEN STATED IN U.S.
DOLLARS. Substantially all of SBS' U.S. export sales to date have been
denominated in United States dollars and substantially all sales generated by OR
have been denominated in Deutsche marks. However, some sales in the future may
be denominated in other currencies. Any decline in the value of other currencies
in which SBS makes sales against the United States dollar or Deutsche mark will
have the effect of decreasing SBS' consolidated earnings when stated in United
States dollars. SBS does not engage in any hedging transactions that might have
the effect of minimizing the consequences of currency fluctuations, and SBS does
not intend to do so in the immediate future.
THE EURO CONVERSION MIGHT CAUSE A SIGNIFICANT DECLINE IN SBS' FINANCIAL
POSITION, RESULTS OF OPERATIONS, OR LIQUIDITY. On January 1, 1999, eleven of
the fifteen member countries of the European Union adopted the euro as their
common legal currency and established fixed conversion rates between their
existing sovereign currencies and the euro. The legacy currencies of the
participating European Union members will remain legal tender in the
participating countries for the transition period from January 1, 1999 to
January 1, 2002. Beginning January 1, 2002, the participating countries will
issue new euro-denominated bills and coins for use in cash transactions. Legacy
currencies will no longer be legal tender for any transactions beginning
July 1, 2002, making conversion to the euro complete. SBS is assessing its need
13
to adapt information technology and other systems to accommodate
euro-denominated transactions, any potential impact on terms and enforceability
of legacy denominated contracts, and potential tax consequences of currency
conversion. This assessment is being conducted to determine whether the euro
conversion will have a material adverse effect on SBS' financial position,
results of operations, or liquidity.
THE POLITICAL AND ECONOMIC POLICIES AND CONCERNS OF COUNTRIES IN WHICH SBS
MAKES OR COULD MAKE SALES COULD RESULT IN THE ADOPTION OF NEW TRADE POLICIES IN
THOSE COUNTRIES OR THE UNITED STATES, OR LEAD TO TRADE DISPUTES BETWEEN THOSE
COUNTRIES AND THE UNITED STATES. These could limit, reduce, eliminate or
disrupt SBS' sales outside the United States, which might adversely affect SBS'
total sales and business prospects outside the United States.
OUTSTANDING OPTIONS AND REGISTRATION RIGHTS COULD HAVE A POTENTIAL DILUTIVE
EFFECT. In April 1996, SBS registered under the Securities Act options for
266,666 shares held by SBS' Chairman of the Board and Chief Executive Officer,
Mr. Amenson. Mr. Amenson expects to exercise and sell, in accordance with
trading periods prescribed by SBS policy and in open market transactions, the
majority, if not all, of those shares before the options expire on December 31,
2000. As of September 1, 2000, Mr. Amenson had exercised and sold 66,666 shares.
As of June 30, 2000, SBS had 1,019,170 options outstanding that could be
exercised and 2,788,316 options that were not yet eligible for exercise.
SBS' COMMON STOCK HAS LIMITED PUBLIC FLOAT AND TRADING AND ITS STOCK PRICE
CAN BE VOLATILE. SBS' Common Stock is traded on The Nasdaq Stock Market. While
a public market currently exists for SBS' Common Stock and the number of shares
in the public float as of June 30, 2000 was 10,292,009, trading volume in the
four weeks ended June 30, 2000 averaged 105,542 shares traded per day. Thus,
trading of relatively small blocks of stock can have a significant impact on the
price at which the stock is traded. In addition, The Nasdaq Stock Market has
experienced, and is likely to experience in the future, significant price and
volume fluctuations that could adversely affect the market price of the Common
Stock without regard to the operating performance of SBS. SBS believes factors
such as quarterly fluctuations in financial results, announcements of new
technologies impacting SBS' products, announcements by competitors or changes in
securities analysts' recommendations may cause the market price to fluctuate,
perhaps substantially. These fluctuations, as well as general economic
conditions, such as recessions or high interest rates, may adversely affect the
market price of the Common Stock.
SBS HAS NOT PAID AND DOES NOT EXPECT TO PAY DIVIDENDS. Since its inception,
SBS has not paid cash dividends on its Common Stock. SBS intends to retain
future earnings, if any, to provide funds for business operations and,
accordingly, does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
ITEM 2. FACILITIES
As of September 1, 2000, SBS leases office and manufacturing space in
Albuquerque, New Mexico, Carlsbad, California, Newark, California, Raleigh,
North Carolina, St. Paul, Minnesota, Madison, Wisconsin, Mansfield,
Massachusetts and Augsburg, and Mindelheim, Germany. SBS' standard practice is
to obtain all of its facilities through operating leases. SBS maintains an
insurance plan covering all its facilities and contents.
The Albuquerque, New Mexico leased facility consists of 31,482 square feet
located in a multi-floor office building. This facility includes adequate
assembly and test space for SBS' avionics interface product line and the
telemetry product line, which was moved to the Albuquerque facility in July,
2000. The Albuquerque facility also serves as SBS' corporate headquarters. The
lease term for the Albuquerque, New Mexico facility runs through June 30, 2005,
with an option to extend the term for
14
an additional five years. Management believes that this facility will be
sufficient to serves the needs of the avionics interface and telemetry product
lines through the term of the lease.
SBS' general purpose I/O business is located in Newark, California. The
approximately 27,000 square foot facility, which is leased for a five year term
expiring November 30, 2004, is a one story multi-tenant building in a business
park consisting of approximately 18,000 square feet of office space and
approximately 9,000 square feet of assembly and test areas. The lease has an
option to extend the term for an additional three years. Management believes
that this facility will be sufficient to serve the needs of the general purpose
I/O business through the term of the lease.
