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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the fiscal year ended JUNE 30, 1999 or
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 _____
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, 1999 as reported on The Nasdaq Stock Market-Registered
Trademark- was approximately $130,008,966. 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, 1999, Registrant had 5,837,483 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 1999
Annual Meeting of Stockholders to be held November 11, 1999.
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, OTHER THAN STATEMENTS OF HISTORICAL FACT,
THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY OR MANAGEMENT
INTENDS, EXPECTS, PROJECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE
FUTURE ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE BASED UPON CERTAIN
ASSUMPTIONS AND ASSESSMENTS MADE BY MANAGEMENT OF THE COMPANY IN LIGHT OF ITS
EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS, CURRENT CONDITIONS, EXPECTED
FUTURE DEVELOPMENTS AND OTHER FACTORS IT BELIEVES TO BE APPROPRIATE. THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE ALSO SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC,
COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S
OPERATIONS, MARKETS, PRODUCTS, SERVICES, PRICES, AND OTHER RISK FACTORS LISTED
HEREIN. THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ACTUAL RESULTS, DEVELOPMENTS AND BUSINESS DECISIONS MAY DIFFER
FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
INTRODUCTION
SBS Technologies, Inc. (the "Company") is a leading manufacturer of embedded
computer components and systems used in a variety of applications, such as
telecommunications, medical imaging, industrial control, and flight
instrumentation, in the commercial and aerospace markets. The Company has
three operating segments: the Computer Group, the Aerospace Group, and the
European Group. The Company's product lines include CPU (Pentium-Registered
Trademark-) and PowerPC-TM- boards, input/output (I/O) modules, avionics
modules and analyzers, computer connectivity products, expansion units,
real-time networks, telemetry boards, data acquisition software, DIN-rail
embedded PCs, and industrial-grade computers. 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 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, through increasing penetration of its
existing customer base, and by adding new customers.
The Company entered the embedded computer market in 1988 with the development
of its avionics interface board, which was used in ground-based avionics
systems development and test applications. Today the Company's avionics
interface and bus analyzer products are the industry standard for quality and
innovation designed into major military programs, including the F-22, F-16,
B-1 and B-2 as well as in such aerospace projects as the International Space
Station.
In 1992, the Company added a second embedded computer product line with the
acquisition of SBS Technologies Inc., Telemetry and Communications Products
(formerly Berg Systems International) ("Telemetry"), a developer of telemetry
interface circuit boards. Telemetry provides open architecture telemetry
boards for aircraft, spacecraft, and launch-vehicle telemetry programs.
Telemetry pioneered the concept of single-board telemetry solutions nearly a
decade ago. The product line currently consists of telemetry receivers,
downconverters, BPSK/QPSK modems, bit synchronizers, PCM decommutators, PCM
simulators, CCSDS products and application software.
In 1995, the Company added a third embedded computer product line with the
acquisition of SBS Technologies, Inc., Modular I/O (formerly GreenSpring
Computer Corporation) ("Modular I/O"). Modular I/O designs, manufactures and
markets modular I/O solutions using mezzanine standards such as
IndustryPack-Registered Trademark-, PCoMIP-TM-, and PMC for use with PCI,
CompactPCI, VME, ISA, STD32, PC/104 and stand-alone embedded platforms.
Currently, the Company offers over 125 I/O modules for digital I/O, analog
I/O, data communications, motion control, field bus, temperature measurement
and graphics controller applications.
In August 1996, the Company acquired SBS Technologies, Inc., Embedded
Computers (formerly Logical Design Group, Inc.) ("Embedded Computers"), 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 which
utilizes the VME computer bus architecture.
In November 1996, the Company acquired SBS Technologies, Inc., Connectivity
Products (formerly Bit 3 Computer Corporation) ("Connectivity Products"), a
provider of high-performance and reliable bus connectivity products that
include bus bridges, bus expansion units, and real-time coherent memory
networks designed to operate in the most demanding applications.
SBS Technologies, Inc., Industrial Computers (formerly Micro Alliance, Inc.)
("Industrial Computers") was added in November 1997 and specializes in the
design and manufacture of rugged, special-purpose PC, and CompactPCI
industrial and military computers, enclosures and turnkey systems. It offers
a variety of Intel and Sparc CPU boards and system enclosures, including
rackmount, benchtop, workstation and portable systems.
On July 1, 1998, the Company acquired, through its newly formed subsidiary,
SBS Technologies Holding GmbH, a 50.1% interest in OR Industrial Computers
GmbH ("OR"), a leading European designer of CPU boards utilized in a wide
range of embedded computer applications. Based in Augsburg, Germany, OR
designs, manufactures and markets CPU boards based on Intel computer
architecture available in the VME, CompactPCI, and PCCompact form factors, as
well as VME CPU boards based on the Motorola 680X0 series processors and a
series of computer input/output boards. As part of this acquisition, the
Company acquired, through its newly formed subsidiary, SBS Technologies
Holding GmbH, a 50.2% interest in ORTEC Electronic Assembly GmbH, ("ORTEC")
based in Mindelheim, Germany, a related company which manufactures OR's
commercial products and electronic products for other customers. The Company
also acquired, through its wholly-owned subsidiary Embedded Computers, 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. The Company purchased the remaining shares in OR and ORTEC in December
1998.
On August 12, 1998, the Company purchased 100% of the outstanding shares of
SBS Technologies, Inc., Embedded PPC Products (formerly V-I Computer)
("Embedded PPC"). Based in Carlsbad, California, Embedded PPC designs,
manufactures and markets CPU boards based on the PowerPC processor for
embedded computer applications based on the VME, CompactPCI, PMC and
standalone bus architecture standards.
In recent years, the Company has discontinued or divested 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, the Company divested the flight simulation business.
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.
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, 1999, the Company had seven subsidiaries,
Telemetry, Modular I/O, Embedded Computers, Connectivity Products, Industrial
Computers, Embedded PPC and SBS Technologies, Inc. Foreign Holding Company.
SBS Technologies Holding GmbH is a subsidiary of SBS Technologies, Inc.
Foreign Holding Company. ORTEC is a subsidiary of SBS Technologies Holding
GmbH. In June 1999, the Company formed through SBS Technologies Holding GmbH,
SBS Technologies Europe GmbH, to market and distribute its U.S. products into
Europe. In August, 1999, the Company formed a partnership between SBS
Technologies Holding GmbH, OR, and the newly formed general partner, SBS OR
Computers Verwaltungs GmbH.
IndustryPack-Registered Trademark- is a registered trademark of the Company.
PCoMIP-TM- is a trademark of MEN Micro, Inc. of Carrollton, Texas, and SBS
Technologies, Inc. All other trademarks or tradenames referred to in this
document are the property of their respective owners.
SBS' OPERATING SEGMENTS AND PRODUCTS
The Company operates internationally through three operating segments, the
Computer Group, the Aerospace Group and the European Group. These segments
are based on the markets that are served, the products that are provided to
those markets and the geographic area from which sales are generated, and are
managed by three managers who report directly to the chief operating
decision-maker. In addition, each segment utilizes a common sales group
specializing in that segment's products. The Company's primary product lines
are divided into two groups: general purpose products and special purpose
products. General purpose products include CPU products, general purpose I/O
products, computer connectivity products and expansion units, and industrial
computer systems and enclosures, and are sold by the Computer Group
and the European Group. Special purpose products include telemetry products,
avionics interface products, and data acquisition software, and are sold by
the Aerospace Group.
GENERAL PURPOSE PRODUCTS
CPU PRODUCTS. The Company entered the standard bus embedded computer CPU
board market with its acquisition of Embedded Computers in August 1996 and
significantly expanded its CPU capabilities with the acquisitions of OR and
Embedded PPC in fiscal 1999. The Company currently has the ability to offer
CPU boards based on Intel Pentium architecture in the VME, CompactPCI and
PCCompact form factors and CPU boards based on the PowerPC processor for
embedded computer applications based on the VME, CompactPCI, PMC and
standalone form factors. The Company's Intel-based CPU product line consists
of boards and systems, including ruggedized products for military and
industrial applications, transportation, industrial control, factory
automation, and various other commercial and industrial applications. The
Company's CPU products based on the PowerPC processor are typically used in
telecommunication, industrial automation, and defense applications. In fiscal
1999, 1998 and 1997, sales of these products comprised 28.5%, 8.8% and 11.5%,
respectively, of the Company's total sales. As of September 1, 1999, 1998 and
1997, backlog orders were $10.5 million, $.6 million and $.7 million,
respectively. All backlog orders are expected to be filled within the current
and next fiscal year.
