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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 1998 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-10981
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
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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, 1998 as reported on NASDAQ was approximately $99,353,678. Shares
of Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock 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, 1998, Registrant had 5,838,725 shares of Common Stock
outstanding.
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
1998 Annual Meeting of Stockholders to be held November 9, 1998.
PART I
ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY,
AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD
LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND ECONOMIC
CONDITIONS; CUSTOMER ACCEPTANCE OF AND DEMAND FOR THE COMPANY'S PRODUCTS; THE
COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW PRODUCTS ON A
TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS;
AND OTHER RISK FACTORS LISTED HEREIN.
INTRODUCTION
SBS Technologies, Inc. (the "Company") 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. The Company's product lines include CPU boards
("CPU"), general purpose input/output ("I/O") modules, avionics interface
modules and analyzers, interconnection and expansion units, telemetry boards,
data acquisition software and industrial computer systems and enclosures. The
Company's products are used in a variety of applications, such as
telecommunications, medical imaging, industrial control, and flight
instrumentation in commercial and aerospace markets. The Company capitalizes
on its design expertise and customer service capabilities to enhance product
quality and reduce time to market for OEM customers.
The Company's objective is to become a leading supplier of board level
components to the standard bus embedded computer market. The Company intends
to continue its growth through a combination of internal growth and
acquisitions. Internal growth is achieved through expanding its existing
product lines through new product development and through increasing
penetration of its existing customer base.
Fiscal 1998 was a year of progress in the continued development of the
Company. The Company focused on continually enhancing and improving the
products it delivers and its ability to satisfy customer needs. During fiscal
1998 the Company instituted a program of business integration. The Company
renamed all of its subsidiary companies under the "SBS" trade name and
realigned them into two operating groups, the SBS Computer Group and the SBS
Aerospace Group. In addition, the Company combined its separate subsidiary
sales forces into two groups, one focused on SBS Computer Group customers and
one focused on the SBS Aerospace Group customers.
Revenues for the fiscal year ended June 30, 1998 increased 40.5% from $52.8
million to $74.2 million. The source of this revenue increase was twofold:
growth in the core businesses, and growth by acquisition.
The Company entered fiscal 1998 as a leader in several segments of the
multi-billion dollar embedded computer market, with the continuing goal of
expanding its market presence. In the computer mezzanine board I/O segment,
the Company broadened its line of IndustryPacks -Registered Trademark- ("IPs")
to over 120 variants and introduced a series of ruggedized mezzanine I/O boards
that serve a segment of the market in which the Company previously did not
participate. In the Avionics business, the Company's interface boards and bus
analyzers remained the industry standard for quality and innovation with a
broadening of the Company's customer base and participation in such programs
as the Joint Strike Fighter Replacement Program, the C130J next generation
military transport aircraft, and Sweden's GRIPEN fighter program. The
Company's telemetry product line is focused toward the satellite test and
control market in order to serve the rapidly expanding satellite market
driven by both telecommunications and defense applications.
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During the last two fiscal years, the Company acquired three business which
have expanded its products and marketing opportunities. It also divested one
part of its business which was not synchronous with its core businesses. In
August 1996, the Company expanded into the broader embedded computing market
with the acquisition of Logical Design Group, Inc. (renamed SBS Embedded
Computers, Inc. in fiscal 1998), a manufacturer of Intel processor-based CPU
boards. This acquisition positioned the Company to take advantage of the
growth in the use of both Intel processors and Microsoft software in the
embedded computer market.
In November 1996, the Company acquired Bit 3 Computer Corporation (renamed
SBS Bit 3 Operations, Inc. in fiscal 1998), a leading developer and
manufacturer of high performance bus interconnect hardware and software
products for many of the most widely used computer architecture standards in
the standard bus embedded computer market. This acquisition took advantage of
the introduction into the embedded computing market of new bus standards such
as PCI and CompactPCI, expanded the Company's customer base and opened the bus
interconnection and expansion market to the Company. In the quarter ended
December 31, 1996, the Company recorded a $11.0 million in-process
research and development charge to earnings associated with this acquisition.
In June 1997, the Company divested its Judgmental Use of Force Training
Business. The Company determined that this business was not consistent with
the Company's objective of becoming a leading supplier of board level
components to the standard bus embedded computer market.
In November 1997, the Company acquired Micro Alliance, Inc. (renamed SBS
Micro Alliance, Inc. in fiscal 1998), which specializes in the design and
manufacture of special-purpose PC-compatible computer systems. This company
offers a variety of CPU boards and system enclosures, including rack mount,
desktop and mobile systems. Most systems contain passive backplanes that
allow the addition of up to 20 ISA and PCI cards. These products are often
customized to meet the needs of particular OEM applications.
After the end of the 1998 fiscal year, the Company acquired two more
businesses. On July 1, 1998, the Company acquired, through its newly formed
subsidiary, SBS Holdings GmbH, a 50.1% interest in OR Industrial Computers
GmbH ("OR") (see "Management's Discussion & Analysis: Subsequent Events"), 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 input/output
boards. As part of this acquisition, the Company acquired, through its newly
formed subsidiary, SBS Holdings 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. The Company also acquired, through its wholly-owned subsidiary SBS
Embedded Computers, Inc. based in Raleigh, NC, 100% of the shares of OR
Computers, Inc, based in Fairfax, Virginia, which is the U.S. marketing
support organization for the OR product line. In addition, the Company and
the shareholders of both OR and ORTEC entered into exclusive option
agreements under which the Company may acquire the remaining shares of both
companies on February 28, 1999.
On August 12, 1998, the Company purchased 100% of the outstanding shares of
V-I Computer ("V-I") (see "Management's Discussion & Analysis: Subsequent
Events"). Based in Encinitas, California, V-I designs, manufactures and
markets CPU boards based on the Motorola PowerPC -Registered Trademark-
processor for embedded computer applications based on the VME and CompactPCI
bus architecture standards.
Excluding the effect of the $11.0 million charge to earnings taken in fiscal
1997 in conjunction with the acquisition of Bit 3, net income for the 1998
fiscal year would have increased 42.3% from $7.1 million in fiscal 1997 to
$10.1 million, and diluted earnings per common share would have increased
22.4% from $1.34 to $1.64. Including the effects for the 1997 charge to
earnings, net income for fiscal 1997 was $461,685, or $0.09 per diluted
common share.
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The Company was incorporated in New Mexico in November 1986 and began
operations in September 1987. The Company's 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 the
"Company" or "SBS" are to SBS Technologies, Inc. and its consolidated
subsidiaries. As of June 30, 1998, the Company had five subsidiaries, SBS
Berg Telemetry Systems, Inc. ("Berg"), SBS GreenSpring Modular I/O, Inc.
("GreenSpring"), SBS Embedded Computers, Inc. ("SBS Embedded"), SBS Bit 3
Operations, Inc. ("Bit 3") and SBS Micro Alliance, Inc ("Micro Alliance").
After the end of the 1998 fiscal year, the Company added five additional
subsidiaries with the formation of SBS Holdings GmbH and the acquisitions of
OR, ORTEC, OR Industrial Computers, Inc. and V-I.
IndustryPack -Registered Trademark- is a registered trademark of the Company.
All other trademarks or tradenames referred to in this document are the property
of their respective owners.
SBS' PRODUCTS
The Company's primary product lines are divided into two groups: general
purpose products including CPU products, general purpose I/O products, bus
interface products and industrial computer systems and enclosures, and
special purpose products including telemetry products, avionics interface
products, and data acquisition software.
GENERAL PURPOSE PRODUCTS
CPU PRODUCTS. The Company entered the standard bus embedded computer CPU
board market with its acquisition of SBS Embedded in August 1996 (see
"Management's Discussion & Analysis: Recent Acquisitions"). CPU boards
contain the computational functionality of an embedded computer system. The
Company produces CPU boards for the VME segment of the embedded computer
market, the most widely accepted bus standard in the industry. The VME CPU
board market can be segmented by processor type. The largest segment is made
up of boards designed around the Motorola 680X0 series processors, upon which
the VME standard was based. A growing segment is comprised of boards based on
Intel 80X86, Pentium and Pentium II processors which provide access to the
large base of Windows and Windows NT software available from the PC market.
The CPU boards sold by SBS Embedded are based on Intel 80X86, Pentium and
Pentium II processors. At present, the Company offers nine Intel
processor-based CPU boards ranging in price from approximately $2,500 to
approximately $8,500. In fiscal 1998 and 1997, sales of these products
comprised 8.8% and 11.5%, respectively, of the Company's total sales. As of
September 1, 1998 and 1997, backlog orders were $.6 and $.7 million
respectively. All backlog orders are expected to be filled in the current
fiscal year.