SBS' Intel-based CPU products business, located in Raleigh, North Carolina,
leases a one story multi-tenant facility consisting of approximately 4,000
square feet of office space and approximately 7,000 square feet of assembly and
test areas. The lease expires on November 30, 2002. Management believes that the
facility is adequate at the current level of business and expansion space is
available if required.
SBS' computer connectivity and expansion unit business leases a 39,597
square foot facility, located in a business park, in St. Paul, Minnesota. This
facility, consisting of 14,813 square feet of office space and 24,784 square
feet of production and warehouse space, has been leased for a term of five years
expiring on November 30, 2002, with an option to extend the term of the lease
for one consecutive period of twenty-four to thirty-six months. Management
believes that this facility will be sufficient to serve the needs of the
computer connectivity and expansion unit business through the term of the lease.
SBS' industrial computer and enclosure and PowerPC processor operations
lease, in Carlsbad, California, a 75,160 square foot facility, located in a
business park, consisting of 32,000 square feet of office space and 43,160
square feet of manufacturing space. The lease term is for seven years expiring
in April, 2006, plus one option to extend the lease for three additional years.
Management believes that this facility will be sufficient to serve the needs of
these operations through the term of the lease. The PowerPC processor operations
also lease, in Madison, Wisconsin, 1,865 square feet of office space used
primarily for research and development. The lease expires in April, 2001 and is
sufficient to serve the needs of the Madison operations through the term of the
lease.
SBS leases, in Augsburg, Germany, four floors of a six floor building,
consisting of approximately 20,000 square feet of office and assembly and test
areas for its OR operations. The lease has a term of ten years expiring
December 31, 2005, with an option to expand to the additional two floors,
consisting of 5,000 square feet each, five years from the commencement of the
lease. Management believes that the facility is sufficient to serve the needs of
the OR operations through the term of the lease. In addition, SBS leases, on a
month to month basis, approximately 5,000 square feet of manufacturing space in
a multi-use facility in Mindelheim, Germany for its ORTEC operations. Management
believes that the facility is sufficient to serve the needs of ORTEC for the
foreseeable future.
The Company's Mansfield, Massachusetts facility consists of 31,237 square
feet located in a one-story multi-tenant building in a business park. The lease
term is for five years, expiring on June 14, 2005, plus one option to extend the
lease for five additional years. Management believes that this facility will be
sufficient to serve the needs of the Mansfield operations through the term of
the lease.
ITEM 3. LEGAL PROCEEDINGS
SBS is subject to various claims which arise in the ordinary course of its
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial position,
results of operations, or liquidity of SBS. SBS is not a party to, and none of
its property is subject to, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the price range (adjusted for two-for-one
stock split declared August 18, 2000) of trading in SBS' Common Stock as
reported on The Nasdaq Stock Market for each full fiscal quarter within the last
two fiscal years:
HIGH LOW
-------- --------
First Quarter Fiscal 1999............................... $ 15.625 $10.6875
Second Quarter Fiscal 1999.............................. 11.75 4.6875
Third Quarter Fiscal 1999............................... 12.1875 8.25
Fourth Quarter Fiscal 1999.............................. 10.5315 8.875
First Quarter Fiscal 2000............................... 13.6875 9.75
Second Quarter Fiscal 2000.............................. 20.00 10.875
Third Quarter Fiscal 2000............................... 27.875 9.625
Fourth Quarter Fiscal 2000.............................. 20.50 12.094
SBS' Common Stock is traded over the counter on The Nasdaq Stock Market
using the symbol SBSE.
Based on data provided by SBS' transfer agent and The Depository Trust
Company, management believes that as of September 1, 2000, the number of share
owner accounts of record, as defined by Rule 12g5-1 of the Exchange Act, was
approximately 250, at which date the closing market value of the SBS' Common
Stock was $25.0625 per share.
SBS has not paid any cash dividends on its Common Stock. Management's
current policy is to retain earnings, if any, for use in the SBS' operations and
for expansion of the business. No dividend payments are anticipated in the
foreseeable future (see "Management's Discussion and Analysis: Liquidity").
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended June 30, 1996
through June 30, 2000 have been derived from the audited consolidated financial
statements of SBS. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and related notes
thereto included elsewhere herein.
YEAR ENDED JUNE 30
-----------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ---------- ---------- ----------
Sales........................... $128,188,773 105,999,233 74,213,901 52,814,568 31,331,793
Net income...................... $ 8,902,607 12,278,388 10,090,188 461,685 3,580,907
Net income per common share..... $ 0.71 1.05 0.90 0.05 0.59
Net income per common share--
assuming dilution............. $ 0.66 1.00 0.82 0.05 0.49
Total assets.................... $133,160,257 92,007,855 74,315,187 61,165,014 20,443,672
Long-term debt, excluding
current installments.......... $ -- -- -- 2,816,251 5,188,320
Total liabilities............... $ 34,146,494 14,779,882 10,051,200 10,838,326 10,392,752
Total stockholders' equity...... $ 99,013,763 77,227,973 64,263,987 50,326,688 10,050,920
- ------------------------
Note: SBS has not declared any dividends during the periods presented. No
dividend payments are expected in the foreseeable future.
On August 18, 2000, SBS declared a two-for-one stock split for
stockholders of record on September 5, 2000, payable on September 20,
2000. All references to net income per common share, net income per
common share--assuming dilution, common stock, and stockholders' equity
have been restated as if the stock split had occurred as of the earliest
period presented.