GENERAL PURPOSE I/O PRODUCTS. In April 1995, the Company purchased Modular
I/O, a leading developer and producer of I/O modules known as IPs. IPs are
small mezzanine boards that plug onto an embedded computer 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 four IPs. The Company's
offerings currently include VME, PCI, PC\104, Compact PCI and ISA bus carrier
cards. Modular I/O's product line of over 125 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. In addition, Modular I/O has a line of
ruggedized conduction cooled mezzanine I/O boards primarily used in military
environments. During fiscal 1999, Modular I/O has directed its efforts to
broadening the scope of its product line with the introduction of
input/output modules utilizing PMC and PCoMIP architecture. In fiscal years
1999, 1998 and 1997, sales of these products comprised 14.7%, 22.8% and
25.8%, respectively, of the Company's total sales. As of September 1, 1999,
1998 and 1997, backlog orders were $2.2 million, $3.2 million, and $2.4
million, respectively. All backlog orders are expected to be filled in the
current fiscal year.
COMPUTER CONNECTIVITY PRODUCTS AND EXPANSION UNITS. In November 1996, the
Company purchased Connectivity Products, 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. Connectivity
Products identified this market for products that permit industrial computers
designed around different computer architectures to communicate. In 1983,
Connectivity Products introduced its first adapter product, an interface
device to connect IBM PC equipment with Multibus architecture computers.
Since then, Connectivity Products 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 Connectivity Products'
new adapter products is driven by the emergence of new standard bus
specifications, new and enhanced operating systems and the need to deliver
products of higher performance. In addition, Connectivity Products provides a
series of PCI expansion units, which allows OEMs to increase the number of
devices to accommodate their particular application. Connectivity Products'
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. Connectivity
Products' 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. In
fiscal 1999, 1998 and 1997, sales of these products comprised 18.1%, 22.7%
and 17.1%, respectively, of the Company's total sales. As of September 1,
1999, 1998 and 1997, backlog orders were $1.3 million, $.9 million 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 Industrial Computers, a leading designer and producer of
PC-compatible industrial computer systems for the embedded computer market.
The systems are based on PCI, CompactPCI and ISA architectures and are
typically passive backplane-based, allowing up to 20 PCI or ISA cards to be
added. These 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 faceplates, 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 1999 and 1998, sales of
these products comprised 8.6% and 6.5%, respectively, of the Company's total
sales. As of September 1, 1999 and 1998, backlog orders were $3.2 million and
$2.8 million, respectively. All backlog orders are expected to be filled
within the current fiscal year.
SPECIAL PURPOSE PRODUCTS
TELEMETRY PRODUCTS. In August 1992, the Company purchased Telemetry, 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 an object under test, such as an aircraft, to a receiving station
while the test is underway. This allows engineers to monitor test performance
in real time, often decreasing total test costs and enhancing test safety.
Use of this technology has expanded to include continuous monitoring of
remote sites and transmission of digital data from satellites to the earth.
Telemetry pioneered the concept of using boards specially designed for
telemetry interface, which would be added to standard ground station
computers. Telemetry 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. In fiscal years 1999, 1998 and 1997, sales of
these products comprised approximately 8.4%, 9.7% and 11.9%, respectively, of
the Company's total sales. As of September 1, 1999, 1998, and 1997, backlog
orders were $0.8 million, $1.6 million and $0.9 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. In fiscal years 1999, 1998 and
1997, sales of this product comprised approximately 21.7%, 29.5%, and 30.6%,
respectively, of the Company's total sales. As of September 1, 1999, 1998 and
1997, backlog orders were $2.7 million, $1.8 million and $2.0 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 #1
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 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. Sales and backlog orders are included in Telemetry Products and
Avionics Interface Products above.
SEGMENT FINANCIAL DATA
See Notes 14 and 15 to the Company's Consolidated Financial Statements for
information about the Company's industry segments, geographic areas, and
major customers.
CUSTOMERS AND APPLICATIONS
The Company's broad range of products support a wide range of applications.
In fiscal 1999, 1998 and 1997, no one customer exceeded 10% of the Company's
sales. The following table highlights, by operating segment, some of the
Company's representative customers and their applications utilizing the
Company's products.
COMPUTER GROUP
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
COMMERCIAL AND INDUSTRIAL APPLICATIONS
- --------------------------------------
Aircraft Simulation Flight Safety International I/O, Connectivity
Aircraft Simulation CAE Electronics Connectivity
Airport Baggage Inspection InVision Technologies Connectivity
Airport Ground Traffic Control Northrop Grumman CPU
Automated Plasma Processing Systems Plasma Therm Industrial Computers
Color Proof Copier Eastman Kodak I/O
Currency Inspection System Currency Systems CPU
DVD Authoring Sonic Solutions Expansion Units
Fluid Dispensing Equipment Asymtek Industrial Computers
Library Material Flow Management 3M Industrial Computers
License Plate Readers Perceptics Connectivity
MediaWatch Competitive Media Reporting I/O
Nuclear Measurement System Aquila CPU
Postal Mail Sorting Lockheed Martin Industrial Computers
Semiconductor Manufacturing Equipment Delta Design I/O
Semiconductor Manufacturing Equipment Applied Materials I/O
Semiconductor Manufacturing Equipment Silicon Valley Group I/O
Semiconductor Manufacturing Equipment GSI Lumonics I/O
Semiconductor Manufacturing Equipment Lamm Research I/O
Turbine Control System GE Motors CPU
COMMUNICATIONS
- --------------
CDMA Wireless Local Loop Addicon Wireless I/O
Cellular Telephone Systems ArgoSystems CPU
Communication Systems Communications Systems Industrial Computers
Technology, Inc.
Frequency Measurement Celerity Systems CPU
Multi-Link Access Device Digital Link CPU
NDA Ericsson CPU
Network Switching Platforms Netrix Industrial Computers
Network Test Equipment GN Nettest CPU
Optical Switch Ciena CPU
Satellite Power Supply Testing Elgar Corporation Industrial Computers
Telemetry Acroamatics CPU
Telephone Switch Billing System Samsung I/O
Telephone Switch Billing System ACECOM I/O
Terabit Router Avici CPU
Voice Over IP Lucent I/O
INDUSTRIAL AUTOMATION
- ---------------------
Animatronics Walt Disney Imagineering I/O
Automotive Brake Tester Burke Porter Machinery CPU
Automotive Painting Systems Behr Systems Connectivity
Automotive Test Stands W.M. Associates/Digital Connectivity
Equipment Corp.