The Company broadened its CPU product line with the recent acquisitions of OR
and V-I. The OR product line includes CPU boards based on Intel computer
architecture and is available in the VME, CompactPCI, and PCCompact form
factors. In addition, OR provides VME CPU boards based on the Motorola 680X0
series processors and a series of computer input/output boards. The OR
product line consists of boards and systems, including ruggedized products
for military and industrial applications, transportation, industrial
controls, factory automation, and various other commercial and industrial
applications. Like other SBS product lines, OR's products, can support some
application specific modifications with their line of component products. The
OR facility will serve as the European base of operations for the Company's
other product lines, and OR Computers, Inc. will operate as a wholly-owned
subsidiary of SBS Embedded Computers, Inc. for the foreseeable future. The
V-I Computer product line consists of products that are typically used in
telecommunication, industrial automation, and defense applications. The V-I
Computer product line complements the other CPU offerings and will enable the
Company to offer a more complete list of processor solutions to its customers.
GENERAL PURPOSE I/O PRODUCTS. In April 1995, the Company purchased
GreenSpring, a leading developer and producer of I/O modules known as IPs.
IPs are small mezzanine boards that plug onto an embedded computer
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board or a carrier board and provide specific types of I/O for embedded
computer systems. The Company has continued to expand the market for IP
products by broadening its line of carrier cards that can accommodate up to
six IPs. The Company's offerings currently include VME, PCI, PC\104, Compact
PCI and ISA bus carrier cards. GreenSpring's product line of over 120 I/O
products services a wide range of applications in the embedded computer
market including analog I/O, bus interface functions, digital/parallel I/O,
motion control, telecommunications/serial I/O, telecommunications products,
video/graphics adapters and temperature measurement with prices ranging from
approximately $350 to approximately $3,500. During fiscal 1998, the Company
introduced sixteen ruggedized conduction cooled mezzanine I/O boards
primarily used in military environments. These serve a portion of the
embedded computer market in which the Company previously did not participate
and have prices ranging from approximately $800 to approximately $5,000. In
fiscal years 1998, 1997 and 1996, sales of general purpose products comprised
approximately 22.8%, 25.8% and 35.3%, respectively, of the Company's total
sales. As of September 1, 1998, 1997 and 1996, backlog orders were $3.2, $2.4
and $2.5 million, respectively. All backlog orders are expected to be filled
in the current fiscal year.
BUS INTERFACE PRODUCTS. In November 1996, the Company purchased Bit 3 (see
"Management's Discussion & Analysis: Recent Acquisitions"), a leading
developer and manufacturer of high performance bus interconnect hardware and
software products. The rapid expansion of microprocessor-based industrial
computers has resulted in the proliferation of a number of different computer
architecture standards. Generally speaking, a computer designed on one
architectural standard cannot communicate with a computer designed on another
architectural standard. Products could not be configured using two or more
computer architectures unless a communications link between them could be
established. Bit 3 identified this market for products which permit
industrial computers designed around different computer architectures to
communicate. In 1983, Bit 3 introduced its first adapter product, an
interface device to connect IBM PC equipment with Multibus architecture
computers. Since then, Bit 3 has expanded its product line to include
computer networking and interconnection hardware for many of the popular
computer architecture standards used in the standard bus embedded computer
market, including VME, PCI, CompactPCI, Sbus, ISA, EISA, Micro Channel, GIO,
TURBOCHANNEL, Multibus and Qbus. The development of Bit 3's new products is
driven by the emergence of significant new standard bus specifications and
applications. In addition, Bit 3 provides a series of PCI expansion units,
which allows OEMs to increase the number of devices needed by their
particular application.
Bit 3 products are used in a wide variety of applications, including data
acquisition, image and visualization processing, industrial process control,
medical electronics, signal processing and system integration. Bit 3's
typical customer uses bus adapter products because of the need for high
speed, low-latency interconnections between computer platforms. This
connectivity cannot be provided at the required performance levels by common
local area networking solutions, such as Ethernet or Token Ring, nor can it
in most cases be provided by higher speed protocols, such as ATM or FDDI. Bit
3 currently provides interconnect and expansion products to a wide variety of
commercial users. In fiscal 1998 and 1997, sales of these products comprised
22.7% and 17.1%, respectively, of the Company's total sales. As of September
1, 1998 and 1997, backlog orders were $.9 and $1.5 million, respectively. All
backlog orders are expected to be filled within the current fiscal year.
INDUSTRIAL COMPUTER SYSTEMS AND ENCLOSURES. In November 1997, the Company
purchased Micro Alliance, (see "Management's Discussion & Analysis: Recent
Acquisitions"), a leading designer and producer of PC-compatible industrial
computer systems for the embedded computer market. The systems are based on
PCI and ISA architectures and are typically passive backplane-based, allowing
up to 20 PCI or ISA cards to be added. The Micro Alliance computer systems
are designed for OEM customers in the industrial, telecommunication,
scientific and military markets. They come in a variety of shapes and sizes,
including rack mount, desktop and mobile. A majority of the systems are
specially designed to include custom paint colors, custom logos, custom face
plates, or custom chassis designs. In June of 1997, a new line of rugged
portable systems was introduced focusing on new segments of existing
business, including medical imaging, remote test and measurement and
telemetry applications. In fiscal 1998, sales of these products comprised
6.5% of the Company's total sales. As of September 1, 1998, backlog orders
were $2.8 million. All backlog orders are expected to be filled within the
current fiscal year.
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SPECIAL PURPOSE PRODUCTS
TELEMETRY PRODUCTS. In August 1992, the Company purchased Berg, a major
supplier of telemetry interface equipment for the embedded computer market.
Telemetry is the process used to send and receive digital data via radio
waves. The Company's telemetry interface products allow computers to receive,
interpret and process telemetry data. Telemetry is often used to transmit
data from some 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.
Berg pioneered the concept of using boards specially designed for telemetry
interface which would be added to standard ground station computers. Berg has
expanded its product offerings to include specialized equipment designed to
receive and process satellite data. The Company's telemetry products serve a
specialized market and include a significant software component. Berg sells
approximately 30 products for the VME, PCI, and ISA bus telemetry markets at
prices ranging from approximately $3,000 to approximately $30,000. In fiscal
years 1998, 1997 and 1996, sales of these products comprised approximately
9.7%, 11.9% and 20.8%, respectively, of the Company's total sales. As of
September 1, 1998, 1997, and 1996, backlog orders were $1.6 million, $0.9
million and $0.7 million, respectively. All backlog orders are expected to be
filled within the current fiscal year.
AVIONICS INTERFACE PRODUCTS. The Company's avionics products interface an
embedded computer system with the MIL-STD-1553 avionics 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. Initial applications for the Company's products were support of
system development, system testing and simulation. 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. Like
its telemetry products, the Company's avionics products occupy a niche market
and include a significant software component. The Company offers
approximately 20 avionics interface products at prices ranging from
approximately $4,000 to approximately $20,000. In fiscal years 1998, 1997 and
1996, sales of this product comprised approximately 29.5%, 30.6% and 39.9%,
respectively, of the Company's total sales. As of September 1, 1998, 1997 and
1996, backlog orders were $1.8 million, $2.0 million and $1.9 million,
respectively. All backlog orders are expected to be filled within the current
fiscal year.
DATA ACQUISITION SOFTWARE PRODUCT. The Company announced its first software
product development effort in October 1997, with the introduction of
DataXpress-TM-, a data acquisition software product designed for the
Microsoft Windows NT operating environment. The first commercial release of
DataXpress was shipped in July 1998. DataXpress acquires data from a variety
of interfaces, displays the data in real-time using multiple, animated
graphical views per screen, and distributes this information on a network.
Because it can run on PC's, laptops and workstations, DataXpress can be
easily and inexpensively expanded without sacrificing quality or
capabilities. This new product is designed to meet the needs of telemetry
ground and flight test applications, commercial and military avionics test
and integration, and industrial automation applications. DataXpress can also
expand existing data acquisition systems by providing object-oriented
interfaces that enable system administrators and programmers to easily
integrate DataXpress systems with the existing, third party software
applications. The Company offers a complete software product including
manuals, training and customer support for implementation and continuing
service.
OTHER BUSINESS. In June 1997, the Company sold its Judgmental Use of Force
product (see "Management's Discussion & Analysis: Sale of Judgmental Use of
Force Business"). Sales of this product line were immaterial to the Company's
operations.
CUSTOMERS AND APPLICATIONS
The Company's broad range of products support a wide range of applications.
In fiscal 1998, 1997 and 1996, no one customer exceeded 10% of the Company's
sales. The following table highlights some of the Company's representative
customers and their applications utilizing the Company's products.