On April 12, 2000, SBS completed the purchase of SDL. In connection with
the acquisition, SBS recorded a $4.0 million acquired in-process research
and development charge in the fourth quarter of fiscal 2000.
For fiscal 2000, net income excluding the $4.0 million acquired
in-process research and development charge would have been $12,902,607,
net income per common share would have been $1.04 and net income per
common share--assuming dilution would have been $0.95.
On December 20, 1999, SBS completed a pooling of interests transaction
with SciTech. SciTech was subsequently merged into Communications
Products. SciTech's historical results did not have a material effect on
combined financial position or results of operations, therefore the
financial position and results of operations of SBS and SciTech are
combined from October 1, 1999 on a prospective basis.
On August 12, 1998, SBS completed the purchase of Communications
Products.
On July 1, 1998, SBS acquired, through its newly formed subsidiary SBS
Technologies Holding GmbH, a 50.1% interest in OR and a 50.2% interest in
ORTEC. SBS also acquired, through its wholly-owned subsidiary, Embedded
Computers, a 100% interest in OR Computers, Inc. On December 9, 1998, SBS
completed the purchases of the minority interest in OR and ORTEC. On
April 12, 1999, OR Computers, Inc. was merged into Embedded Computers.
For fiscal 1999, net income per common share--assuming dilution, includes
a net benefit of approximately $0.05 related to non-recurring foreign
exchange gains, tax credit adjustments, and an acquired in-process
research and development charge.
On November 24, 1997, SBS completed the purchase of Industrial Computers.
17
On November 18, 1996, SBS completed the purchase of Connectivity
Products. In connection with the acquisition of Connectivity Products,
SBS recorded an $11.0 million acquired in-process research and
development charge in the second quarter of fiscal 1997.
On November 18, 1996, SBS consummated a fully underwritten public
offering of 3,000,000 shares of SBS' Common Stock at a price of $12.8125
per share. The net proceeds to SBS from the public stock offering were
used to fund the acquisition of Connectivity Products and to repay
long-term debt, and the balance was used for general working capital
requirements and acquisitions.
For fiscal 1997, net income excluding the $11.0 million acquired
in-process research and development charge would have been $7,061,685
(net of income taxes). Net income per common share excluding the
$11.0 million acquired in-process research and development charge would
have been $0.78 and net income per common share--assuming dilution would
have been $0.67.
On August 19, 1996, SBS completed a pooling of interests transaction with
Embedded Computers, the results of which are included in fiscal 1997 on a
prospective basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES
ALL STATEMENTS IN THIS FORM 10-K, OTHER THAN STATEMENTS OF HISTORICAL FACT,
THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT SBS OR MANAGEMENT INTENDS,
EXPECTS, PROJECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS AND OTHER FORWARD-LOOKING
STATEMENTS ARE BASED UPON CERTAIN ASSUMPTIONS AND ASSESSMENTS MADE BY MANAGEMENT
OF SBS IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS,
CURRENT CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS IT BELIEVES
TO BE APPROPRIATE. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE
ALSO SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED
TO ECONOMIC, COMPETITIVE, SUPPLY AND DEMAND, GOVERNMENTAL AND TECHNOLOGICAL
FACTORS AFFECTING SBS' OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES. THESE
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ACTUAL
RESULTS, DEVELOPMENTS, AND BUSINESS DECISIONS MAY DIFFER FROM THOSE EXPRESSED OR
IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
SBS is a leading designer and manufacturer of open-architecture, standard
bus embedded computer components that system designers can easily utilize to
create a custom solution specific to the user's unique application. SBS embedded
computer components are used in OEM applications such as telecommunications base
stations and routers, medical imaging machines, automation and control
equipment, and aerospace devices. SBS has three operating segments: the
Communications Group, the Computer Group, and the Aerospace Group. SBS' product
lines include CPU (Pentium-Registered Trademark- and PowerPC-TM-) boards, I/O
modules, avionics modules and analyzers, computer connectivity products,
expansion units, real-time networks, telemetry boards, DIN-rail embedded PCs,
and industrial-grade computers. It is SBS' objective to continue to capitalize
on its design expertise and customer service capabilities to enhance product
quality and reduce time to market for OEM customers. SBS has grown, and intends
to continue to do so, through a combination of internal growth and acquisitions.
SBS achieves internal growth by expanding its existing product lines through new
product development, through increasing penetration of its existing customer
base, and by adding new customers.
SBS entered the embedded computer market in 1988 with the development of its
avionics interface board, which is used in ground-based avionics systems
development and test applications. Today, SBS is a leading provider of
MIL-STD-1553 and ARINC 429/575 interface modules and bus analysis systems for
military, space and commercial avionics applications. SBS' products are the
industry standard for quality and innovation and have been selected for major
military programs, including the F-22, F-16, and B-2 aircraft, as well as in
aerospace projects such as the International Space Station.
18
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In 1992, SBS added a second embedded computer product line with the
acquisition of SBS Technologies, Inc., Telemetry and Communications Products
(formerly Berg Systems International) ("Telemetry"), a developer of telemetry
interface circuit boards. Telemetry provides open architecture telemetry boards
for aircraft, spacecraft, and launch-vehicle telemetry programs. Telemetry
pioneered the concept of single-board telemetry solutions nearly a decade ago.
The product line currently consists of telemetry receivers, downconverters,
BPSK/QPSK modems, bit synchronizers, PCM decommutators and PCM simulators.
Telemetry was merged into SBS effective June 23, 2000.