Automotive Wheel Alignment Burke Porter Machinery CPU
CNC Controller MDSI I/O
CNC Machine UVA I/O
Carpet Manufacturer Process Control MOOG I/O
Disk Platter Test/Verification IBM Connectivity
Factory automation Samsung CPU
Factory automation Measurex CPU
Nuclear Power Plant Controls Westinghouse Connectivity
Packaging Machinery Triangle Package Machinery I/O
PLC Co-processor GE Fanuc CPU
Programmable Logic Controller Reliance Electric Connectivity
Real-time Control Systems Queue Systems, Inc./DEC Connectivity
Robot Control Adept Technology I/O
Semiconductor Fabricating Equipment ETEC Systems Connectivity
Semiconductor Simulation Quickturn CPU
Semiconductor Trim Equipment Control Automation CPU
Surface Mount Board Assembly Seiko Instruments Connectivity
Tire Manufacturing Process Control Goodyear Connectivity
MEDICAL DEVICES
- ---------------
CT Beam Scanner Imatron Connectivity &
Expansion Units
CT/MRI Toshiba Medical Connectivity
DNA Analyzer PE Applied Biosystems CPU
DNA Analyzer Organon Teknika I/O
Electronic Scanning Microscopes EDAX Expansion Units
Laser Eye Correction Autonomous Technologies, Inc. I/O
MRI GE Medical Connectivity &
Expansion Units
MRI Hitachi Medical Connectivity
PET Imaging Systems UGM Medical Systems, Inc. Connectivity
Positron Emissions Topography Positron Corporation Connectivity
MILITARY AND SPACE APPLICATIONS
- -------------------------------
ABL Raytheon I/O
Army Vehicle Program ACMS Systems CPU
BSY-II LM Tactical Defense Systems I/O
Communications System Department of Defense CPU
Lamps Trainer Upgrade LM Federal Systems I/O
Launch Vehicle Space Vector CPU
Marine CC Shelter Litton Data Systems CPU
Military Vehicle Test SFA (for U.S. Army) I/O
Mini-DAMA Titan Linkabit I/O
Mission Planning & Debriefing Lockheed-Sanders Connectivity
Nimrod 2000 Raytheon I/O
Radar Control Raytheon CPU
Radar Tracking U.S. Navy CPU
Rocket Launch Controller Orbital Sciences CPU
Shipboard Decoy Launch Systems Sippican I/O
Space Station Simulator Raytheon CPU
Trident Missile Program GDDS CPU
TAC-3 Hughes Data Systems Connectivity
TAC-4 Hewlett Packard Connectivity
Q70 LM Tactical Defense Systems I/O
X33 Program Allied Signal Canada CPU
TEST AND MEASUREMENT APPLICATIONS
- ---------------------------------
Automotive Test/ Simulation Systems Integrated Systems I/O
Data Acquisition MIT Lincoln Labs I/O
Data Acquisition Real-Time Integration I/O
(for Boeing)
Manufacturing Test of Storage Systems Storagetek I/O
Particle Accelerator Thomas Jefferson National Labs I/O
Particle Collision and Detection System CERN I/O
Sub-millimeter Array Interferometer Observatory I/O
Temperature Control Therm-O-Disk I/O
TRANSPORTATION
- --------------
Aircraft Ground Control ARINC I/O
FAA Communication System Delta Information Systems I/O
Marine Navigation System Raytheon Marine CPU
Weather Radar for FAA Sigmet I/O
AEROSPACE GROUP
- ---------------
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
COMMUNICATIONS
- --------------
Communications Satellite Testing TRW Telemetry
GSP Testing Aerospatiale Telemetry
MILITARY AND SPACE APPLICATIONS
- -------------------------------
Aircraft Instrumentation BVR Telemetry
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 Avionics
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 Fujitsu Avionics
Military Satellite Telemetry Tracking & Lockheed Martin Telemetry
Control/ Missile Test
Military Satellite Telemetry Tracking & Control Aerojet Telemetry
Missile Systems/ F-18 Raytheon Avionics
Missile Test Raytheon Telemetry
Missile and Aircraft Test NAWC Telemetry
Missile and Aircraft Test Lockheed Martin Telemetry
Missile and Aircraft Test Boeing Telemetry
Satellite Imaging TRW Telemetry
Satellite Telemetry Tracking and & Control/ Real Time Logic Telemetry
Satellite Integration Test
Satellite Integration & Test TRW Space and Electronics Telemetry
SBIRS Ground Stations Lockheed Martin Telemetry
V-22 Test Support Bell Helicopter Telemetry
TRANSPORTATION
- --------------
777 Aircraft Testing Boeing Telemetry
Aircraft Flight Testing Cessna Telemetry
Commercial Avionics System Test Honeywell Avionics
Commercial Avionics System Test Rockwell International Avionics
Jet Engine Testing Pratt & Whitney Telemetry
Maritime Systems NEC Avionics
EUROPEAN GROUP
APPLICATION CUSTOMER PRODUCT
- ----------- -------- -------
COMMERCIAL AND INDUSTRIAL APPLICATIONS
- --------------------------------------
High Speed Camera Weinberger CPU
Power Distribution Repas CPU
Shipboard Equipment Hollandse Signaalapparaten CPU
INDUSTRIAL AUTOMATION
- ---------------------
Extruder Krauss Maffei CPU
Gear Processing Gleason Hurth CPU
Wood Processing Grecon Dimter CPU
MILITARY AND SPACE APPLICATIONS
- -------------------------------
Sonar System STN Atlas CPU
Space Station On-Board Computers Matra Marconi Space CPU
X34 Kayser Threde CPU
TEST AND MEASUREMENT APPLICATIONS
- ---------------------------------
Automotive Test Systems DaimlerChrysler CPU
Automotive Test Systems Bosch CPU
TRANSPORTATION
- --------------
Driving Robot Volkswagen CPU
SALES AND MARKETING
The Company markets its products both domestically and internationally
utilizing a combination of direct employee sales personnel, independent
manufacturers' representatives and distributors. As of September 1, 1999, the
Company had 96 employees, who typically hold engineering degrees, in sales,
marketing and customer relations, 19 U.S. based independent manufacturers'
representatives and 40 distributors located outside the U.S. The Company has
aligned its sales force in accordance with its three operating segments, the
Aerospace Group sales force, the Computer Group sales force, and the European
Group sales force, each supporting its respective product lines. 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 operating segments. The Company's Aerospace
Group products generally have the most complex applications and leads are
generally identified and sales closed by field sales personnel or independent
manufacturers' representatives. In the case of the Company's Computer Group,
sales are either closed by the Computer Group sales force, independent
manufacturers' representatives, or are the result of catalog sales. The
European Group sales are either closed by the Group's direct sales employees
or received directly from a distributor. In each of the Company's operating
segments, sales employees generally pursue "design in" applications where the
Company's products are included as part of a system.
The Company maintains sales offices in Albuquerque, New Mexico for its
avionics interface products; in Raleigh, North Carolina and Augsburg, Germany
for its Intel-based CPU products; in Menlo Park, California, for its I/O
products; in Carlsbad, California, for its telemetry, industrial computer
systems and enclosures, and PowerPC products and in St. Paul, Minnesota for
its computer connectivity and expansion unit 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, 1999, the Company had approximately 125
employees engaged in research and development activities. Of these employees,
78 have technical degrees and 18 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 60% of
the Company's research and development efforts in fiscal 1999 were software
related. The Company's research and development expense was $14.4 million,
$8.0 million and $4.4 million in fiscal 1999, 1998 and 1997, respectively,
corresponding to 13.5%, 10.8% and 8.4% of sales, respectively.
During fiscal 1999, research and development efforts continued in each
product area. Embedded Computer's and OR'S current research and development
activity is focused on evolutionary improvement of its Intel-based CPU
product line. Recently, Embedded Computer introduced a Pentium based CPU
board designed to meet low cost embedded applications and OR introduced a
high performance CPU board incorporating the Pentium III architecture.
Embedded PPC's research and development efforts are focused on designing
processor boards utilizing PowerPC architecture for telecommunications,
industrial automation and defense applications. An example is the Company's
recent announcement of a PowerPC module targeted at the telecommunications
market utilizing a PowerPC 750 processor. Modular I/O's efforts have been
directed toward broadening the scope of its IP product line with the
introduction of input/output modules utilizing PMC and PCoMIP architecture.
The development of Connectivity Products' new adapter products is driven by
the emergence of new bus specifications, new and enhanced operating systems
and the need to deliver products of higher performance. For example,
Connectivity Products recently introduced two new adapter products, a
CompactPCI to VME adapter and an IEEE 1394 to VME adapter. Industrial
Computers concentrated its efforts on expanding its line of industrial
computer systems. Telemetry is continuing to upgrade its products'
performance by increasing the operating bit rates and demodulation
techniques, key performance measures in the telemetry industry. Telemetry is
also expanding its offerings of high performance, CCSDS packet switching
products for the satellite ground station market. The Company continued
development of commercial and rugged avionics network products for the
aerospace market. The Company also introduced enhancements to DataXpress, its
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. The
Company cannot assure that it will be successful in developing and bringing
to market any products as a result of its research and development efforts.
SUPPLIERS
The Company uses contract manufacturing to produce substantially all of its
U. S. built 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 components from third party vendors. The
Company performs all assembly, test, packaging and support functions for
these products.
The Company's German operation manufactures approximately 90% of its
board-level products at its Mindelheim facility, using contract manufacturing
for the balance, in order to meet certain rugged and military applications.
Many of 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 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 sales 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.
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.