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APPLICATION CUSTOMER COMPANY PRODUCT
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COMMERCIAL AND INDUSTRIAL APPLICATIONS
Aircraft Simulation Flight Safety International I/O, Interconnect
Aircraft Simulation CAE Electronics Interconnect
Airport Baggage Inspection InVision Technologies Interconnect
Airport Ground Traffic Control Norden/Westinghouse CPU
Airport Ground Traffic Control ARINC I/O
Automated Plasma Processing Systems Plasma Therm Industrial Systems & Enclosures
"C" Size Copier Xerox I/O
Color Proof Copier Eastman Kodak I/O
Currency Inspection System Currency Systems CPU
Document Scanner General Scanning I/O
License Plate Readers Perceptics Interconnect
OCR Mail Address Processing Bell & Howell Interconnect
Semiconductor Handler Delta Design I/O
Semiconductor Handler Lamm Research I/O
Turbine Control System GE Motors CPU
Video Compression Sun Microsystems Interconnect
COMMUNICATIONS
Cellular Telephone Systems ArgoSystems CPU
Commercial DAMA Viasat I/O
Communications Satellite Testing TRW Telemetry
GSP Testing Aerospatiale Telemetry
Integrated Voice and Data Systems Dictaphone Industrial Systems & Enclosures
Network Switching Platforms Netrix Industrial Systems & Enclosures
PBX Systems Allstar Systems Industrial Systems & Enclosures
Satellite Power Supply Testing Elgar Corporation Industrial Systems & Enclosures
Telephone Switch Billing System ACECOM I/O
INDUSTRIAL AUTOMATION
Automotive Brake Tester Burke Porter Machinery CPU
CNC Controller MDSI I/O
CNC Controller Herkules I/O
CNC Machine UVA I/O
Carpet Manufacturer Process Control MOOG I/O
Packaging Machinery Triangle Package Machinery I/O
Robot Control Adept Technology I/O
Automotive Test Stands W.M. Associates/Digital Equipment Interconnect
Corp.
Automotive Wheel Alignment Burke Porter Machinery CPU
Carpet Manufacturer Process Control MOOG I/O
Packaging Machinery Triangle Package Machinery I/O
PLC Co-processor GE Fanuc CPU
Programmable Logic Controller Reliance Electric Interconnect
Real-time Control Systems Queue Systems, Inc./Digital Interconnect
Equipment Corp
Robot Control Adept Technology I/O
Semiconductor Trim Equipment Control Automation CPU
Surface Mount Board Assembly Seiko Instruments Interconnect
Page 8
MEDICAL DEVICES
Blood Analyzer IGEN I/O
CT Beam Scanner Imatron Interconnect
DNA Analyzer Organon Teknika I/O
PET Imaging Systems UGM Medical Systems, Inc. Interconnect
Positron Emissions Topography Positron Corporation Interconnect
Ventilators Display NellCor I/O
MILITARY AND SPACE APPLICATIONS
Ariane V System Test and Simulation Aerospatiale Avionics
Ariane V Test Support Lockheed Martin Telemetry
B-2 Flight Testing Northrop Grumman Telemetry
C-17 Aircraft Testing Boeing Telemetry/Avionics
Communications System Department of Defense CPU
Crusader UDLP/General Dynamics I/O
F-14 Northrop Grumman Avionics
F-15, F-16 U.S. Government Avionics
F-16 TRW Avionics
F-22 Lockheed Martin Avionics
Flight Test/Satellite Integration & Test Boeing Telemetry
Flight Test/Shuttle Command Launch Control NASA Telemetry
System
Helicopter Systems Fugitsu Avionics
Military Radios GEC Marconi CPU
Military Satellite Telemetry Tracking & Lockheed Martin Telemetry
Control/ Missile Test
Military Satellite Telemetry Tracking & Aerojet Telemetry
Control
Mini-DAMA Titan Linkabit I/O
Missile Systems/ F-18 Raytheon Avionics
Missile Test Raytheon Telemetry
Missile and Aircraft Test NAWC Telemetry
Missile and Aircraft Test McDonnell Douglas Telemetry
Mission Planning & Debriefing Lockheed-Sanders Interconnect
Rocket Launch Controller Orbital Sciences CPU
Satellite Imaging TRW Telemetry
Satellite Telemetry Tracking and & Control/ Real Time Logic Telemetry
Satellite Integration Test
Satellite Integration & Test TRW Space and Electronics Telemetry
Space Station Simulator Raytheon CPU
TAC-3 Hughes Data Systems Interconnect
TAC-4 Hewlett Packard Interconnect
TEST AND MEASUREMENT APPLICATIONS
Automotive Test/ Simulation Systems Integrated Systems I/O
Particle Collision and Detection System CERN I/O
Temperature Control Therm-O-Disk I/O
VLSI Tester LTX/Trillium Interconnect
TRANSPORTATION
Aircraft Flight Testing Cessna Telemetry
Aircraft Ground Control ARINC I/O
Commercial Avionics System Test Honeywell Avionics
Page 9
Commercial Avionics System Test Rockwell International Avionics
FAA Communication System Delta Information Systems I/O
Jet Engine Testing Pratt & Whitney Telemetry
Lane Controllers NYSTA I/O
Maritime Systems NEC Avionics
777 Aircraft Testing Boeing Telemetry
Train Track Alignment System Fairmont Tamper CPU
SALES AND MARKETING
The Company markets its products both domestically and internationally. As of
September 1, 1998, excluding the effect of the acquisitions of OR and V-I,
(see "Management's Discussion and Analysis: Subsequent Events"), the Company
had 70 employees, who typically hold engineering degrees, in sales, marketing
and customer relations. During fiscal 1998, the Company realigned its sales
force into two groups, the aerospace group sales force and the computer group
sales force and reduced its use of independent manufacturers' representatives
from 43 at the beginning of fiscal 1998 to 14 at the end of fiscal 1998. The
aerospace sales force is responsible for sales of the Company's avionics
interface and telemetry products and the computer group sales force is
responsible for sales of the Company's CPU, I/O, interconnect and industrial
computer systems and enclosures products. Employee sales personnel are
educated about each of the Company's product lines and refer opportunities to
appropriate product line managers. Primary sales methods vary among the
Company's product lines. The Company's avionics interface and telemetry
products generally have the most complex applications and, as a result, leads
are generally identified by field sales personnel or independent
manufacturers' representative and closed with the assistance of the
appropriate product line manager. In the case of the Company's CPU, I/O,
interconnect and industrial computer systems and enclosure products, sales
are either closed by the computer group sales force, or independent
manufacturers' representatives or are the result of catalog sales. In each of
the Company's product lines, sales employees generally pursue "design in"
applications where the Company's products are included as part of a system.
The Company sells approximately 16% of its products outside the United States
(see footnote 4 to the consolidated financial statements). These sales are
primarily generated by the 41 international distributors which represent the
Company's products. During the 1999 fiscal year, the Company will add sales
from its recently acquired German businesses. The Company maintains sales
offices in Albuquerque, New Mexico for its avionics interface products; in
Raleigh, North Carolina, for its Intel processor-based CPU boards; in Menlo
Park, California, for its I/O products; in Carlsbad, California, for its
telemetry products; in St. Paul, Minnesota for its interconnect products and
in Vista, California for its industrial computer systems and enclosure
products. The Company's domestic field sales employees are located throughout
the United States. The Company also maintains an international sales office
near London, England to support European sales of its avionics interface
products. Sales and sales leads are generated through a range of activities
performed by the Company including identification of participants in key
defense-related programs, participation in numerous trade shows, direct mail
catalogs, advertisements in leading trade publications and corporate and
subsidiary web sites on the Internet.
COMPANY RESEARCH AND DEVELOPMENT
The Company 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, 1998, excluding the effect of the
acquisition of OR and V-I (see "Management's Discussion and Analysis:
Subsequent Events"), the Company had approximately 86 employees engaged in
research and development activities. Of these employees, 48 have technical
degrees and 21 have advanced degrees. The Company seeks to combine
special-purpose hardware, firmware and software in its products to provide
its customers with the desired functionality. Approximately
Page 10
60% of the Company's research and development efforts in fiscal 1998 were
software related. The Company's research and development expense was $8.0
million, $4.4 million and $2.8 million in fiscal 1998, 1997 and 1996,
respectively, corresponding to 10.8%, 8.4% and 9.1% of sales, respectively.
SBS Embedded's current research and development activity is focused on
evolutionary improvement of its existing product lines. GreenSpring's efforts
are directed towards broadening the scope of its market by developing new IPs
and upgrading existing products to state of the art technology. Examples
include the recent introduction of 16 ruggedized conduction cooled mezzanine
I/O boards primarily used in military environments. The development of Bit
3's new products is driven by the emergence of significant new bus
specifications and applications. For example, Bit 3 recently introduced a
fiber optic adapter to connect PCI and VME systems. Berg is continuing to
upgrade its products' performance by increasing the operating bit rates, a
key performance measure in the telemetry industry. Berg is also continuing to
expand its offerings of high performance, CCSDS packet switching products for
the satellite ground station market. The Company is also extending its
avionics interface product line. For example, the Company is continuing to
expand development of additional ruggedized avionics product for the
operational system market. In October 1997, the Company announced its first
software product development effort with the introduction of DataXpress-TM-,
a data acquisition software product designed for the Microsoft Windows NT
operating environment. This product is designed to meet the needs of
telemetry ground and flight test applications, commercial and military
avionics test and integration, and industrial automation applications. There
can be no assurance that the Company will be successful in developing and
bringing to market any products as a result of its research and development
efforts.