In 1995, SBS added a third embedded computer product line with the
acquisition of SBS Technologies, Inc., Modular I/O (formerly GreenSpring
Computer Corporation) ("Modular I/O"). Modular I/O designs, manufactures and
markets modular I/O solutions using mezzanine standards such as
IndustryPack-Registered Trademark-, PC-MIP-TM-, and PMC for use with PCI,
CompactPCI, VME, ISA, STD32, PC/104 and stand-alone embedded platforms.
Currently, Modular I/O offers over 125 I/O modules for communications
applications, network interface, video controller, digital I/O, analog I/O,
motion control, field bus, temperature measurement and memory applications. In
addition, Modular I/O has a line of conduction-cooled mezzanine I/O boards for
use in non-air cooled, rugged environments.
In August 1996, SBS acquired Embedded Computers, a manufacturer of Intel
processor-based CPU boards. This acquisition positioned SBS to take advantage of
the growth in the use of both Intel processors and Microsoft software in the
embedded computer market that utilizes the VME computer bus architecture.
In November 1996, SBS acquired Connectivity Products, a provider of
high-performance, low latency bus connectivity products that include bus-to-bus
adapters, bus expansion units, and real-time coherent memory networks designed
to operate in the most demanding applications.
Industrial Computers was added in November 1997 and specializes in the
design and manufacture of rugged, special-purpose PC, and CompactPCI industrial
and telecommunications platforms, enclosures and turnkey systems. It offers a
variety of Intel and PowerPC CPU boards and system enclosures, including
rackmount, benchtop, workstation and portable systems.
On July 1, 1998, SBS acquired, through its newly formed subsidiary SBS
Technologies Holding GmbH, a 50.1% interest in OR, a leading European designer
of CPU boards utilized in a wide range of embedded computer applications. Based
in Augsburg, Germany, OR designs, manufactures and markets CPU boards based on
Intel computer architecture available in the VME, CompactPCI, and PCCompact form
factors, as well as VME CPU boards based on the Motorola 680X0 series processors
and a series of computer I/O boards. As part of this acquisition, SBS acquired,
through its newly formed subsidiary SBS Technologies Holding GmbH, a 50.2%
interest in ORTEC, based in Mindelheim, Germany, a related company which
manufactures OR's commercial products and electronic products for other
customers. SBS also acquired, through its wholly-owned subsidiary Embedded
Computers, based in Raleigh, NC, 100% of the shares of OR Computers, Inc., which
was the U.S. marketing support organization for the OR product line and was
subsequently merged into Embedded Computers. SBS purchased the remaining shares
in OR and ORTEC in December 1998.
On August 12, 1998, SBS purchased 100% of the outstanding shares of
Communications Products. Based in Carlsbad, California, Communications Products
designs, manufactures and markets CPU boards based on the PowerPC processor for
embedded computer applications based on the VME, CompactPCI, PMC and standalone
bus architecture standards.
19
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On December 20, 1999, SBS acquired SciTech, a Madison, Wisconsin based
designer and manufacturer of communications network I/O products based on PMC
and PCI form factors. SciTech was subsequently merged into Communications
Products.
On April 12, 2000, SBS purchased 100% of the outstanding shares of SDL.
Based in Mansfield, Massachusetts, SDL specializes in WAN I/O for the
telecommunications and data communications market. SDL designs, manufactures and
markets T1/E1, T3/E3, HSSI and OC3 products based on the PCI, CompactPCI and PMC
form factors and supporting protocols such as Frame Relay, HDLC, PPP, X.25 and
ATM. SDL's products support the operating systems most commonly used in
communications applications.
See "Recent Acquisitions" below for additional information.
RECENT ACQUISITIONS
On April 12, 2000, SBS completed the acquisition of SDL. Before the
acquisition, SDL was a privately held company. Located in Mansfield,
Massachusetts, SDL specializes in the design, manufacture and sale of WAN I/O
for the telecommunications and data communications markets. SDL designs,
manufactures, and markets T1/EI, T3/E3, HSSI and OC3 products based on the PCI,
CompactPCI, and PMC form factors, and supporting protocols such as Frame Relay,
HDLC, PPP, X.25 and ATM. In addition, SDL's products support the operating
systems most commonly used in communications, including Windows NT, Solaris, and
VxWorks. SBS acquired all of the outstanding stock of SDL for $25.6 million in
cash. Of the $25.6 million, $24.8 million was paid to the sellers at closing,
and $0.8 million was paid to the sellers on June 27, 2000, upon finalizing the
closing balance sheet. Acquisition costs associated with the purchase were
$0.6 million. The purchase price also includes $1.2 million for the fair value
of SBS options issued in exchange for unvested SDL options. The acquisition was
funded with existing cash and a $20.0 million borrowing under SBS' Credit
Agreement with Bank of America, N.A. The acquisition was accounted for under the
purchase method, whereby the purchase price was allocated to the underlying
assets and liabilities based upon their estimated fair values. Identifiable
intangibles are being amortized over four to eight years and goodwill is being
amortized over ten years. In connection with the acquisition, SBS recorded a
$4.0 million earnings charge, based on an assessment by SBS, in conjunction with
an independent valuation firm, of purchased technology of SDL. The assessment
determined that $4.0 million of SDL's purchase price represented technology that
did not meet the accounting definitions of "completed technology," and thus
should be charged to earnings under generally accepted accounting principles.
