Plan Category |
|
Number of securities to be issued upon exercise of
outstanding options, rights, restricted stock, and other stock-based
awards |
|
Weighted-average exercise price of outstanding options,
rights, restricted stock, and other stock-based awards |
|
Number of securities remaining available for future
issuance under equity compensation plans (excluding securities reflected
in first column) |
Equity compensation plans approved by security holders |
|
2,952,505 |
|
$14.91 |
|
2,794,638 * |
Equity compensation plans not approved by security
holders |
|
- |
|
- |
|
- |
Total |
|
2,952,505 |
|
$14.91 |
|
2,794,638 * |
* Certain equity compensation plans of the Company contain a formula that
automatically increases the number of securities available for issuance by a
percentage of the number of outstanding securities of the Company as
follows:
- the 1993 Director and Officer Stock Option Plan provides securities
available for grant equal to 5% of the number of shares of the Company's
common stock outstanding the first day of each fiscal year plus shares
underlying expired or terminated options (1,405,824 shares available at June
30, 2004).
- the 2000 Long-Term Equity Incentive Plan provides securities available
for grant equal to ten percent of the adjusted average of the outstanding
stock, as that number is determined by SBS to calculate net income per
common share - assuming dilution for the preceding fiscal year, reduced by
any shares of stock under the plan subject to unexercised options and any
shares of stock under the plan subject to restrictions (452,921 shares
available at June 30, 2004).
Issuer Purchases of Equity Securities
Not applicable.
Item 6. Selected Financial Data
The following selected financial data for the years ended June
30, 2000 through June 30, 2004 have been derived from the audited consolidated
financial statements of SBS. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and related notes
to the consolidated financial statements included elsewhere in this
report.
Years ended June 30,
----------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Thousands except per share data)
Statements of Operations Data:
Sales............................................... $ 133,874 115,521 118,856 187,180 128,189
Gross profit........................................ 64,729 57,519 42,628 88,565 67,015
Operating income (loss)............................. 7,132 2,165 (38,412) 27,736 15,736
Net income (loss)................................... 5,193 (4,450)(a) (24,360) 17,184 8,903
Per Share Data:
Net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle............... $ 0.34 0.11 (a) (1.67) 1.23 0.71
Net income (loss)................................. 0.34 (0.30) (1.67) 1.23 0.71
Net income (loss) per common share -
assuming dilution:
Income (loss) before cumulative effect
of change in accounting principle............... $ 0.34 0.11 (a) (1.67) 1.14 0.66
Net income (loss)................................. 0.34 (0.30) (1.67) 1.14 0.66
Balance Sheet Data:
Working capital..................................... $ 86,715 73,187 69,304 75,282 37,535
Total assets........................................ 145,136 128,610 125,648 147,172 133,160
Total liabilities................................... 15,509 12,503 12,002 13,377 34,146
Total stockholders' equity.......................... 129,627 116,107 113,646 133,795 99,014
__________
Notes: We have not declared any dividends during the periods presented and we
do not expect to pay dividends in the foreseeable future.
(a) The fiscal year 2003 summary financial data includes a transitional impairment charge
of $6,058,000 (or ($0.41) per common share), net of tax, reported as a cumulative effect of
change in accounting principle as a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," on July 1, 2002.
On August 18, 2000, SBS declared a two- for-one stock split for
stockholders of record on September 5, 2000, distributed on September 20, 2000.
All references to net income per common share, net income per common share -
assuming dilution, common stock, and stockholders' equity have been restated as
if the stock split had occurred as of the earliest period presented.
On June 30, 2003, SBS completed the purchase of Avvida Holdings
and Avvida Systems (subsequently amalgamated under Canadian law into SBS
Canada).
On April 12, 2000, SBS completed the purchase of SDL
Communications, Inc. (subsequently merged into SBS Communications). In
connection with the acquisition, SBS recorded a $4.0 million acquired in-process
research and development ("IPR&D") charge in the fourth quarter of fiscal
2000.
On December 20, 1999, SBS completed a pooling of interests
transaction with SciTech Inc. ("SciTech"). SciTech was subsequently merged into
SBS Communications. SciTech's historical results did not have a material effect
on combined financial position or results of operations; therefore, the
financial position and results of operations of SBS and SciTech are combined
from October 1, 1999 on a prospective basis.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Company Overview
We design and build open-architecture embedded computer
products that enable OEMs to serve the government, commercial, and
communications end markets. Embedded computer products are put inside or made
part of larger systems to process information, control machines, move computer
data between machines, and interact with people. The companies that use our
products manufacture very sophisticated, expensive devices, for example, MRI
machines, flight simulators, wireless networks, fighter jets and industrial
robots.
The SBS product line is strategically focused on embedded
computing, and we serve virtually all parts of the market. We currently list
more than 450 products in the product section of our website, www.sbs.com. We
offer components like I/O modules, bus adapters, carrier cards, system
enclosures, FPGA boards and single board computers, as well as network switches,
blades and fully integrated systems. Many of these products are available in
ruggedized versions, which can operate in conditions of extreme temperature,
vibration, shock and humidity.
We serve a broad range of customers. We help our customers get
to market faster, more reliably and more economically, by providing a wide range
of standard and customized embedded computer products. Our products have
application in diverse industries, including space and aviation,
telecommunications, military and government, transportation, telemetry,
robotics, networking, broadcasting, wireless communications and medical imaging.
We have grown because we understand our role in the embedded
computing process: we make components which are part of larger, more complicated
devices. As embedded computer applications expand, we broaden our product line
to meet our customers' needs and to attract new customers. We invest in
technology and customer service so that we can grow with our customers.