SUPPLIERS
The Company uses contract manufacturing to produce substantially all of its
board-level products. The Company 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 the Company's products. Following manufacturing of
these products, the Company performs test, packaging and support functions
for the Company's products. The Company reduces dependence on a particular
contract manufacturer by using multiple contract manufacturers for each of
the Company's product lines. However, the Company 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 the Company 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. The Company's industrial computer systems and enclosure business
purchases all needed components from third party vendors. The Company
performs all assembly, test, packaging and support functions for these
products.
Many of the Company's products consist in part of state-of-the-art digital
electronic components. The Company is dependent upon third parties for the
continuing supply of many of these components, some of which are obtained
from a sole supplier such as Xylinx, Inc. or a limited number of suppliers,
alternative sources for which would be difficult to locate. Moreover,
suppliers may discontinue or upgrade some of the products incorporated into
the Company's products, which could require the Company to redesign a product
to incorporate newer or alternative technology. Although the Company believes
that it has arranged for an adequate supply of components to meet short-term
requirements, the Company does not have contracts for the components which
assure availability and price, however the Company has negotiated cash
discount terms for prompt payment. Lack of timely availability of components
could cause delays in shipment of product and affect the Company's revenues
during certain periods as well as lead to customer dissatisfaction. Limited
availability of components could also require the Company to pay premiums for
parts to make shipment deadlines and thus affect the Company's profit margin,
or cause the Company to increase its inventory of scarce parts and thus
affect the Company's cash flow. There is no assurance that the Company 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.
Page 11
COMPETITION
The standard bus embedded computer industry is highly competitive and
fragmented, and the Company's competitors differ depending on product type,
company size, geographic market and application type. The Company faces
competition in each of its product lines. The Company believes that because
of the diverse nature of the Company's products and the fragmented nature of
the embedded computer market, there is little overlap of competitors for each
product line. Competitive factors across the Company's product lines include
performance, customer support, product longevity, supplier stability, breadth
of product offerings and reliability. Many of the Company's existing and
potential competitors have financial, technological and marketing resources
significantly greater than those of the Company and may have established
relationships with customers or potential customers that afford them a
competitive advantage. There can be no assurance that the Company will be
able to compete effectively in its current or future markets or that
competitive pressures will not adversely affect its business, financial
condition or results of operations.
In the Company's CPU product line, the Company competes with a number of
other suppliers of CPU boards. The Company's direct competitors include other
companies that build CPU boards based on Intel microprocessor technology such
as Force Computers, Inc. (a wholly owned subsidiary of Solectron
Corporation), Performance Technologies, Inc., RadiSys Corporation, VME
Microsystems, Inc. and XYCOM, Inc. In addition, with the acquisition of OR
and VI, the Company also competes with suppliers of CPU boards based on
Motorola 680x0 and PowerPC architectures.
In the generalized computer I/O product area served by GreenSpring and its IP
product line, the Company has two classes of competition. The first class
includes companies that compete directly by selling IP products. The second
class includes companies that compete with I/O products using a different
implementation to provide functionally equivalent products. The Company's
competitors in each of these classes include Acromag, Inc. , Systran, Inc.
and VME Microsystems, Inc.
In the telemetry market, the Company competes with other suppliers of open
architecture telemetry solutions. It also indirectly competes with suppliers
of traditional, closed architecture telemetry systems. The Company's
competitors include Aydin Vector Division, AVTECH Systems, Inc., L3
Communications, Inc., Terametrix, Inc. and Veda, Inc.
In the avionics interface market, the Company competes with a number of other
companies that produce similar avionics interface products. The Company's
competitors include Ballard Technologies, Inc., Data Devices Corporation,
Systran, Inc., Excalibur Technologies Corporation, Condor Engineering and
Gesellschaft Fur Angewandte Informatik und Mikroelekernik, GmbH.
In the Company's interconnect and expansion unit product line, the Company
competes with personal computer (PC) 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.
In the Company's industrial computer systems and enclosure business, the
Company competes with other suppliers of ISA/PCI systems and enclosures such
as I-Bus, a subsidiary of Maxwell Technologies, Texas Micro, Inc and
Industrial Computer Source.
EMPLOYEES
As of September 1, 1998, the Company had, exclusive of recent acquisitions,
approximately 327 employees at its six locations: Albuquerque, New Mexico;
Carlsbad, California; Vista, California; Menlo Park, California; Raleigh,
North Carolina; and St. Paul, Minnesota. Of these employees, 35 were in
executive and administrative positions; 70 were in sales, marketing and
customer relations; 86 were in research and development; 29 were clerical,
and 107 were employed in support of ongoing production.
Page 12
In July and August 1998 the Company added 98 employees resulting from the
50.1% acquisition of OR, the 50.2% acquisition of ORTEC, the 100% acquisition
of OR Computers, Inc. and the acquisition of VI (see "Management's
Discussion and Analysis: Subsequent Events"). Of these employees, 5 were in
executive and administrative positions; 22 were in sales, marketing and
customer relations; 34 were in research and development; 2 were clerical, and
35 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:
GROWTH THROUGH ACQUISITIONS AND INTEGRATION OF ACQUIRED COMPANIES. SBS has
increased the scope of its operations through the acquisition of seven
businesses and product lines acquired since 1992. SBS acquired Berg in fiscal
1993, GreenSpring in fiscal 1995, SBS Embedded in fiscal 1997, Bit 3 in
fiscal 1997, Micro Alliance in fiscal 1998, and, in fiscal 1999, OR, ORTEC
and OR Computer Inc. and VI. 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.
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 and acquire acceptable acquisition
candidates on terms favorable to SBS, and in a timely manner. SBS could use a
substantial portion of its capital resources for these 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. Also, even if SBS does acquire other businesses, it will continue
to encounter the risks associated with the integration of the acquisitions
described above.
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. An acquisition by SBS might or might
not, however, occur. An acquisition which does occur could potentially
materially and adversely affect SBS and might not be successful in enhancing
SBS' business.
ACQUISITION CHARGES. 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, no one can 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, no one can assure that changes in
future markets or technologies will not require faster amortization of
goodwill in such a way that overall Company financial condition or results of
operations would be adversely affected. SBS may also be required, under
generally accepted accounting principles, to charge against earnings the
value of an acquired business' technology which does not meet the accounting
definition of "completed technology." When SBS acquired Bit 3 in fiscal 1997,
it recorded approximately $10.0 million in intangible assets, including
goodwill. These are being amortized on a straight-line basis over the
estimated benefit period of ten years. Also, in connection with the Bit 3
acquisition, SBS recorded an $11.0 million charge against earnings in the
second fiscal quarter of 1997. The amount of the charge against earnings was
based on an assessment by SBS, in conjunction with an independent valuation
firm, of purchased technology of Bit 3. SBS incurred a net loss of $5 million
(or $1.24 per share) for the second fiscal quarter of 1997 as a result of the
earnings charge. In connection
Page 13
with SBS' acquisition of Micro Alliance in fiscal 1998, SBS recorded $4.5
million of goodwill, which is being amortized over a ten-year period. As a
result of its recent acquisitions of OR, ORTEC, OR Computers, Inc. and VI,
SBS expects to amortize goodwill and take a charge against earnings for
technology which is not completed technology. (see "Fluctuations in Operating
Results").
FLUCTUATIONS IN OPERATING RESULTS. 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 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.
RELIANCE ON DEFENSE SPENDING. In each of fiscal 1995, 1996, 1997 and 1998 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 revenues, 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.
RELIANCE ON INDUSTRY STANDARDS; FUNDAMENTAL TECHNOLOGY CHANGE. 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. Among such standards which SBS' products meet are
MIL-STD-1553, Telemetry IRIG Standards and various ANSI standards. 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 could
significantly adversely affect its marketing and sales, revenues and
financial condition.
Many of SBS' product designs rely on state of the art digital
technology. Future advances in technology might make obsolete SBS' existing
product lines, which would require SBS to compete more and 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 probably will
affect the competitive environment in the markets in which they are
introduced. The development of new products and technologies, or the
adaptation or development of 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 be materially adversely affected.
PRODUCT MARKET 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
Page 14
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 the Company's
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 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.
POTENTIAL YEAR 2000 PROBLEMS. The Year 2000 ("Y2K") issue refers to the
inability of certain date-sensitive computer chips, software, and systems to
recognize a two-digit date field as belonging to the 21st century. Mistaking
"00" for 1900 or any other incorrect year could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing, a
temporary inability to process transactions, or send invoices, or engage in
other normal business activities. This is a significant issue for most, if
not all companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty. The Y2K issue may
create unforeseen risks to the Company from its internal computer systems as
well as from computer systems of third parties with which it deals. Failures
of the Company's and/or third parties' computer systems could have a material
adverse impact on the Company's ability to conduct its business (see
"Management's Discussion and Analysis: Year 2000 Issue").