The assessment analyzed certain products that were in various stages of
completion ranging from 35% of completion to 85% of completion, with estimated
completion dates ranging from the third quarter of calendar 2000 to the second
quarter of calendar 2001. The value assigned to acquired in-process research and
development was determined based on estimates of the resulting net cash flows
from the evaluated technology of SDL and the discounting of those cash flows to
present value. In projecting net cash flows resulting from those products,
management estimated revenues, cost of sales, selling expenses, research and
development expenses, and income taxes for those products. These estimates were
based on the following assumptions:
- Estimated revenues projected a compound annual growth rate over seven
years of 18%. Projections of revenue growth were based on management's
estimates of market size and growth supported by analyst's estimates and
by the nature and expected timing of the development of the products by
SBS and its competitors.
20
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- The estimated cost of sales as a percentage of revenue, initially at 64%
declining to 50%, was consistent with the historical rates for SDL's
business as well as historical results of companies operating within the
industry.
- Estimated selling expenses were expected to remain consistent as a
percentage of sales, with an average of 14% to 15%.
- The estimated research and development costs were expected to remain
consistent as a percentage of sales at 3.5% as most research and
development efforts are in the maintenance phase.
- An effective tax rate of 40% was estimated.
The projected net cash flows for the in-process projects were discounted
using a 30% weighted-average cost of capital ("WACC"). The calculation produces
the average required rate of return of an investment in an operating enterprise.
The WACC selected was based upon the risk/return characteristics of the subject
asset class. A WACC of 25% or 26% was used to determine the value of the return
of the core developed technology, the customer list and all other intangibles
acquired as part of the purchase of SDL. The fair value of the purchased
technology was determined in accordance with the views expressed by the staff of
the Securities and Exchange Commission. The financial results of SDL have been
included in SBS' Consolidated Financial Statements from April 12, 2000.
On December 20, 1999, SBS acquired SciTech, a Madison, Wisconsin based
designer and manufacturer of communications network I/O products based on PMC
and PCI form factors. The acquisition qualified as a pooling of interests for
accounting purposes and constituted a tax-free reorganization for federal income
tax purposes. Under the terms of the agreement, SciTech's shareholders exchanged
all outstanding shares of SciTech stock for 349,726 shares of SBS' stock.
SciTech was subsequently merged into Communications Products. SciTech's
historical results do not have a material effect on combined financial position
or results of operations, and as such, the financial position and results of
operations of SBS and SciTech are combined from October 1, 1999 on a prospective
basis.
On August 12, 1998, SBS completed the purchase of Communications Products.
Based in Carlsbad, California, Communications Products designs, manufactures,
and markets CPU boards based on the PowerPC processor for computer applications
that utilize VME and CompactPCI bus standards. SBS acquired all of the
outstanding capital stock of Communications Products for a total purchase price
of $5.3 million. The acquisition was accounted for using the purchase method of
accounting, and goodwill is being amortized over ten years. The financial
results of Communications Products have been included in SBS' Consolidated
Financial Statements from August 12, 1998.
On July 1, 1998, SBS acquired through its newly formed subsidiary, SBS
Technologies Holding GmbH, a 50.1% interest in OR. Based in Augsburg, Germany,
OR designs, manufactures, and markets CPU boards utilized in a wide range of
embedded computer applications. As part of the acquisition, SBS acquired,
through its newly formed subsidiary, SBS Technologies Holding GmbH, a 50.2%
interest in ORTEC, a Mindelheim, Germany based related company which
manufactures OR's commercial products and electronic products for other
customers. SBS also acquired, through its wholly-owned subsidiary, Embedded
Computers, based in Raleigh, North Carolina, a 100% interest in OR
Computers, Inc., based in Fairfax, Virginia, which was the U.S. marketing
support organization for the OR product line. Effective April 12, 1999, OR
Computers, Inc. was merged into Embedded Computers. The purchase price,
excluding transaction costs, for the majority interest in the two companies
based in Germany and
21
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
100% of OR Computers, Inc. was DM 17.5 million, approximately $9.7 million, paid
in cash and 48,000 shares of common stock valued at $0.7 million at closing. In
addition, SBS and the shareholders of both OR and ORTEC entered into exclusive
option agreements whereby SBS could acquire the remaining shares of both
companies on February 28, 1999. In December 1998, SBS modified the option
agreements, accelerating the purchase of the remaining interest in OR and ORTEC
from February 28, 1999 to December 9, 1998. The purchase price, excluding
transaction costs, for the remaining interest in the two companies based in
Germany was DM 18.2 million. SBS disbursed the cash, approximately
$10.4 million, including interest at 4.0%, during the quarter ended March 31,
1999. Acquisition costs associated with the purchases were approximately
$1.1 million. The acquisitions were accounted for using the purchase method of
accounting and goodwill is being amortized over a ten year period. In connection
with the initial acquisition, SBS recorded a $0.5 million earnings charge, based
on an assessment by SBS, in conjunction with an independent valuation firm, of
purchased technology of OR. The assessment determined that $0.5 million of OR's
purchase price represented technology that did not meet the accounting
definitions of "completed technology," and thus should be charged to earnings
under generally accepted accounting principles. This assessment analyzed certain
VME, CompactPCI, and PC Compact products that were under development at the time
of acquisition. These programs were in various stages of completion ranging from
initial development to 90% of completion, with estimated completion dates
ranging from September 1998 through April 1999. The fair value of these
development programs was determined in accordance with views expressed by the
staff of the Securities and Exchange Commission. In conjunction with the
acquisition of the remaining interest of OR completed on December 9, 1998, all
projects in process at the date of the initial acquisition had been
substantially completed so that no additional in-process research and
development was acquired. The financial results of OR, ORTEC, and OR
Computers, Inc. have been included in SBS' Consolidated Financial Statements
from July 1, 1998.