Many of SBS' existing and potential competitors are bigger companies who have
financial, technological and marketing resources significantly greater than
that of SBS, which may give them a competitive advantage. They and other
competitors may have established relationships with customers or potential
customers who can make it harder for SBS to sell its products to those
customers. SBS cannot assure that it will be able to compete effectively in
its current or future markets. Also, competitive pressures might
significantly adversely affect SBS' marketing and sales, and financial
condition.
In the CPU market in which Embedded Computers and OR 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, VMIC, Inc. and
XYCOM, Inc. In addition, with the acquisition of Embedded PPC and OR, 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 Modular I/O and its
IP, PMC and PCoMIP product lines, SBS has two classes of competition. The
first class includes companies that compete directly by selling these
products. The second class includes companies that compete with these
products using a different implementation to provide functionally equivalent
products. SBS' competitors in each of these classes include Acromag, Inc.,
Systran, Inc. and VMIC, Inc.
In the telemetry market, SBS competes with suppliers such as 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 Gesellschaft Fur Angewandte Informatik und Mikroelekemik GmbH.
In SBS' computer connectivity and expansion unit product line, SBS competes
with personal computer manufacturers that offer computer motherboards with
multiple PCI slots and with companies that have similar product lines. There
is no significant direct competitor in this market.
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, RadiSys Corporation and Industrial Computer Source.
EMPLOYEES
As of September 1, 1999, the Company had approximately 444 employees at its
seven locations: Albuquerque, New Mexico; Carlsbad, California; Menlo Park,
California; Raleigh, North Carolina; St. Paul, Minnesota; and Augsburg and
Mindelheim, Germany. Of these employees, 40 were in executive and
administrative positions; 96 were in sales, marketing and customer relations;
125 were in research and development; 24 were clerical, and 159 were employed
in support of ongoing production.
RISK FACTORS
Statements in this Report about SBS' outlook for its business and markets,
such as projections of future performance, statements of management's plans
and objectives, forecasts of market trends and other matters, are
forward-looking statements that involve risks and uncertainties. SBS' actual
results may differ materially from the results discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed below:
A MAJOR PART OF SBS' GROWTH STRATEGY IS TO ACQUIRE BUSINESSES, WHICH IT MAY
NOT BE ABLE TO IDENTIFY, OR IF ACQUIRED, TO INTEGRATE EFFECTIVELY. SBS has
increased the scope of its operations through the acquisition of seven
businesses and product lines acquired since 1992. SBS acquired Telemetry in
fiscal 1993,
Modular I/O in fiscal 1995, Embedded Computers in fiscal 1997, Connectivity
Products in fiscal 1997, Industrial Computers in fiscal 1998, and, in fiscal
1999, OR, ORTEC, OR Computer, Inc., and Embedded PPC. 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.
SBS' EARNINGS COULD BE ADVERSELY AFFECTED BECAUSE OF CHARGES RESULTING FROM
ACQUISITIONS. As part of its strategy for growth, SBS acquires compatible
businesses. Not infrequently, in accounting for a newly acquired business,
SBS is required to amortize, over a period of years, intangible assets,
including goodwill. Although usually the acquired business' current operating
profit offsets the amortization expense, 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 the overall financial condition or results of operations of
the Company 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."
SBS' OPERATING RESULTS CAN FLUCTUATE AND CAN AFFECT THE MARKET PRICE FOR SBS'
COMMON STOCK. SBS has experienced fluctuations in its operating results in
the past and may experience those fluctuations in the future. Sales, on both
an annual and a quarterly basis, can fluctuate as a result of a variety of
factors, many of which are beyond SBS' control. These factors include the
timing of customer orders, manufacturing delays, delays in shipment due to
component shortages, cancellations of orders, the mix of products sold,
cyclicality or downturns in the markets served by SBS' customers, including
significant reductions in defense spending affecting certain of SBS'
customers, and regulatory changes. Because those fluctuations can happen, SBS
believes that comparisons of the results of its operations for preceding
quarters are not necessarily meaningful and that investors should not rely on
the results for any one quarter as an indication of how SBS will perform in
the future. Investors should also understand that, if SBS' sales or earnings
for any quarter are less than the level expected by securities analysts or
the market in general, the market price for SBS' Common Stock could
immediately and significantly decline.
SBS' BUSINESS MIGHT BE MATERIALLY ADVERSELY AFFECTED IF DEFENSE SPENDING
DECREASES. In each of fiscal 1999, 1998 and 1997, although no one customer or
group of entities known to be under common control exceeded 10% of SBS'
sales, SBS derived a significant portion of its sales directly or indirectly
from the U.S. Department of Defense. SBS expects that the Department of
Defense will continue to be a significant source of sales. Changes in the
geopolitical environment or in national policy might result in significantly
reduced defense spending. Reduced spending could significantly reduce SBS'
marketing opportunities and sales, and, therefore, materially adversely
affect its financial condition, results of operations, or liquidity. Also,
SBS believes that many of its potential customers will rely on U.S.
government funding for the purchase of SBS' products. Sales to these
customers may be reduced if those funds are unavailable or delayed because of
budget constraints or bureaucratic processes.
CHANGES IN INDUSTRY STANDARDS OR TECHNOLOGY COULD REQUIRE SBS TO EXPEND
SUBSTANTIAL FUNDS TO REDESIGN ITS TECHNOLOGY. Most of SBS' products are
developed to meet certain industry standards, which define the basis of
compatibility in operation and communication of a system supported by
different vendors. 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 and adversely affect its marketing and sales, and financial
condition.
Many of SBS' product designs rely on state of the art digital technology.
Future advances in technology might 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.
SBS' PRODUCT MARKETS MIGHT NOT DEVELOP. Many of SBS' potential customers
design and manufacture standard bus embedded computers internally. Increased
market acceptance of SBS' products and services depends in part on these
customers relying on SBS instead of themselves to provide embedded computer
components. SBS believes that increased market acceptance of its products
will also depend on a number of factors. These factors include the quality of
SBS' design and production expertise, the increasing use and complexity of
embedded computer systems in new and traditional products, the expansion of
markets that are served by standard bus embedded computers, time-to-market
requirements of 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.
SBS MAY BE AT RISK FOR 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").
SBS HAS SIGNIFICANT COMPETITION IN MOST OF ITS MARKETS. The standard bus
embedded computer industry is highly-competitive and fragmented, and SBS'
competitors differ depending on product type, company size, geographic market
and application type. 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. For the 1999 fiscal
year, SBS had sales of $106.0 million and net income of $12.3 million. Many
of SBS' existing and potential competitors are bigger companies who have
financial, technological and marketing resources significantly greater than
that of SBS, which may give them a competitive advantage. They and other
competitors may have established relationships with customers or potential
customers who can make it harder for SBS to sell its products to those
customers. SBS cannot assure that it will be able to compete effectively in
its current or future markets. Also, competitive pressures might
significantly adversely affect SBS' marketing and sales, and financial
condition.
In the CPU market in which Embedded Computers and OR 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, VMIC, Inc. and XYCOM, Inc. In
addition, with the acquisition of Embedded PPC and OR, 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 Modular I/O and its IP,
PMC and PCoMIP product lines, SBS has two classes of competition. The first
class includes companies that compete directly by selling these products. The
second class includes companies that compete with these products using a
different implementation to provide functionally equivalent products. SBS'
competitors in each of these classes include Acromag, Inc., Systran, Inc. and
VMIC, Inc.
In the telemetry market, SBS competes with suppliers such as 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 Gesellschaft Fur Angewandte Informatik und Mikroelekemik, GmbH.
In SBS' computer connectivity and expansion unit product line, SBS competes with
personal computer manufacturers that offer computer motherboards with multiple
PCI slots and with companies that have similar product lines. There is no
significant direct competitor in this market.
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, RadiSys Corporation and Industrial Computer Source.
SBS PURCHASES MANY OF THE COMPONENTS IT USES FROM THIRD PARTIES, AND ITS
BUSINESS COULD BE ADVERSELY AFFECTED IF SOME OF THOSE COMPONENTS ARE NOT
AVAILABLE ON TIME. Many of SBS' products contain state of the art digital
electronic components. SBS is dependent upon third parties for the continuing
supply of many of these components. Some of the components are obtained from
a sole supplier or a limited number of suppliers, for which alternate sources
may be difficult to locate. 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' sales during certain periods as well as lead to customer
dissatisfaction. If enough components are not available, SBS might have to
pay premiums for parts in order to make shipment deadlines. Paying premiums
for parts would lower or eliminate SBS' profit margin and hurt its business
and financial condition, or cause SBS to increase its inventory of scarce
parts, which would adversely affect SBS' cash flow.