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 product lines. 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 product
line. Competition in all of SBS' product lines is based on: performance,
customer support, product longevity, supplier stability, breadth of product
offerings and reliability. At the end of the 1998 fiscal year, SBS had
revenues of $74.2 and net income of $10.1 million. Many of SBS' existing and
potential competitors are bigger companies which have financial,
technological and marketing resources significantly greater than those 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 promise 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, revenues and financial condition.
In the CPU market in which SBS Embedded's products are marketed, SBS
competes with a number of other suppliers of CPU boards. SBS' direct
competitors include other companies that build CPU boards based on Intel
microprocessor technology, such as Force Computers, Inc. (a wholly-owned
subsidiary of Solectron Corporation), RadiSys Corporation, VME Microsystems,
Inc. and XYCOM, Inc. In addition, with the acquisition of OR and VI, SBS also
competes with suppliers of CPU boards based on Motorola 68OxO, and PowerPC
architectures.
In the generalized computer I/0 product area served by GreenSpring and
its IP product line, SBS has two classes of competition. The first class
includes companies that compete directly by selling IP products. The second
class includes companies that compete with I/0 products using a different
implementation to provide functionally equivalent products. SBS' competitors
in each of these classes include Acromag, Inc., Systran, Inc. and VME
Microsystems, Inc.
In the telemetry market, SBS competes with suppliers such as Aydin
Vector Division, AVTECH Systems, Inc., L3 Communications, Inc., Terametrix,
Inc. and Veda, Inc.
In the avionics interface market in which SBS' MIL-STD 1553 products are
marketed, SBS competes with a number of other companies that produce similar
avionics interface products. SBS' competitors include Ballard Technologies,
Inc., Data Devices Corporation, Excalibur Technologies Corporation, Condor
Engineering and
Page 15
Gesellschaft Fur Angewandte Informatik und Mikroelekemik, GmbH.
In SBS' interconnect and expansion unit product line, SBS competes with
personal computer (PC) 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.
In SBS' industrial computer systems and enclosure business, SBS competes
with other suppliers of ISA/PCI systems and enclosures such as I-Bus, a
subsidiary of Maxwell Technologies, Texas Micro, Inc. and Industrial Computer
Source.
AVAILABILITY OF COMPONENT MATERIALS. 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, such as Xilinx, Inc., or a limited number
of suppliers, for which alternate sources may be difficult to locate.
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 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'
revenues 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.
RETENTION AND RECRUITMENT OF KEY 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, marketing and sales,
revenues, and business condition could suffer material adverse effects.
NO PATENT PROTECTION. Although SBS believes that some of its processes and
equipment may be proprietary, SBS has not sought 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 developed
independently, by them or others, to Company 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 which 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
patents issue, so patent applications may have been filed by someone else
that relate to SBS' products and technology. 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.
PRODUCT LIABILITY. SBS' products and services could be subject to product
liability or government or commercial warranty claims. SBS maintains primary
product liability insurance with a general aggregate limit of $2.0
Page 16
million, $1.0 million per occurrence, and an $9.0 million excess policy.
While SBS has never been the subject of any significant claims of this kind,
its products are widely used in a variety of applications and claimants have
a propensity initially to pursue all possible contributors in a legal action.
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 have a material
adverse effect upon SBS.
INTERNATIONAL SALES IN GENERAL. SBS sells its products in countries
throughout the world from its United States and European based offices. 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 which may make payment in United States dollars more expensive
for foreign customers (who may, as a result, limit or reduce purchases).
CHANGES IN EXCHANGE RATES. Substantially all of SBS' revenues to date have
been received in United States dollars. However, some sales in the future may
be in other currencies. Any decline in the value of other currencies in which
SBS makes sales against the United States dollar will have the effect of
decreasing SBS' 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.
TRADE POLICIES AND DISPUTES. 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 revenues and business
prospects outside the United States.
POTENTIAL DILUTIVE EFFECT OF OUTSTANDING WARRANTS AND OPTIONS AND
REGISTRATION RIGHTS. SBS, in connection with its acquisition of GreenSpring
in August 1995, issued warrants to purchase 400,000 shares of Common Stock at
an exercise price of $4.50 per share (the "GreenSpring Warrants"). SBS also
registered the Common Stock underlying the GreenSpring Warrants for sale
under the Securities Act of 1933 (the "Securities Act"). In April 1996, SBS
registered under the Securities Act options for 133,333 shares held by SBS'
Chairman of the Board and Chief Executive Officer, Mr. Amenson. As of June
30, 1998, 140,236 of the GreenSpring Warrants remained, all of which were
exercisable. The holders of the GreenSpring Warrants also possess until
August 2000 the right to sell shares of Common Stock underlying the
GreenSpring Warrants alongside SBS should SBS file a registration statement
during this period.
As of June 30, 1998, SBS had 463,933 options and warrants outstanding which
could be exercised and 944,267 options which were not yet eligible for
exercise.
LIMITED PUBLIC FLOAT; TRADING; VOLATILITY OF STOCK PRICE. SBS' Common Stock
is traded on the Nasdaq National Market. While a public market currently
exists for SBS' Common Stock and the number of shares in the public float as
of June 30, 1998 was 5,328,512, trading volume in the four weeks ended June
30, 1998 averaged 25,587 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 National Market has experienced, and
is likely to experience in the future, significant price and volume
fluctuations which 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.
Page 17
ABSENCE OF 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
The Company leases office and manufacturing space in Albuquerque, New Mexico,
Carlsbad, California, Menlo Park, California, Vista, California, Encinitas,
California, Raleigh, North Carolina, St. Paul, Minnesota and Angsburg and
Mindelheim, Germany. The Company's standard practice is to obtain all of its
facilities through operating leases. The Company 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 which includes adequate assembly and
test space for the Company's avionics interface product line, as well as
serving as the Company's corporate headquarters. Management believes that
this facility is capable of handling projected increases in production for
the foreseeable future, as the current capacity utilization of the available
productive floor space is approximately 50%. The lease term for the
Albuquerque, New Mexico facility runs through June 30, 2000, with an option
to extend the term for an additional five years.
The Company's general purpose I/O business is located in Menlo Park,
California. The 16,394 square foot facility, which is leased for a four year
term expiring May 31, 2000, is a one story multi-tenanted building in a
business park which consists of 6,000 square feet of office space and 10,394
square feet of assembly and test areas. Management believes that the facility
will be sufficient to serve the general purpose I/O business needs through
the term of the lease.
The Company's CPU products business, located in Raleigh, North Carolina,
leases a one story multi-tenanted 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 Company's current level of business and
that expansion space is available if required.
The Company's interconnect business relocated during fiscal 1998 from
Minneapolis, Minnesota to a 39,597 square foot leased 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. In addition, the Company has 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 needs of
the interconnect business through the term of the lease.
The Company leases, in Carlsbad, California, a one story 12,000 square foot
building, located in a business park, consisting of approximately 6,000
square feet of office space and 6,000 square feet of assembly and test areas
for the Company's telemetry products and development of the Company's data
acquisition software. The lease term for the Carlsbad, California location
runs through July 2000. In addition, the Company's industrial computer and
enclosure business is located in a leased facility in Vista, California
consisting of approximately 10,661 square feet as part of a multi-tenant
industrial building. This lease expires on December 31, 1998. Management is
currently finalizing a seven year lease for a 75,160 square foot one story
facility located in a business park in Carlsbad, California and will relocate
the Company's telemetry, data acquisition software development, and
industrial computer and enclosure operations, as well as the Company's recent
acquisition, VI, currently located in Encinitas, California (see "Management
Discussion and Analysis: Subsequent Events"), to this facility. Management
estimates that the relocation of these activities will be completed by
January 1999 and will not be disruptive to their operations. Management
believes that this facility will sufficiently serve the needs of these
operations through the term of the lease.
The Company leases, in Angsburg, Germany (see "Management's Discussion and
Analysis: Subsequent Events"), 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, the Company
leases approximately 5,000 square feet of manufacturing space in a multi-use
facility, in Mindelheim, Germany, for its other operations. The lease had a
five-year term that commenced May 1, 1992 with an option to extend in
one-year increments open three months written notice. Management believes
that the facility is sufficient to serve the needs of others for the
foreseeable future.
Page 18
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in Virtual Systems Group, Inc. (VSG) v.
SBS Technologies, Inc., filed on June 19, 1996 in the Second Judicial
District Court, County of Bernalillo, State of New Mexico. The plaintiff, a
company engaged by SBS to market its Judgmental Use of Force Trainers (the
Company sold this business in June 1997), claimed that the Company failed to
fulfill all its obligations under an Agreement between the Company and VSG
whereby VSG would market the Company's Judgmental Use of Force Trainers. The
Company settled this lawsuit in March 1998 for $40,000.