In June 1999, SBS formed through SBS Technologies Holding GmbH, SBS
Technologies Europe GmbH ("SBS Europe") to act as a sales and marketing agent in
Europe. SBS also formed, SBS Technologies, Inc. Foreign Holding Company, a
Nevada Corporation, to act as the holding company for all current and future
off-shore owned entities.
In August 1999, SBS formed a partnership between SBS Technologies Holding
GmbH, OR, and the newly formed general partner, SBS ORComputers Verwaltungs
GmbH.
On November 24, 1997, SBS completed the purchase of Industrial Computers, a
privately held San Diego County, California based manufacturer specializing in
the design and manufacture of rugged, special-purpose PC, and CompactPCI
industrial and telecommunications platforms, enclosures and turnkey systems and
offering a variety of Intel and PowerPC CPU boards and system enclosures,
including rackmount, benchtop, workstation and portable systems. SBS acquired
all of the outstanding capital stock of Industrial Computers for a total
purchase price of $5.8 million. The acquisition was accounted for using the
purchase method of accounting and goodwill is being amortized over a ten year
period. The financial results of Industrial Computers have been included in SBS'
Consolidated Financial Statements from November 24, 1997.
22
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following pro forma consolidated results of operations have been
prepared as if the acquisitions of SDL, Communications Products, and the
minority interest in OR and ORTEC had occurred at the beginning of each year
presented to the extent not included in historical results.
JUNE 30 JUNE 30
2000 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) -------- --------
Sales....................................................... $139,536 117,497
Net income.................................................. 10,745 7,910
Net income per common share................................. 0.86 0.68
======== =======
Net income per common share--assuming dilution.............. 0.79 0.64
======== =======
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisitions been consummated as of those dates, nor
is it intended to be a projection of future results. For the years ended
June 30, 2000 and 1999, non-recurring acquired in-process research and
development charges directly attributable to the acquisition of SDL on
April 12, 2000 of $4.0 million, and $0.5 million related to the acquisition of
the majority interest in OR on July 1, 1998, were not included in the pro forma
consolidated results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data as a percentage of sales:
YEAR ENDED JUNE 30
------------------------------
2000 1999 1998
-------- -------- --------
Sales....................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 47.7 42.0 42.8
------ ----- ------
Gross profit............................................ 52.3 58.0 57.2
Selling, general and administrative expense................. 20.5 22.6 22.8
Research and development expense............................ 12.5 13.5 10.8
Acquired in-process research and development charge......... 3.1 0.5 --
Amortization of intangible assets........................... 3.9 3.8 2.6
------ ----- ------
Operating income........................................ 12.3 17.6 21.0
Interest income (expense), net.............................. -- -- 1.3
Foreign exchange gains (losses)............................. (0.1) 0.6 --
------ ----- ------
Income before income taxes and minority interest........ 12.2 18.2 22.3
Income taxes................................................ 5.2 6.3 8.7
------ ----- ------
Income before minority interest............................. 7.0 11.9 13.6
Minority interest........................................... -- 0.4 --
------ ----- ------
Net income.................................................. 7.0% 11.5% 13.6%
====== ===== ======
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
SALES. In fiscal 2000, sales increased 20.9%, or $22.2 million, from
$106.0 million in fiscal 1999, to $128.2 million. Of this 20.9% increase, sales
contributed by SDL, which was acquired on April 12, 2000,
23
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
comprised 4.3%, and 16.6% was attributable to SBS' other product lines. Unit
shipments increased within the Computer Group segment, primarily due to an
increase in sales of the Group's computer processor products and general purpose
I/O products, partially offset by pricing pressure, the negative impact of
changes in exchange rates on sales, and a decrease in sales of the Group's
bus-to-bus adapter products. Unit shipments increased among all product lines
within the Communications Group (excluding the effect of the SDL acquisition),
but the increase in unit shipments was also partially offset by pricing
pressure. Unit shipments declined within the Aerospace Group, primarily due to a
decline in large project bookings, declines in the commercial satellite and
military markets which the Aerospace Group serves, and a decline in major new
aircraft development programs. Currently, management does not expect a further
decline in Aerospace Group sales or sales of bus-to-bus adapter products to
continue in fiscal 2001.
GROSS PROFIT. In fiscal 2000, gross profit increased 8.9%, or
$5.5 million, from $61.5 million in fiscal 1999, to $67.0 million. Of this 8.9%
increase, 3.8% was due to the acquisition of SDL. As expected, gross profit as a
percentage of sales decreased to 52.3% in fiscal 2000 from 58.0% in fiscal 1999,
primarily due to a higher percentage of sales of SBS' Communications Group
products, which generally yield lower margins than SBS' other products, and
lower margins experienced by the Computer Group and the Aerospace Group.