SBS IS DEPENDENT ON QUALIFIED EMPLOYEES. SBS' ability to maintain its
competitive position and to develop and market new products depends, in part,
upon its ability to retain key employees and to recruit and retain additional
qualified personnel, particularly engineers. If SBS is unable to retain and
recruit key employees, its product development, marketing and sales,
revenues, and business condition could suffer material adverse effects.
SBS HAS LIMITED PATENT PROTECTION ON ITS TECHNOLOGY. Although SBS believes
that some of its processes and equipment may be proprietary, SBS has sought
limited patent protection for its technology. SBS has relied upon trade
secret laws, industrial know-how and employee confidentiality agreements.
SBS' processes and equipment might not provide it with a sufficient
competitive advantage to overcome its lack of patent protection. Others could
independently develop equivalent or superior products or technology. Also,
SBS might not be able to establish trade secret protection, and secrecy
obligations might not be honored. If consultants, employees and other parties
apply technological information 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 that SBS could otherwise
use in its business, which could hurt SBS and its business.
Patent applications in the United States are not publicly disclosed until the
patent is issued, so patent applications 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.
SBS COULD HAVE SIGNIFICANT PRODUCT LIABILITY. SBS' products and services
could be subject to product liability or government or commercial warranty
claims. SBS maintains primary product liability insurance for its
non-aviation products with a general aggregate limit of $1.0/$2.0 million per
occurrence, a $10.0 million lead umbrella policy, and a $40.0 million excess
umbrella policy. SBS maintains, for its aviation products, a $100.0 million
liability insurance policy, per occurrence. SBS' products are widely used in
a variety of applications. If a claim is made against SBS, SBS' insurance
coverage might not be adequate to pay for its defense or to pay for any
award, in which case SBS would have to pay for it. Also, SBS might not be
able to continue that insurance in effect for premiums acceptable to SBS. If
a litigant were successful against SBS, a lack or insufficiency of insurance
coverage could have a material adverse effect upon SBS.
SBS' INTERNATIONAL SALES SUBJECT IT TO ADDITIONAL RISKS. SBS sells its
products in countries throughout the world from its United States and
European based operations. These sales subject SBS to various governmental
regulations, export controls, and the normal risks involved in international
sales. Sales of products internationally are subject to political, economic
and other uncertainties, including, among others, risk of war, revolution,
expropriation, renegotiation or modification of existing contracts, standards
and tariffs, and taxation policies. They are also subject to international
monetary fluctuations which may make payment more expensive for foreign
customers who may, as a result, limit or reduce purchases.
EXHANGE RATE FLUCTUATIONS COULD REDUCE SBS' EARNINGS WHEN STATED IN U.S.
DOLLARS. Substantially all of SBS' U.S. export sales to date have been
denominated in United States dollars and substantially all sales generated by
OR have been denominated in German Deutsche Marks. However, some sales in the
future may be denominated in other currencies. Any decline in the value of
other currencies in which SBS makes sales against the United States dollar or
German Deutsche Marks will have the effect of decreasing SBS' consolidated
earnings when stated in United States dollars. SBS does not engage in any
hedging transactions that might have the effect of minimizing the
consequences of currency fluctuations, and SBS does not intend to do so in
the immediate future.
THE COMPANY IS CONDUCTING AN ASSESSMENT TO DETERMINE WHETHER THE EURO
CONVERSION WILL HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL
POSITION, RESULTS OF OPERATIONS, OR LIQUIDITY. On January 1, 1999, eleven of
the fifteen member countries of the European Union adopted the euro as their
common legal currency and established fixed conversion rates between their
existing sovereign currencies and the euro. The legacy currencies of the
participating European Union members will remain legal tender in the
participating countries for the transition period from January 1, 1999 to
January 1, 2002. Beginning January 1, 2002, the participating countries will
issue new euro-denominated bills and coins for use in cash transactions.
Legacy currencies will no longer be legal tender for any transactions
beginning July 1, 2002, making conversion to the euro complete. The Company
has begun to assess its need to adapt information technology and other
systems to accommodate euro-denominated transactions, any potential impact on
terms and enforceability of legacy denominated contracts, and potential tax
consequences of currency conversion.
THE POLITICAL AND ECONOMIC POLICIES AND CONCERNS OF COUNTRIES IN WHICH SBS
MAKES OR COULD MAKE SALES COULD RESULT IN THE ADOPTION OF NEW TRADE POLICIES
IN THOSE COUNTRIES OR THE UNITED STATES OR LEAD TO TRADE DISPUTES BETWEEN
THOSE COUNTRIES AND THE UNITED STATES. These could limit, reduce, eliminate
or disrupt SBS' sales outside the United States, which might adversely affect
SBS' total sales and business prospects outside the United States.
OUTSTANDING WARRANTS AND OPTIONS AND REGISTRATION RIGHTS COULD HAVE A
POTENTIAL DILUTIVE EFFECT. SBS, in connection with its acquisition of Modular
I/O 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, 1999, 76,849 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, 1999, SBS had 704,044 options and warrants outstanding which
could be exercised and 1,224,705 options which were not yet eligible for
exercise.
SBS' COMMON STOCK HAS LIMITED PUBLIC FLOAT AND TRADING AND ITS STOCK PRICE
CAN BE VOLATILE. SBS' Common Stock is traded on The Nasdaq Stock Market.
While a public market currently exists for SBS' Common Stock and the number
of shares in the public float as of June 30, 1999 was 5,503,025, trading
volume in the four weeks ended June 30, 1999 averaged 27,728 shares traded
per day. Thus, trading of relatively small blocks of stock can have a
significant impact on the price at which the stock is traded. In addition,
The Nasdaq Stock Market has experienced, and is likely to experience in the
future, significant price and volume fluctuations 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.
SBS HAS NOT PAID AND DOES NOT EXPECT TO PAY DIVIDENDS. Since its inception,
SBS has not paid cash dividends on its Common Stock. SBS intends to retain
future earnings, if any, to provide funds for business operations and,
accordingly, does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.
ITEM 2. FACILITIES
As of September 1, 1999, the Company leases office and manufacturing space in
Albuquerque, New Mexico, Carlsbad, California, Menlo Park, California,
Raleigh, North Carolina, St. Paul, Minnesota and Augsburg, 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 is currently exploring
alternative locations for this business.
The Company's Intel-based 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 expansion space is available if required.
The Company's computer connectivity and expansion unit business leases a
39,597 square foot facility, located in a business park, in St. Paul,
Minnesota. This facility, consisting of 14,813 square feet of office space
and 24,784 square feet of production and warehouse space, has been leased for
a term of five years expiring on November 30, 2002. 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 the needs of the computer connectivity and expansion
unit business through the term of the lease.
The Company's telemetry, data acquisition software development, industrial
computer and enclosure, and PowerPC processor operations lease, in Carlsbad,
California, a 75,160 square foot facility, located in a business park,
consisting of 32,000 square feet of office space and 43,160 square feet of
manufacturing space. The lease term is for seven years expiring in April 2006
plus one option to extend the lease for three additional years. Management
believes that this facility will be sufficient to serve the needs of these
operations through the term of the lease.
The Company leases, in Augsburg, Germany, four floors of a six floor
building, consisting of approximately 20,000 square feet of office and
assembly and test areas for its OR operations. The lease has a term of ten
years expiring December 31, 2005 with an option to expand to the additional
two floors, consisting of 5,000 square feet each, five years from the
commencement of the lease. Management believes that the facility is
sufficient to serve the needs of the OR operations through the term of the
lease. In addition, the Company leases, on a month to month basis,
approximately 5,000 square feet of manufacturing space in a multi-use
facility in Mindelheim, Germany for its ORTEC operations. Management believes
that the facility is sufficient to serve the needs of ORTEC for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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. The
Company is not a party to, and none of its property is subject to, any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 Stock Market for each full fiscal
quarter within the last two fiscal years:
HIGH LOW
First Quarter Fiscal 1998 $ 26.250 $ 20.125
Second Quarter Fiscal 1998 31.375 22.125
Third Quarter Fiscal 1998 29.250 23.000
Fourth Quarter Fiscal 1998 33.375 26.500
First Quarter Fiscal 1999 31.250 21.375
Second Quarter Fiscal 1999 23.500 9.375
Third Quarter Fiscal 1999 24.375 16.500
Fourth Quarter Fiscal 1999 21.063 17.750
The Company's Common stock is traded over the counter on The Nasdaq Stock
Market using the symbol SBSE.