The Company 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of closing price of the Company's
common stock as reported on the NASDAQ National Market System for each full
fiscal quarter within the last two fiscal years:
High Low
---- ---
First Quarter 1997 $ 19.750 $ 10.625
Second Quarter 1997 39.000 19.000
Third Quarter 1997 35.000 15.250
Fourth Quarter 1997 24.875 10.875
First Quarter 1998 26.250 20.125
Second Quarter 1998 31.375 22.125
Third Quarter 1998 29.250 23.000
Fourth Quarter 1998 33.375 26.500
The Company's common stock is traded over the counter on the NASDAQ National
Market System using the symbol SBSE.
Based on the Company's survey of brokerage houses, management believes that
as of September 1, 1998, the number of common stockholders of record was
approximately 250, at which date the closing market value of the Company's
common stock was $22.50 per share.
The Company has not paid any cash dividends on its common stock. Management's
current policy is to retain earnings for use in the Company's operations and
for expansion of the Company's business. No dividend payments are expected to
be paid in the future.
Page 20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended June 30, 1994
through June 30, 1998 have been derived from the Company's audited
consolidated financial statements. 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
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Sales - continuing operations $ 74,213,901 52,814,568 31,331,793 16,217,648 10,196,568
Net income - continuing operations $ 10,090,188 461,685 3,580,907 1,844,876 870,750
Net income per common share $ 1.81 0.10 1.19 0.66 0.30
Net income per common share - assuming dilution $ 1.64 0.09 0.97 0.65 0.30
Total assets $ 74,315,187 61,165,014 20,443,672 19,904,922 13,476,737
Long-term debt, excluding current installments $ -- 2,816,251 5,188,320 5,341,649 273,573
Total liabilities $ 10,051,200 10,838,326 10,392,752 14,855,674 7,611,400
Total stockholders' equity $ 64,263,987 50,326,688 10,050,920 5,049,248 5,865,337
- ----------------------------------------------------------------------------------------------------------------------------------
Note: The Company has not declared any dividends during the periods presented.
No future dividend payments are expected.
On November 24, 1997, the Company completed the purchase of Micro
Alliance.
On November 18, 1996, the Company completed the purchase of Bit 3. In
connection with the acquisition of Bit 3, the Company recorded an $11.0
million in-process R&D charge in the second quarter of fiscal 1997.
For fiscal 1997, net income excluding the $11.0 million in-process R&D
charge would have been $7,061,685 (net of income taxes). Net income per
common share excluding the $11.0 million in-process R&D charge would
have been $1.56 and net income per common share - assuming dilution
would have been $1.34.
On August 19, 1996, the Company completed a pooling of interests
transaction with SBS Embedded, the results of which are included in
fiscal 1997 on a prospective basis.
On April 28, 1995 the Company completed the purchase of GreenSpring.
On April 26, 1995 the Company sold its flight simulation business to
Camber Corporation, which was reported as discontinued operations in
the consolidated financial statements.
The Selected Financial Data for the statements of operations data are
for continuing operations only.
Page 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING
STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND
ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE COMPANY'S
PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW
PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS AND OTHER RISK FACTORS (SEE "ITEM 1. RISK FACTORS").
OVERVIEW
The Company 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. The Company's product lines include CPU boards ("CPU"), general
purpose input/output ("I/O") modules, avionics interface modules and
analyzers, interconnection and expansion units, telemetry boards, data
acquisition software and industrial computer systems and enclosures. In 1992,
the Company added a second embedded computer product line with the
acquisition of Berg, a developer of telemetry interface circuit boards. In
1995, the Company added a third embedded computer product line with the
acquisition of GreenSpring. GreenSpring is engaged in the design, development
and manufacture of general purpose I/O products. In recent years, the Company
has discontinued certain of its operations. From its inception in 1986 until
1995, the Company provided flight simulators for a variety of military
aircraft to U.S. and foreign entities. In April 1995, following a decline in
the defense industry, the Company divested this business and recorded a
related charge of $2.3 million. Additionally, from 1987 through the first
half of fiscal 1996, the Company provided engineering services that generated
minimal revenue and profit. The Company subsequently exited this business.
The Company marketed a Judgmental Use of Force Training System, used to train
police and military personnel in the appropriate situational use of force,
from 1993 through fiscal year 1997, when the Company sold this business as
discussed in "Sale of Judgmental Use of Force Business" below. Since 1995,
the Company has focused its efforts and investments in the embedded computer
marketplace, expanding its product offerings and marketing with the
acquisition of five embedded computer companies as discussed in "Recent
Acquisitions," "Public Stock Offering," and "Subsequent Events" below.
RECENT ACQUISITIONS
On November 24, 1997, the Company completed the purchase of Micro Alliance, a
privately held San Diego county-based manufacturer of industrial computer
systems and enclosures. Micro Alliance specializes in the design and
manufacture of special-purpose PC-compatible computer systems offering a
variety of CPU boards and system enclosures, including rack mount, desktop
and mobile systems. Most systems contain passive backplanes that allow the
addition of up to 20 ISA and PCI cards. These systems are often customized to
meet the needs of particular OEM applications. Under the terms of the
purchase agreement dated November 24, 1997 (the "Agreement") among the
Company, Micro Alliance, a California corporation, and Jeffrey Huston, Edward
Larson, and Sherrin W. Larson (together "Shareholders"), the Company acquired
all of the outstanding capital stock of Micro Alliance for a total purchase
price of $5.8 million. Of this total purchase price, $250,000 in cash was
placed in a joint escrow account until the earlier of resolution of certain
tax issues or the end of any applicable statute of limitations. The financial
results of Micro Alliance have been included in the Company's Consolidated
Financial Statements from November 24, 1997. As a result of the acquisition,
the Company recorded $4.5 million of goodwill, which is being amortized over
a ten-year period.
Page 22
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
On November 18, 1996, the Company completed the purchase of Bit 3. Bit 3 is a
St. Paul-based manufacturer of computer networking and interconnection
hardware for many of the most widely used computer architecture standards in
the standard bus embedded computer market. Under the terms of the purchase
agreement dated October 8, 1996 (the "Acquisition Agreement") among the
Company and the two shareholders of Bit 3 (the "Sellers"), the Company
acquired all of the outstanding capital stock of Bit 3 for a total purchase
price of $24.0 million paid or to be paid from the proceeds from the public
stock offering (see "Public Stock Offering") and cash flow from the Company's
operations. Of this total purchase price, $20.0 million was paid to the
Sellers in cash upon closing of the offering. Of the balance of $4.0 million,
$1.0 million was paid to the Sellers on July 1, 1997 and $3.0 million was
paid to the Sellers on July 1, 1998, pursuant to secured promissory notes
according to the terms of the Acquisition Agreement. The financial results of
Bit 3 have been included in the Company's Consolidated Financial Statements
from November 18, 1996. In connection with the acquisition of Bit 3, the
Company recorded an $11.0 million earnings charge based on an assessment by
the Company, in conjunction with an independent valuation firm, of purchased
technology of Bit 3. The assessment determined that $11.0 million of Bit 3's
purchase price represented technology that does not meet the accounting
definition of "completed technology," and thus should be charged to earnings
under generally accepted accounting principles. In addition, as a result of
the acquisition, the Company recorded $10.0 million of goodwill which is
being amortized over a ten year period.
The following pro forma consolidated results of operations have been prepared
as if the acquisitions of Bit 3 and Micro Alliance had occurred at July 1,
1996.
June 30 June 30
(in thousands except per share amounts) 1998 1997
---- ----
Sales $ 76,437 64,476
Net income 10,014 1,862
Net income per common share 1.79 0.41
---- ----
---- ----
Net income per common share - assuming dilution 1.62 0.35
---- ----
---- ----
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 that time, nor
is it intended to be a projection of future results.
On August 19, 1996, the Company completed a pooling of interests transaction
with SBS Embedded based in Raleigh, North Carolina. SBS Embedded manufactures
Intel processor-based CPU boards for the standard bus embedded computer
market. The financial results of SBS Embedded are not included in the
Company's Consolidated Financial Statements for the periods prior to July 1,
1996, as historical results did not have a material effect on combined
consolidated results of operations. For its fiscal year ended March 31, 1996,
SBS Embedded recorded sales of approximately $4.0 million and income from
continuing operations of approximately $103,000.