Management expects gross margins as a percentage of sales to continue to
decrease, as SBS' lower margin production and systems business is expected to
continue to represent a larger portion of the total sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 2000, selling,
general and administrative expense increased 9.8%, or $2.3 million from
$24.0 million in fiscal 1999, to $26.3 million. Of this 9.8% increase, 2.0%
resulted from the acquisition of SDL, and 7.8% was primarily due to an increase
in costs commensurate with the growth of the Communications Group and to the
formation of SBS Europe to act as a sales and marketing agent in Europe,
partially offset by a decrease in costs within the Aerospace group. In fiscal
2000, selling, general and administrative expense as a percentage of sales
decreased to 20.5% from 22.6% in fiscal 1999, as the increase in sales volume
more than offset the increase in expense.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 2000, research and development
expense increased by 11.1%, or $1.6 million, from $14.4 million in fiscal 1999,
to $15.9 million. Of this 11.1% increase, 3.7% resulted from the acquisition of
SDL, and 7.4% was primarily due to increased investment in product development
within the Communications Group commensurate with the growth of the segment,
partially offset by a reduction in costs within the Aerospace Group. In fiscal
2000, research and development expense as a percentage of sales decreased to
12.5% from 13.5% in fiscal 1999, as the increase in sales volume more than
offset the increase in expense.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. In fiscal 2000 and
fiscal 1999, in connection with the acquisition of SDL, completed on April 12,
2000, and in connection with the acquisition of the majority interest in OR
completed on July 1, 1998, SBS recorded earnings charges of $4.0 million, and
$0.5 million, respectively, based on assessments by SBS, in conjunction with
independent valuation firms, of purchased technology. These assessments
determined that $4.0 million of SDL's purchase price and $0.5 million of OR's
purchase price represented technology that did not meet the accounting
definitions of "completed technology", and thus should be charged to earnings
under generally accepted accounting principles (see "Recent Acquisitions"
above). In conjunction with the acquisition of the remaining interest in OR in
December 1998, all projects in process had been substantially completed so that
no additional in-process research and development was acquired.
24
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 2000, amortization of
intangible assets increased 25.9%, or $1.0 million from $4.0 million in fiscal
1999, to $5.0 million. This increase was primarily the result of the
amortization of goodwill and identifiable intangibles associated with the
acquisition of SDL and the acquisition of the minority interest in OR and ORTEC
in December of 1998, partially offset by the favorable impact of changes in
exchange rates.
INTEREST INCOME. In fiscal 2000, interest income increased 50.5%, or
$151,000, from $298,000 in fiscal 1999, to $449,000. This increase was primarily
due to interest income associated with amendments of prior years' tax returns
for research and experimental tax credits, as well as an increase in interest
income associated with SBS' surplus cash.
INTEREST EXPENSE. In fiscal 2000, interest expense increased 56.8%, or
$163,000, from $288,000 in fiscal 1999, to $451,000. This increase was primarily
due to interest associated with the $20.0 million of borrowings used to fund the
acquisition of SDL, partially offset by the elimination of interest expense
associated with the $10.4 million payment made in February 1999 for the
remaining interest in OR and ORTEC.
FOREIGN EXCHANGE GAINS (LOSSES). In fiscal 2000, the $144,000 of foreign
exchange losses were primarily attributable to the change in exchange rates
relating to interest payable on debt from SBS' foreign subsidiary. In fiscal
1999, the $667,000 of foreign exchange gains was primarily attributable to the
change in exchange rates between December 9, 1998 and February 28, 1999,
relating to the DM 16.7 million of payments made during the quarter ended
March 31, 1999 for the remaining interests in OR and ORTEC (see "Recent
Acquisitions" above).
INCOME TAXES. For fiscal 2000 and fiscal 1999, income taxes represented
effective income tax rates of 42.9% and 34.3%, respectively. The increase in the
effective rate was primarily due to a non-deductible acquired in-process
research and development charge and non-deductible goodwill amortization expense
associated with the acquisition of SDL, partially offset by tax planning
strategies implemented by SBS, including minimization of SBS' tax liability
related to debt between SBS and its foreign subsidiaries, and increased use of
SBS' foreign sales corporation. Additionally, the fiscal 1999 effective tax rate
included a $0.5 million benefit from research and experimental tax credits
related to prior years.
EARNINGS PER SHARE. For fiscal 2000, net income per common share was $0.71
compared to $1.05 for fiscal 1999. Net income per common share--assuming
dilution was $0.66 for fiscal 2000 compared to $1.00 for fiscal 1999. For fiscal
2000, net income per common share--assuming dilution, excluding the acquired
in-process research and development charge, would have been $0.95. For fiscal
1999, net income per common share--assuming dilution, excluding the net benefits
related to non-recurring foreign exchange gains, tax credit adjustments, and an
acquired in-process research and development charge, would have been $0.95. Net
income per common share and net income per common share--assuming dilution have
been restated to reflect the two-for-one stock split declared August 18, 2000.
REVIEW OF BUSINESS SEGMENTS
SBS is managed and operates through three operating segments: the
Communications Group, the Computer Group and the Aerospace Group. The
Communications Group was established this fiscal year and includes
Communications Products and Industrial Computers (which were included in the
Computer Group prior to this time), and SDL. The European Group which consisted
of OR and ORTEC has been merged into the Computer Group, as their business is
closely related to the processor and I/O
25
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
product businesses and is now under the same management. Reportable segments for
all periods have been reclassified to conform to the new segment reporting
structure.
The following is a discussion of sales to external customers and segment
profit for each reportable segment. SBS does not allocate to these segments
costs associated with its corporate headquarters, substantially all of the
amortization expense associated with acquisitions, substantially all interest
income earned on cash balances, interest expense associated with SBS borrowing
facilities and acquired in-process research and development charges. This
measure of segment profit described above is referred to in this review as
"Segment Profit."
COMMUNICATIONS GROUP
SALES TO EXTERNAL CUSTOMERS SEGMENT PROFIT
--------------------------- --------------
FY00.................................... $43.9 million $10.2 million
FY99.................................... $19.3 million $ 3.9 million
Communications Group sales to external customers in fiscal 2000 increased
127.1%, or $24.6 million, from $19.3 million in fiscal 1999, to $43.9 million.
Of this 127.1% increase, sales contributed from the acquisition of SDL on
April 12, 2000 accounted for 23.3% of the increase. Sales of the Group's system
and enclosure products and sales of the Group's PowerPC based processor products
increased 18.3% and 179.5%, respectively, as compared to fiscal 1999. These
increases in sales represent volume increases, partially offset by competitive
pricing pressure.