Based on data provided by the Company's transfer agent and The Depository
Trust Company, management believes that as of September 1, 1999, the number
of shareholders of record, as defined by Rule 12g5-1 of the Exchange Act, was
approximately 250, at which date the closing market value of the Company's
common stock was $23.625 per share.
The Company has not paid any cash dividends on its Common stock. Management's
current policy is to retain earnings, if any, for use in the Company's
operations and for expansion of the Company's business. No dividend payments
are anticipated in the foreseeable future (see "Management's Discussion and
Analysis: Liquidity").
ITEM 6.SELECTED FINANCIAL DATA
The following selected financial data for the years ended June 30, 1995
through June 30, 1999 have been derived from the audited consolidated financial
statements of SBS Technologies, Inc. ("the Company"). 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
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Sales - continuing operations $ 105,999,233 74,213,901 52,814,568 31,331,793 16,217,648
Net income - continuing operations $ 12,278,388 10,090,188 461,685 3,580,907 1,844,876
Net income per common share $ 2.11 1.81 0.10 1.19 0.66
Net income per common share - assuming dilution $ 1.99 1.64 0.09 0.97 0.65
Total assets $ 92,007,855 74,315,187 61,165,014 20,443,672 19,904,922
Long-term debt, excluding current installments $ -- -- 2,816,251 5,188,320 5,341,649
Total liabilities $ 14,779,882 10,051,200 10,838,326 10,392,752 14,855,674
Total stockholders' equity $ 77,227,973 64,263,987 50,326,688 10,050,920 5,049,248
- ---------------------------------------------------------------------------------------------------------------------
Note: The Company has not declared any dividends during the periods
presented. No dividend payments are expected in the foreseeable future.
On August 12, 1998, the Company completed the purchase of Embedded PPC.
On July 1, 1998, the Company acquired through its newly formed
subsidiary, SBS Technologies Holding GmbH, a 50.1% interest in OR and a
50.2% interest in ORTEC. The Company also acquired, through its
wholly-owned subsidiary, Embedded Computers, a 100% interest in OR
Computers, Inc. On December 9, 1998, the Company completed the
purchases of the minority interest in OR and ORTEC. On April 12, 1999,
OR Computers, Inc. was merged into Embedded Computers.
For fiscal 1999, net income per common share - assuming dilution,
includes a net benefit of approximately $0.10 related to non-recurring
foreign exchange gains, tax credit adjustments, and acquired in-process
research and development.
On November 24, 1997, the Company completed the purchase of Industrial
Computers.
On November 18, 1996, the Company completed the purchase of
Connectivity Products. In connection with the acquisition of
Connectivity Products, 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 Embedded Computers, the results of which are included
in fiscal 1997 on a prospective basis.
On April 28, 1995, the Company completed the purchase Modular I/O.
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 are for
continuing operations only.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
ALL STATEMENTS IN THIS FORM 10-K, OTHER THAN STATEMENTS OF HISTORICAL FACT,
THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY OR
MANAGEMENT INTENDS, EXPECTS, PROJECTS, BELIEVES OR ANTICIPATES WILL OR MAY
OCCUR IN THE FUTURE ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE
BASED UPON CERTAIN ASSUMPTIONS AND ASSESSMENTS MADE BY MANAGEMENT OF THE
COMPANY IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION OF HISTORICAL TRENDS,
CURRENT CONDITIONS, EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS IT
BELIEVES TO BE APPROPRIATE. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
REPORT ARE ALSO SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING BUT
NOT LIMITED TO ECONOMIC, COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL FACTORS
AFFECTING THE COMPANY'S OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES.
THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
ACTUAL RESULTS, DEVELOPMENTS, AND BUSINESS DECISIONS MAY DIFFER FROM THOSE
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
The Company is a leading manufacturer of embedded computer components and
systems used in a variety of applications, such as telecommunications,
medical imaging, industrial control, and flight instrumentation, in the
commercial and aerospace markets. The Company has three operating segments:
the Computer Group, the Aerospace Group, and the European Group. The
Company's product lines include CPU (Pentium and PowerPC) boards,
input/output (I/O) modules, avionics modules and analyzers, computer
connectivity products, expansion units, real-time networks, telemetry boards,
data acquisition software, DIN-rail embedded PCs, and industrial-grade
computers. 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 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,
through increasing penetration of its existing customer base, and by adding
new customers.
The Company entered the embedded computer market in 1988 with the development
of its avionics interface board, which was used in ground-based avionics
systems development and test applications. Today the Company's avionics
interface and bus analyzer products are the industry standard for quality and
innovation designed into major military programs, including the F-22, F-16,
B-1, and B-2 as well as in such aerospace projects as the International Space
Station.
In 1992, the Company added a second embedded computer product line with the
acquisition of Telemetry, a developer of telemetry interface circuit boards.
Telemetry provides open architecture telemetry boards for aircraft,
spacecraft, and launch-vehicle telemetry programs. Telemetry pioneered the
concept of single-board telemetry solutions nearly a decade ago. The product
line currently consists of telemetry receivers, downconverters, BPSK/QPSK
modems, bit synchronizers, PCM decommutators, PCM simulators, CCSDS products
and application software.
In 1995, the Company added a third embedded computer product line with the
acquisition of Modular I/O. Modular I/O designs, manufactures and markets
modular I/O solutions using mezzanine standards such as IndustryPack, PCoMIP,
and PMC for PCI, CompactPCI, VME, ISA, STD32, PC/104 and standalone embedded
platforms. Currently, the Company offers over 125 I/O modules for digital
I/O, analog I/O, data communications, motion control, field bus, temperature
measurement and graphics controller applications.
In August 1996, the Company acquired Embedded Computers, a manufacturer of
Intel processor-based CPU boards based on VME architecture. 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.
Connectivity Products was added in November 1996, a provider of
high-performance and reliable bus connectivity products that include bus
bridges, bus expansion units, and real-time coherent memory networks designed
to operate in the most demanding applications.
Industrial Computers was added in November 1997 and specializes in the design
and manufacture of rugged, special-purpose PC, and CompactPCI industrial and
military computers, enclosures and turn-key systems. It offers a variety of
CPU boards and system enclosures, including rackmount, benchtop, workstation
and portable systems.
On July 1, 1998, the Company acquired, through its newly formed subsidiary,
SBS Technologies Holding GmbH, a 50.1% interest in OR, a leading European
designer of CPU boards utilized in a wide range of embedded computer
applications. Based in Augsburg, Germany, OR designs, manufactures and
markets CPU boards based on Intel computer architecture available in the VME,
CompactPCI, and PCCompact form factors, as well as VME CPU boards based on
the Motorola 680X0 series processors and a series of computer input/output
boards. As part of this acquisition, the Company acquired, through its newly
formed subsidiary, SBS Technologies Holding GmbH, a 50.2% interest in ORTEC,
based in Mindelheim, Germany, a related company which manufactures OR's
commercial products and electronic products for other customers. The Company
also acquired, through its wholly-owned subsidiary Embedded Computers, 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. The Company purchased the remaining shares in OR and ORTEC in December
1998.
On August 12, 1998, the Company purchased 100% of the outstanding shares of
Embedded PPC. Based in Carlsbad, California, Embedded PPC designs,
manufactures and markets CPU boards based on the PowerPC processor for
embedded computer applications based on the VME and CompactPCI bus
architecture standards.
In recent years, the Company has discontinued or divested 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, the Company divested the flight simulation business.
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.
See "Recent Acquisitions" below for additional information.