PUBLIC STOCK OFFERING
On November 18, 1996, the Company consummated a fully underwritten public
offering of 1,500,000 shares of the Company's common stock at a price of
$25.625 per share. In addition, certain selling shareholders sold an
additional 300,000 shares in the offering. The proceeds of the sale of the
300,000 additional shares did not benefit the Company; however, the Company
did receive the exercise price of $4.80 per share from the exercise of
warrants covering 100,000 of the shares. The offering was managed by an
underwriting group led by Cowen & Co. and SoundView Financial Group, Inc. The
net proceeds to the Company from the public
Page 23
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
stock offering were used to fund the acquisition of Bit 3 (see "Recent
Acquisitions" above), to repay long-term debt, and the balance has been used
for general working capital requirements and acquisitions.
SALE OF JUDGMENTAL USE OF FORCE BUSINESS
On June 26, 1997, the Company sold substantially all of the assets of the
Company's Judgmental Use of Force Business to FATS, Inc. for $2.0 million.
This Business marketed a Judgmental Use of Force Training System used to
train police and military personnel in appropriate situational use of force.
The results of operations of this business were immaterial to the total
operating results of the Company.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data as a percentage of sales:
Year ended June 30
----------------------------------------------
1998 1997 1996
------------ ----------- ----------
Sales 100.0% 100.0% 100.0%
Cost of Sales 42.8 47.2 46.3
------------ ----------- ----------
Gross Profit 57.2 52.8 53.7
Selling, general and administrative expense 22.8 19.4 20.1
Research and development expense 10.8 8.4 9.1
Acquired in-process research and development charge -- 20.8 --
Amortization of intangible assets 2.6 2.8 2.8
------------ ----------- ----------
Operating income 21.0 1.4 21.7
Interest income (expense) (net) 1.3 0.1 (2.7)
------------ ----------- ----------
Income before income taxes 22.3 1.5 19.0
Income taxes 8.7 0.6 7.6
------------ ----------- ----------
Net income 13.6% 0.9% 11.4%
------------ ----------- ----------
------------ ----------- ----------
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. In fiscal 1998, sales increased 40.5%, or $21.4 million, from $52.8
million in fiscal 1997 to $74.2 million. Of this 40.5% increase, sales
contributed by Micro Alliance, which was acquired on November 24, 1997,
comprised 9.1%; sales contributed by Bit 3, which was acquired on November
18, 1996, comprised 14.7%; and 19.8% of this increase was attributable to the
Company's other product lines, offset by 3.1% due to the sale of the
Company's Judgmental Use of Force business on June 26, 1997. Throughout
fiscal 1998, prices for the Company's products remained firm, and unit
shipments increased across all product lines. Historically, less than 5% of
the Company's sales were direct sales to Asian-based customers. The Company
experienced minimal direct effect (less than 2% of sales) on its operations
due to the current Asian currency and economic crisis. Management believes
that any future direct effect on the Company from the Asian currency and
economic crisis will remain minimal; however, it is difficult for the Company
to predict any indirect effect derived from sales to U.S. based customers
whose products are sold into Asia. Sales of the Company's products are
recorded at the time of shipment.
Page 24
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
GROSS PROFIT. In fiscal 1998, gross profit increased 52.0%, or $14.5 million,
from $27.9 million in fiscal 1997, to $42.4 million. In fiscal 1998, gross
margin increased to 57.2% of sales from 52.8% in fiscal 1997. This increase
was primarily due to the acquisition of Micro Alliance and Bit 3, increased
sales volume over fixed costs, material cost improvements, and a reduction in
commissionable sales due to the movement from an independent representative
sales force to a direct sales force, and the sale of the Company's low margin
Judgmental Use of Force business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1998, selling, general
and administrative expense increased 65.7%, or $6.7 million from $10.2
million in fiscal 1997, to $16.9 million resulting from the added
expenditures due to the acquisitions of Bit 3 and Micro Alliance, and
additional salaried sales personnel as the Company transitioned from an
independent sales force to a direct sales force, as well as additional
administrative staffing and promotional costs commensurate with the growth of
the Company. For the same reasons, selling, general and administrative
expense increased as a percentage of sales from 19.4% in fiscal 1997 to 22.8%
in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1998, research and development
expense increased by 81.8%, or $3.6 million, from $4.4 million in fiscal
1997, to $8.0 million. The increase resulted primarily from the added
expenditures due to the acquisition of Bit 3 as well as increased investment
in new products in the Company's other product areas. For the same reasons,
research and development expense increased as a percentage of sales from 8.4%
in fiscal 1997, to 10.8% in fiscal 1998.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1998, amortization of intangible
assets increased 26.7%, or $400,000 from $1.5 million in fiscal 1997, to $1.9
million as a result of goodwill amortization associated with the acquisitions
of Bit 3 and Micro Alliance.
INTEREST INCOME, NET OF INTEREST EXPENSE. In fiscal 1998, interest income,
net of interest expense, was $933,000 compared to $14,000 in fiscal 1997.
This change is attributable to the elimination of all bank debt effective
November 22, 1996, by application of some of the proceeds of the public stock
offering, and earnings on surplus cash from operations as well as earnings on
cash received above the Company's immediate requirements from the public
offering, offset by imputed interest of $184,000 on notes payable to the
former owners of Bit 3.
INCOME TAXES. For fiscal 1998 and fiscal 1997 income taxes represent
effective income tax rates of 39.0% and 40.0%, respectively. The decrease in
the effective rate is due to tax planning strategies implemented by the
Company in fiscal 1998, including a research and experimental tax credit.
EARNINGS PER SHARE. For fiscal 1998, net income per common share was $1.81
compared to $0.10 for fiscal 1997. Net income per common share - assuming
dilution was $1.64 for fiscal 1998 compared to $0.09 for fiscal 1997. This
change is primarily due to the $11.0 million charge to earnings associated
with the acquisition of Bit 3 in November 1996, offset by additional shares
outstanding. For fiscal 1997, net income per common share-assuming dilution,
excluding the charge to earnings, net of income taxes, would have been $1.34.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES. In fiscal 1997, sales increased 68.7%, or $21.5 million, from $31.3
million in fiscal 1996 to $52.8 million. Sales contributed by SBS Embedded,
which was acquired effective August 9, 1996 and pooled effective July 1,
1996, and sales contributed by Bit 3, which was acquired on November 18,
1996, comprised 48.2% of this increase and 20.5% of this increase was
attributable to the Company's other product lines. The increases in sales for
1997 resulted from increased sales of existing products, introduction of new
products, and sales of new and existing products to new customers in all of
the Company's product lines. Throughout fiscal 1997, prices for the Company's
products remained firm.
Page 25
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
GROSS PROFIT. In fiscal 1997, gross profit increased 66.1%, or $11.1 million,
from $16.8 million in fiscal 1996, to $27.9 million, as a result of increased
sales volume. In fiscal 1997, gross margin decreased to 52.8% of sales from
53.7% in fiscal 1996, as a result of sales mix. In fiscal 1997, although
gross margins of each of the Company's product lines remained relatively
constant with fiscal 1996, total sales were comprised of a higher percentage
of commercial products (i.e., general purpose I/O, CPU, and interconnect
products), which generally yield lower gross margins than the Company's
avionics and telemetry products. Reductions in component material costs in
each of the Company's product lines partially offset the effect on gross
margin of this shift in sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1997, selling, general
and administrative expense increased 61.9%, or $3.9 million from $6.3 million
in fiscal 1996, to $10.2 million, largely because of the increased staffing
resulting from the SBS Embedded and Bit 3 acquisitions and subsequent
augmentation of those staffs in an effort to increase productivity and
efficiency, as well as additional staffing and promotional costs related to
the Company's avionics, telemetry, and I/O product lines. However, selling,
general and administrative expense decreased as a percentage of sales from
20.1% in fiscal 1996 to 19.4% in fiscal 1997 as the increase in sales more
than offset the increase in expense.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1997, research and development
expense increased by 57.1%, or $1.6 million, from $2.8 million in fiscal
1996, to $4.4 million. The increase resulted primarily from the added
expenditures resulting from the SBS Embedded and Bit 3 acquisitions, as well
as additional staffing required for new product development in the avionics,
telemetry, and I/O product lines. However, research and development expense
decreased as a percentage of sales from 9.1% in fiscal 1996, to 8.4% in
fiscal 1997, as a result of sales increasing at a faster rate than the
expense.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. In conjunction with the
acquisition of Bit 3 completed on November 18, 1996, the Company recorded an
$11.0 million earnings charge based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
Bit 3. The assessment determined that $11.0 million of Bit 3's purchase price
represented technology that did not meet the accounting definition of
completed technology, and thus should be charged to earnings under generally
accepted accounting principles.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1997, amortization of intangible
assets increased 70.1%, or $620,000, from $884,000 in fiscal 1996, to $1.5
million as a result of goodwill amortization associated with the acquisition
of Bit 3.
INTEREST INCOME, NET OF INTEREST EXPENSE. In fiscal 1997, interest income,
net of interest expense, was $14,000 compared to interest expense, net of
interest income, of $830,000 in fiscal 1996. This change is attributable to
the reduction of debt incurred primarily to finance the acquisition of
GreenSpring in April 1995, the elimination of all bank debt effective
November 22, 1996, by application of some of the proceeds of the public stock
offering, and earnings on surplus cash from operations as well as earnings on
cash received above the Company's immediate requirements from the public
offering, offset by imputed interest of $144,000 on notes payable to the
former owners of Bit 3.