Communications Group segment profit in fiscal 2000 increased 161.9%, or
$6.3 million, from $3.9 million in fiscal 1999, to $10.2 million. This increase
was primarily due to earnings contributed by the acquisition of SDL on
April 12, 2000 and an increase in sales among the Group's other product lines,
partially offset by an increase in selling, general and administrative and
research and development expenses commensurate with the growth of the segment.
For the same reasons, segment profit as a percentage of sales increased from
20.2% in fiscal 1999 to 23.2% in fiscal 2000.
COMPUTER GROUP
SALES TO EXTERNAL CUSTOMERS SEGMENT PROFIT
--------------------------- ----------------
FY00.................................... $ 58.1 million $ 11.9 million
FY99.................................... $ 54.8 million $ 12.8 million
Computer Group sales to external customers in fiscal 2000 increased 6.0%, or
$3.3 million from $54.8 million in fiscal 1999, to $58.1 million. Sales of the
Group's general purpose I/O products and sales of the Group's computer processor
products increased 11.4% and 12.2%, respectively, as compared to fiscal 1999.
This increase was partially offset by a decrease in sales of the Group's
bus-to-bus adapter products, primarily the result of a decrease in inventory
requirements from a large customer, a decrease in export sales, and continued
migration from older more expensive bus technologies to PCI-based applications.
Currently, management does not expect the decrease in sales of bus-to-bus
adapter products to continue in fiscal 2001. Overall, the Group experienced
competitive pricing pressure as well as the negative impact of changes in
exchange rates on sales, as the U.S. dollar strengthened against the Deutsche
mark.
26
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Computer Group segment profit decreased 7.1%, or $900,000, from
$12.8 million in fiscal 1999 to $11.9 million. This decrease was primarily due
to lower margins experienced across the Group's product lines, the decrease in
sales of the Group's bus-to-bus adapter products, and an increase in selling,
general and administrative expense primarily associated with the formation of
SBS Europe to act as a selling and marketing agent in Europe. For the same
reasons, segment profit as a percentage of sales decreased from 23.4% in fiscal
1999 to 20.5% in fiscal 2000.
AEROSPACE GROUP
SALES TO EXTERNAL CUSTOMERS SEGMENT PROFIT
--------------------------- --------------
FY00.................................... $26.2 million $ 6.9 million
FY99.................................... $31.9 million $10.8 million
Aerospace Group sales to external customers in fiscal 2000 decreased 17.9%,
or $5.7 million, from $31.9 million for fiscal 1999, to $26.2 million. Sales of
the Group's avionics interface products and sales of the Group's telemetry
products decreased 12.6% and 31.6%, respectively, compared to fiscal 1999. These
decreases were primarily the result of declines in large project bookings and
declines in the commercial satellite and military markets which the Aerospace
Group serves, as well as a decline in major new aircraft development programs.
Management expects no growth in Aerospace Group sales to external customers in
fiscal 2001.
Aerospace Group segment profit decreased 35.9%, or $3.9 million, from
$10.8 million for fiscal 1999, to $6.9 million. This decrease was primarily due
to lower sales of the Group's telemetry and avionics interface product lines and
a shift in sales mix to lower margin products, partially offset by reductions in
research and development and selling, general and administrative expense. For
the same reasons, segment profit as a percentage of sales decreased from 33.7%
in fiscal 1999 to 26.3% in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
SBS uses a combination of the sale of equity securities, internally
generated funds and bank borrowings to finance its acquisitions, working capital
requirements, capital expenditures and operations.
Cash totaled $3.6 million at June 30, 2000, an increase of $95,000 from
June 30, 1999. This increase was the result of $4.9 million of cash provided by
operating activities, $9.3 million from the exercise of stock options and
warrants, and $20.0 million drawn against SBS' $30.0 million Credit Agreement
with Bank of America, N.A., formerly NationsBank, N.A., used to finance the
acquisition of SDL, offset by the acquisition of SDL for $24.7 million, net of
cash acquired, $1.9 million for the acquisition of property and equipment,
$2.0 million to enter into a licensing agreement for fibre channel technology,
$4.0 million of payments on SBS' notes payable, $1.4 million of payments to the
former shareholder of OR, and $0.4 million of dividends paid to the former
shareholders of SciTech, in conjunction with the acquisition accounted for as a
pooling of interests. SBS' growth during the fiscal year caused SBS to increase
accounts receivable and inventory. Liabilities were in line with the current
level of business.
In fiscal years ended June 30, 1999 and June 30, 1998, SBS generated
$10.3 million and $8.7 million, respectively, of positive cash flow from
operating activities. In fiscal 1999, the positive cash
27
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
flow from operating activities and surplus cash, combined with borrowings under
SBS' Credit Agreement, provided sufficient funds to acquire Communications
Products, OR, ORTEC, and OR Computers Inc. In fiscal 1998, the positive cash
flow from operating activities provided SBS sufficient funds to acquire
Industrial Computers in November 1997.
On December 1, 1998, SBS entered into a $15.0 million Credit Agreement
("Agreement") with Bank of America, N.A. The Agreement expired on November 30,
1999, but was modified to extend the expiration date to January 31, 2000.
Effective January 31, 2000, the Agreement was renewed and modified, allowing for
$25.0 million of borrowings with an expiration date of November 30, 2001.
Effective March 31, 2000, the Agreement was modified, allowing for
$30.0 million of borrowings with an expiration date