RECENT ACQUISITIONS
On August 12, 1998, the Company completed the purchase of Embedded PPC. Based
in Carlsbad, California, Embedded PPC designs, manufactures, and markets CPU
boards based on the PowerPC processor for computer applications that utilize
VME and CompactPCI bus standards. The Company acquired all of the outstanding
capital stock of Embedded PPC for a total purchase price of $5.3 million. Of
the $5.3 million, $5.0 million was paid in cash to the sellers at closing,
and $0.2 million was paid in cash to the sellers on October 13, 1998, upon
finalizing the closing balance sheet. The remainder represents acquisition
costs associated with the purchase. The acquisition was accounted for using
the purchase method of accounting, and goodwill is being amortized over 10
years. The financial results of Embedded PPC have been included in the
Company's Consolidated Financial Statements from August 12, 1998.
On July 1, 1998, the Company acquired through its newly formed subsidiary,
SBS Technologies Holding GmbH, a 50.1% interest in OR. Based in Augsburg,
Germany, OR designs, manufactures, and markets CPU boards utilized in a wide
range of embedded computer applications. As part of the acquisition, the
Company acquired, through its newly formed subsidiary, SBS Technologies
Holding GmbH, a 50.2% interest in ORTEC, a Mindelheim, Germany-based related
company which manufactures OR's commercial products and electronic products
for other customers. The Company also acquired, through its wholly-owned
subsidiary, Embedded Computers, based in Raleigh, North Carolina, a 100%
interest in OR Computers, Inc., based in Fairfax, Virginia, which is the U.S.
marketing support organization for the OR product line. Effective April 12,
1999, OR Computers, Inc. was merged into Embedded Computers. The purchase
price, excluding transaction costs, for the majority interest in the two
companies based in Germany and 100% of OR Computers, Inc. was DM 17.5 million,
approximately $9.7 million, paid in cash and 24,000 shares of common stock
valued at $0.7 million at closing. In addition, the Company and the
shareholders of both OR and ORTEC entered into exclusive option agreements
whereby the Company could acquire the remaining shares of both companies on
February 28, 1999. In December 1998, the Company modified the option
agreements, accelerating the purchase of the remaining interest in OR and
ORTEC from February 28, 1999 to December 9, 1998. The purchase price,
excluding transaction costs, for the remaining interest in the two companies
based in Germany was DM 18.2 million. The Company disbursed the cash,
approximately $10.4 million, including interest at 4.0%, during the quarter
ended March 31, 1999. Acquisition costs associated with the purchases were
approximately $1.1 million. The acquisitions were accounted for using the
purchase method of accounting and goodwill is being amortized over a ten year
period. In connection with the initial acquisition, the Company recorded a
$0.5 million earnings charge, based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
OR. The assessment determined that $0.5 million of OR's
purchase price represented technology that did not meet the accounting
definitions of "completed technology," and thus should be charged to earnings
under generally accepted accounting principles. This assessment analyzed
certain VME, CompactPCI, and PC Compact products that were under development
at the time of acquisition. These programs were in various stages of
completion ranging from initial development to 90% of completion, with
estimated completion dates ranging from September 1998 through April 1999.
The fair value of these development programs was determined in accordance
with views expressed by the staff of the Securities and Exchange Commission.
In conjunction with the acquisition of the remaining interest of OR completed
on December 9, 1998, all projects in process at the date of the initial
acquisition had been substantially completed such that no additional
in-process research and development was acquired. The financial results of
OR, ORTEC, and OR Computers, Inc. have been included in the Company's
Consolidated Financial Statements from July 1, 1998.
In June 1999, the Company formed through SBS Technologies Holding GmbH, SBS
Technologies Europe GmbH, to market and distribute its U.S. products into
Europe. The Company also formed SBS Technologies, Inc. Foreign Holding
Company, a Nevada Corporation, to act as the holding company for all current
and future off-shore owned entities.
In August 1999, the Company formed a partnership between SBS Technologies
Holding GmbH, OR, and the newly formed general partner, SBS OR Computers
Verwaltungs GmbH.
On November 24, 1997, the Company completed the purchase of Industrial
Computers, a privately held San Diego County, California-based manufacturer
of industrial computer enclosures and systems. Industrial Computers
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. The Company acquired all of the outstanding capital stock of
Industrial Computers for a total purchase price of $5.8 million. Of this
total purchase price, $5.7 million was paid in cash, including $250,000 which
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, and
the remainder represents acquisition costs associated with the purchase. The
acquisition was accounted for using the purchase method of accounting and
goodwill is being amortized over a ten year period. The financial results of
Industrial Computers have been included in the Company's Consolidated
Financial Statements from November 24, 1997.
On November 18, 1996, the Company completed the purchase of Connectivity
Products. Connectivity Products 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
Connectivity Products (the "Sellers"), the Company acquired all of the
outstanding capital stock of Connectivity Products for a total purchase price
of $24.0 million. Of this total purchase price, $20.0 million was paid to the
Sellers in cash upon closing of the public stock offering (see "Public Stock
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 Connectivity Products have
been included in the Company's Consolidated Financial Statements from
November 18, 1996. In connection with the acquisition, the Company recorded a
$11.0 million earnings charge based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
Connectivity Products. The assessment determined that $11.0 million of the
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. Goodwill is being amortized
over a ten year period.
The following pro forma consolidated results of operations have been prepared
as if the acquisitions of Industrial Computers, OR, ORTEC, OR Computers,
Inc., and Embedded PPC had occurred on July 1, 1997.
June 30 June 30
(in thousands except per share amounts) 1999 1998
---- ----
Sales $ 106,570 95,244
Net income 12,857 8,795
Net income per common share 2.21 1.57
--------- ------
--------- ------
Net income per common share - assuming dilution 2.08 1.42
--------- ------
--------- ------
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 Embedded Computers based in Raleigh, North Carolina. Embedded Computers
manufactures Intel processor-based CPU boards for the standard bus embedded
computer market. The financial results of Embedded Computers 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
consolidated results of operations.
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. An underwriting group led by S G
Cowen Securities Corporation and SoundView Financial Group, Inc. managed the
offering. The net proceeds to the Company from the public stock offering were
used to fund the acquisition of Connectivity Products (see "Recent
Acquisitions" above), to repay long-term debt, and the balance was 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
-------------------------------------------
1999 1998 1997
------------ ----------- ----------
Sales 100.0 % 100.0 % 100.0 %
Cost of Sales 42.0 42.8 47.2
------------ ----------- ----------
Gross Profit 58.0 57.2 52.8
Selling, general and administrative expense 22.6 22.8 19.4
Research and development expense 13.5 10.8 8.4
Acquired in-process research and development charge 0.5 --
20.8
Amortization of intangible assets 3.8 2.6 2.8
------------ ----------- ----------
Operating income 17.6 21.0 1.4
Interest income, net -- 1.3 0.1
Foreign exchange gains 0.6 -- --
------------ ----------- ----------
Income before income taxes and minority interest 18.2 22.3 1.5
Income taxes 6.3 8.7 0.6
------------ ----------- ----------
Income before minority interest 11.9 13.6 0.9
Minority interest 0.4 -- --
------------ ----------- ----------
Net Income 11.5 % 13.6 % 0.9 %
------------ ----------- ----------
------------ ----------- ----------
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
SALES. In fiscal 1999, sales increased 42.8%, or $31.8 million, from $74.2
million in fiscal 1998 to $106.0 million. Of this 42.8% increase, sales
contributed by Embedded PPC, which was acquired on August 12, 1998, comprised
13.8%, sales contributed by OR, ORTEC, and OR Computers, Inc., which were
acquired on July 1, 1998, comprised 18.9%, sales contributed by Industrial
Computers, which was acquired on November 24, 1997, comprised 4.9%, and 5.2%
was attributable to the Company's other product lines. Throughout fiscal
1999, prices for the Company's products remained firm, and unit shipments
increased across all product lines, with the exception of the Company's U.S.
built CPU products manufactured by Embedded Computers and Modular I/O product
lines, which declined compared to fiscal 1998. The sales of the Company's CPU
and Modular I/O products decreased 9.0% compared to fiscal 1998, primarily
due to the effects of a slowdown in the semiconductor industry and the Asian
currency and economic crisis. Management currently believes that the markets
for these products are stabilizing, and that any further declines will have a
minimal effect on its operations.