INCOME TAXES. For fiscal 1997 and fiscal 1996 income taxes represent an
effective income tax rate of 40.0%.
EARNINGS PER SHARE. For fiscal 1997, net income per common share was $0.10
compared to $1.19 for fiscal 1996. Net income per common share - assuming
dilution was $0.09 for fiscal 1997 compared to $0.97 for fiscal 1996. This
reduction is due to the $11.0 million charge to earnings associated with the
acquisition of Bit 3 in November 1996 and due to more shares outstanding. For
fiscal 1997, net income per common share - assuming dilution excluding the
charge to earnings, net of income taxes, would have been $1.34.
Page 26
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 $22.9 million at June 30, 1998, an increase of $1.2 million from
June 30, 1997. This increase is a result of cash flow provided by operations
of $8.7 million and $2.0 million received from the exercise of stock options
and warrants, reduced by $5.6 million for the purchase of Micro Alliance, net
of cash received, $3.0 million for the purchase of property and equipment,
and $1.0 million for the payments to the former owners of Bit 3, in
conjunction with the acquisition. The Company's growth during the fiscal year
caused the Company to increase accounts receivable and inventory. Liabilities
were in line with the current level of business. The exercise of stock
options related to the Company's stock option plans reduced the Company's tax
liability.
In fiscal years ended June 30, 1997 and June 30, 1996, the Company generated
$10.2 million and $3.4 million, respectively, of positive cash flow from
operating activities. In fiscal 1997, the positive cash flow from operating
activities combined with the net proceeds from the sale of common stock (see
"Public Stock Offering") provided the Company sufficient funds to acquire Bit
3 in November 1996 and to pay down all existing debt. In fiscal 1996, the
positive cash flow from operating activities was partially used to pay down
bank debt, to purchase equipment and to acquire the IndustryPack-Registered
Trademark- compatible product line from Wavetron Microsystems, Inc. in January
1996.
On April 26, 1996 and November 15, 1996, the Company amended its bank
financing agreement with NationsBank, N.A. originally entered into in April
1995, to provide the Company with a $6.8 million term loan and a $2.5 million
revolving line of credit. The term loan was completely paid down from the
proceeds of the public stock offering. The revolving line of credit matured
on October 30, 1997, and was not renewed. For the entire year ended June 30,
1998, there were no borrowings drawn on the revolving line of credit. The
Company is currently negotiating a $15.0 million credit facility with
NationsBank, N.A. Management believes that financial resources, including its
internally generated funds, debt capacity, and the remaining net proceeds
from the public offering, will be sufficient to finance the Company's current
operations and capital expenditures, excluding acquisitions, for the next
twelve months.
For the three most recent fiscal years, there has been no significant impact
from inflation or changing prices on the Company's sales or income from
continuing operations.
YEAR 2000 ISSUE
DESCRIPTION OF THE ISSUE. The Y2K issue refers to the inability of certain
date-sensitive computer chips, software, and systems to recognize a two-digit
date field as belonging to the 21st century. Mistaking "00" for 1900 or any
other incorrect year could result in a system failure or miscalculations
causing disruptions to operations, including manufacturing, a temporary
inability to process transactions, or send invoices, or engage in other
normal business activities. This is a significant issue for most, if not all
companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty. The Y2K issue may
create unforeseen risks to the Company from its internal computer systems as
well as from computer systems of third parties with which it deals. Failures
of the Company's and/or third parties' computer systems could have a material
adverse impact on the Company's ability to conduct its business.
Page 27
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
YEAR 2000 TASK FORCE. The Company assembled, in April 1998, an internal task
force, chaired by the CEO and comprised of senior managers throughout the
Company, to review its products, business and engineering applications and
suppliers and develop contingency plans for Y2K readiness to be completed by
the end of calendar 1999. The goal of the task force is to minimize the
effect that Y2K issues will have on the Company and its customers. The CEO of
the Company updates the Board of Directors on its Y2K readiness at each
scheduled Board Meeting.
INTERNAL BUSINESS AND ENGINEERING SYSTEMS. The task force is currently
reviewing all internal business and engineering computer systems to ensure
that such systems either will be Y2K ready, or will be modified or replaced
by Y2K ready systems. The Company has already been assured that its business
information system, installed in 1998 and utilized at most of its locations,
is Y2K ready as long as the Company adheres to the supplier's Y2K readiness
guidelines. The Company plans to simulate and test, in a Y2K environment, its
business information systems to verify its Y2K readiness by the middle of
calendar 1999. All other internal engineering development applications and
systems are planned to be modified if necessary, by the middle of calendar
1999.
SUPPLIERS. The major suppliers to the Company are component parts
distributors and contract manufacturers. Often the Company sources its
products and manufacturing services from multiple, competing vendors. The
Company is conducting reviews of its key suppliers to ensure Y2K readiness of
as many vendors as possible and has initiated communication with all of its
key suppliers to determine to what extent the Company may be vulnerable due
to their failure to be Y2K ready. This communication, including site visits
by Company personnel, will be ongoing throughout calendar 1999. There can be
no assurance that the systems of other companies on which the Company relies
will be Y2K ready on a timely basis and will not have an adverse effect on
the operations of the Company. In the instances where the Company is unable
to determine that its vendors have taken appropriate steps to minimize
disruption due to non-Y2K readiness, the Company will consider contingency
plans, including moving to currently identified alternate sources, or
developing new alternate sources.
PRODUCTS. The Company also has a program to assess the capability of its
existing and legacy products to handle the year 2000. In addition, all
products under development are also being reviewed to ensure Y2K readiness
prior to release. Certain of the Company's computer processor board level
products and integrated computer systems utilize computer chips that include
built in operating systems ("BIOS") allowing the computer to initialize and
load software. For many users, software is provided by sources other than the
Company. As with the typical PC computer, the assessment of whether a
complete system will operate correctly may depend on the BIOS capability and
software. To the extent that older BIOS or software are not Y2K ready, they
may need to be upgraded or replaced.
COSTS. The Company expects the cost of its Y2K assessment, including both
incremental spending and redeployed resources, will not be material. The
current assessment does not include potential costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business. This assessment is subject to change. Since there
is no uniform definition of "Y2K readiness" and since all customer situations
cannot be anticipated, particularly those involving third party products, the
Company may see claims as a result of the Y2K transition. Such claims, if
successful, could have a material adverse impact on future results.
CUSTOMERS. Since the Company has no customer which comprises more than 5% of
its sales, the Company believes that the effect of a failure of any single
customer to continue to purchase goods and services from the Company due to
non-Y2K readiness will not be material to the operations of the Company. As
the Company sells its products and services to many hundreds of customers,
there can be no assurance that some of
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SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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the Company's customers will not become Y2K ready, and in the aggregate, have
a material effect on the Company's operations.
SUBSEQUENT EVENTS
On July 1, 1998, the Company acquired through its newly formed subsidiary,
SBS Holdings 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, the Company
acquired, through its newly formed subsidiary, SBS Holdings 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. The Company also acquired, through its wholly-owned subsidiary SBS
Embedded Computers, Inc. based in Raleigh, NC, 100% of the shares of OR
Computers, Inc, based in Fairfax, Virginia, which is the U.S. marketing
support organization for the OR product line. In addition, the Company and
the shareholders of both OR and ORTEC entered into exclusive option
agreements which means that the Company may acquire the remaining shares of
both companies on February 28, 1999. The purchase price, excluding
transaction costs, for the majority interest in the two companies based in
Germany and 100% of OR Computers Inc. was DM 17.5 million, approximately $9.7
million, paid in cash and common stock at closing. The purchase price for the
remaining interest in the two companies based in Germany is DM 17.2 million,
approximately $9.5 million based on the exchange rate at June 26, 1998. The
acquisition will be accounted for under the purchase method, whereby the
purchase price will be allocated to the underlying assets and liabilities
based upon their estimated fair values. It is expected that a portion of the
purchase price will be allocated to in-process research and development
which, under generally accepted accounting principles, will be expensed by
the Company in the quarter ending September 30, 1998. Goodwill will be
amortized over 10 years. For the year ended December 31, 1997, combined sales
and net income of OR, ORTEC, and OR Computers, Inc. were approximately $12.1
million and $1.8 million, respectively. In fiscal 1999, the Company plans to
change the name of OR to SBS OR Industrial Computers GmbH; OR Computers, Inc.
will operate as a wholly-owned subsidiary of SBS Embedded Computers, Inc. for
the foreseeable future.
On August 12, 1998, the Company completed the acquisition of VI for $5.0
million, subject to adjustment upon finalizing the closing balance sheet.
Based in En