GROSS PROFIT. In fiscal 1999, gross profit increased 45.0%, or $19.1 million,
from $42.4 million in fiscal 1998, to $61.5 million. Of this 45.0% increase,
34.2% was due to the acquisitions of Embedded PPC, OR, ORTEC, OR Computers,
Inc., and Industrial Computers, and 10.8% was due to increased sales volume
over fixed costs and material cost improvements in the Company's other
product areas, as well as a higher percentage of sales of the Company's
Aerospace and Connectivity products, which generally yield higher margins
than the Company's other products. For the same reasons, in fiscal 1999,
gross margin increased to 58.0% of sales from 57.2% in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1999, selling, general
and administrative expense increased 42.0%, or $7.1 million from $16.9
million in fiscal 1998, to $24.0 million. Of this 42.0% increase, 24.0%
resulted from the added expenditures due to the acquisitions of Embedded PPC,
OR, ORTEC, OR Computers, Inc., and Industrial Computers, and 18.0% was due to
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. In fiscal 1999, selling, general and administrative expense as a
percentage of sales was consistent at 22.6%, compared to 22.8% in fiscal
1998, in line with the increase in sales volume.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1999, research and development
expense increased by 79.8%, or $6.4 million, from $8.0 million in fiscal
1998, to $14.4 million. Of this 79.8% increase, 41.3% resulted from the added
expenditures due to the acquisitions of Embedded PPC, OR, ORTEC, OR
Computers, Inc., and Industrial Computers, and 38.5% was due to increased
investment in product development in the Company's other product areas. For
the same reasons, in fiscal 1999, research and development expense increased
to 13.5% of sales from 10.8% in fiscal 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. In fiscal 1999, in
connection with the acquisition of the majority interest in OR completed on
July 1, 1998, the Company recorded a $0.5 million earnings charge based on an
assessment by the Company, in conjunction with an independent valuation firm,
of purchased technology of OR. The assessment determined that $0.5 million of
OR's purchase price represented technology that did not meet the accounting
definitions of completed technology, and thus should be charged to earnings
under generally accepted accounting principles (see "Recent Acquisitions"
above). In conjunction with the acquisition of the remaining interest in OR,
all projects in process at the date of the initial acquisition had been
substantially completed such that no additional in-process research and
development was acquired.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1999, amortization of intangible
assets increased 105.4%, or $2.1 million from $1.9 million in fiscal 1998, to
$4.0 million. This increase was the result of the amortization of goodwill
associated with the acquisitions of Embedded PPC, OR, ORTEC, and Industrial
Computers.
INTEREST INCOME. In fiscal 1999, interest income decreased 73.4%, or
$822,000, from $1.1 million in fiscal 1998, to $298,000. This decrease was
primarily due to the reduction in interest earned on cash, as the Company's
cash decreased due to the $3.0 million final payment to the former owners of
Connectivity Products on July 1, 1998, the $20.2 million payments (net of
cash acquired) for the acquisitions of OR, ORTEC, and OR Computers, Inc., the
$5.1 million payment (net of cash acquired) for the acquisition of Embedded
PPC, $2.4 million for the acquisition of property and equipment, and $1.6
million in capital expenditures for leasehold improvements at the Company's
new facility located in Carlsbad, California.
INTEREST EXPENSE. In fiscal 1999, interest expense increased 53.2%, or
$100,000, from $188,000 in fiscal 1998, to $288,000. This increase was due to
interest associated with the $7.9 million of borrowings drawn under the
Company's line of credit, as well as interest paid on the $10.4 million
payment for the remaining interest in OR and ORTEC, partially
offset by the elimination of the imputed interest expense associated with the
notes payable to the former owners of Connectivity Products.
FOREIGN EXCHANGE GAINS. In fiscal 1999, the $667,000 of foreign exchange
gains were primarily attributable to the change in exchange rates between
December 9, 1998 and February 28, 1999, relating to the DM 16.7 million
payments made during the quarter ended March 31, 1999 for the remaining
interests in OR and ORTEC (see "Recent Acquisitions" above).
INCOME TAXES. For fiscal 1999 and fiscal 1998 income taxes represent
effective income tax rates of 34.3% and 39.0%, respectively. The decrease in
the effective rate is due to tax planning strategies implemented by the
Company, including research and experimental tax credits (including $0.5
million of credits related to prior years), and increased use of the
Company's foreign sales corporation, partially offset by a higher effective
tax rate in Germany.
EARNINGS PER SHARE. For fiscal 1999, net income per common share was $2.11
compared to $1.81 for fiscal 1998. Net income per common share - assuming
dilution was $1.99 for fiscal 1999 compared to $1.64 for fiscal 1998.
Included in net income per common share and net income per common share
assuming dilution for fiscal 1999 is a net benefit of approximately $0.10
related to non-recurring foreign exchange gains, tax credit adjustments, and
acquired in-process research and development.
REVIEW OF BUSINESS SEGMENTS
The Company is managed and operates through three operating segments: the
Computer Group, the Aerospace Group and the European Group. The following is
a discussion of sales from external customers and segment profit for each
reportable segment. The Company does not allocate to these segments costs
associated with its corporate headquarters, substantially all of the
amortization expense associated with acquisitions, substantially all interest
income earned on cash balances, interest expense associated with Company
borrowing facilities, and acquired in-process research and development
charges. This measure of segment profit described above is referred to herein
as "Segment Profit."
COMPUTER GROUP
SALES FROM EXTERNAL CUSTOMERS SEGMENT PROFIT
FY99 $64.1 million $13.5 million
FY98 $45.1 million $11.3 million
Computer Group sales from external customers in fiscal 1999 increased 42.3%,
or $19.0 million, from $45.1 million in fiscal 1998 to $64.1 million. Of this
42.3% increase, sales contributed by the acquisitions of Embedded PPC,
Industrial Computers, and the U.S. distribution of OR products accounted for
39.9% of the increase. The balance of the increase, 2.4%, is due to increases
in the Group's other product lines. On a standalone basis, sales of the
Company's I/O products and the U.S. built CPU products manufactured by
Embedded Computers decreased 9% compared to fiscal 1998, primarily due to the
effects of a slowdown in the semiconductor industry and the Asian currency
and economic crisis. Management currently believes that the markets for these
products are stabilizing, and that any further declines will have a minimal
effect on its operations. These declines were offset by a 14.0% increase in
the Company's computer connectivity and expansion unit products.
Computer Group segment profit in fiscal 1999 increased 19.5%, or $2.2
million, from $11.3 million in fiscal 1998, to $13.5 million, primarily due
to earnings contributed by the acquisitions of Embedded PPC and Industrial
Computers. Segment profit as a percentage of sales decreased from 25.0% in
fiscal 1998 to 21.0% in fiscal 1999. This decrease was primarily the result
of lower gross margins as the Group's overall sales mix shifted to lower
margin products, as well as increased sales expense as the Group strengthened
its sales force and increased investment in product development.
AEROSPACE GROUP
SALES FROM EXTERNAL CUSTOMERS SEGMENT PROFIT
FY99 $31.9 million $10.8 million
FY98 $29.1 million $11.0 million
Aerospace Group sales from external customers in fiscal 1999 increased 9.4%,
or $2.8 million, from $29.1 million in fiscal 1998 to $31.9 million. In
fiscal 1999, sales of the Group's avionics interface products increased 4.8%
over fiscal 1998, a reduced rate of growth compared to that experienced by
the Group in the past several years. Management believes that this reduced
growth is the result of the Group's high market share of its avionics
interface products and a decline in defense electronics research and
development expenditures. Sales of the Group's telemetry products increased
23.5% in fiscal 1999 over fiscal 1998 as the Group increased its
participation in the military and commercial satellite market.
Aerospace Group segment profit in fiscal 1999 decreased 2.0%, or $200,000,
from $11.0 million in fiscal 1998 to $10.8 million. The additional gross
margin realized from the Group's increased sales was offset by higher
selling, general and administrative expenses and product development costs
primarily in the telemetry products area as the Group positioned Telemetry
for additional growth.
EUROPEAN GROUP
SALES FROM EXTERNAL CUSTOMERS SEGMENT PROFIT
FY99 $10.0 million $3.3 million
The European Group was formed in July 1998 with the acquisitions of O