We have grown organically and through strategic acquisitions,
acquiring companies that supplement our core competencies - a pattern we expect
to continue. Our organic growth is driven by adding new products, improving
existing products through our research and development program, and attracting
new customers with our products and service. We also completed eleven
acquisitions between 1992 and June 2004 that broadened our product offerings and
our customer base.
Executive Summary
During the fiscal year ended June 30, 2004, we made significant
progress in the implementation of our strategic plan. As a team, we completed a
major restructure of the Company and developed an outward looking, aggressive
approach to the market. As an example, we expanded into China with the opening
and staffing of a sales and technical support office in June 2004.
For the past two years, we have maintained an annual book-to-
bill ratio of greater than one-to-one. Throughout fiscal 2004, our customers
required shorter lead times for our products, increasing our turn business and
resulting in more extensive variability of our bookings. In addition, we believe
the number and quality of design win opportunities in all of our markets are
strong, and we remain committed to providing an excellent base of products.
During the fiscal year ended June 30, 2004 (fiscal 2004), we
noted the following:
- Our book-to-bill ratio for fiscal 2004 was 1.04 to 1.
Book-to-bill ratio represents the net value of customer orders
received and booked each period divided by total sales.
- Order backlog was $42.1 million as of June 30, 2004, compared to $36.2
million as of June 30, 2003;
Order backlog represents customer orders that have been
contracted for future delivery. Accordingly, these orders have not yet been
recognized as revenue, but represent potential future revenue.
- Thirty-four design wins were achieved during fiscal 2004.
Each reported design win represents an initial purchase order
of a minimum of $100,000 and is forecasted to produce a minimum of $500,000 in
sales annually when in production.
By end market, the design wins included twenty in the
government market, seven in the commercial market, and seven in the
communications market.
- During fiscal 2004, one commercial customer represented approximately
10% of our total sales and one communications customer represented
approximately 8% of our total sales. We had no other customer whose sales
represented more than 5% of our total in fiscal 2004.
Financial Highlights
Select financial highlights during the year ended June 30, 2004
compared to the years ended June 30, 2003 and 2002 follows:
Fiscal Years Ended
---------------------------------------------------
June 30, June 30,
Thousands (except -------------------- % --------- %
per share amounts) 2004 2003 change 2002 change
--------- --------- --------- --------- ---------
Sales............................ $ 133,874 $ 115,521 15.9% $ 118,856 12.6%
========= ========= =========
Operating income (loss).......... $ 7,132 $ 2,165 229.4% $ (38,412) 118.6%
========= ========= =========
Income (loss) before
cumulative effect of change
in accounting.................. $ 5,193 $ 1,608 222.9% $ (24,360) 121.3%
========= ========= =========
Net income (loss)(*)............. $ 5,193 $ (4,450) 216.7% $ (24,360) 121.3%
========= ========= =========
Income (loss) per share
before cumulative effect of
change in accounting........... $ 0.34 $ 0.11 209.1% $ (1.67) 120.4%
========= ========= =========
Net income (loss) per
share - assuming
dilution (**).................. $ 0.34 $ (0.30) 213.3% $ (1.67) 120.4%
========= ========= =========
Sales for fiscal 2004 were $133.9 million, a 15.9% increase from sales of
$115.5 million for the prior year.
Operating income for fiscal 2004 increased approximately $5.0 million, or
229.4% from the fiscal 2003 balance.
Net income for fiscal 2004 was $5.2 million, compared with income before the
cumulative effect of change in accounting for goodwill of $2.4 million and net
loss of $(4.4) million for the prior fiscal year.
* Included in the determination of net loss in fiscal year 2003 is a
transitional goodwill impairment charge of
$6.1 million (or ($0.41) per
common share), net of tax, which is reported as a cumulative effect of change in
accounting principle, as a result of our adoption of SFAS 142 effective on July
1, 2002.
Net income per share - assuming dilution for fiscal 2004 was $0.34, compared
with income per common share - assuming dilution before the cumulative effect of
change in accounting for goodwill of $0.11 and net loss per common share -
assuming dilution of $(0.30) for the prior fiscal year.
** Included in the results for fiscal 2004 are employee severance and
consolidation costs associated with the closure of the Carlsbad, California
facility of approximately $2.4 million, which negatively impacted net income per
common share - assuming dilution by ($0.11) on an after tax basis. This compares
to employee severance and consolidation costs associated with closure of the
Carlsbad facility and other management actions totaling approximately $1.7
million for fiscal 2003, which negatively impacted income per common share -
assuming dilution before the cumulative effect of change in accounting for
goodwill by ($0.08) on an after tax basis.
For a more complete analysis of the financial results, see
"Results of Operations" below.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and
related disclosures in accordance with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We use estimates when we account for items such as
inventory, allowances for uncollectible accounts receivable, depreciation and
amortization periods for property and equipment and certain identifiable
intangible assets, goodwill and intangible asset impairment analysis, and income
taxes (see Note 1 to the SBS' consolidated financial statements). These
estimates and assumptions are based upon our continuous evaluation of historical
results and anticipated future events. Actual results could differ from these
estimates under different assumptions or conditions.
The Securities and Exchange Commission defines critical
accounting polices as those that are, in management's view, most important to
the portrayal of SBS' financial condition and results of operations and those
that require significant judgments and estimates. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in preparing our consolidated financial statements:
- Revenue Recognition
. We recognize revenue from product sales upon
shipment to customers, provided we have received a valid purchase order, the
price is fixed, title has transferred, collection of the associated
receivable is reasonably assured, and there are no remaining significant
obligations. Where customer acceptance provisions exist, we defer revenue
recognition until acceptance by the customer unless we demonstrate the
product meets the customer specified criteria upon shipment provided all
other revenue recognition criteria were met.
- Inventory Valuation. We record inventory write- downs based on
estimates of obsolete or unmarketable inventory, taking into account
historical usage, forecasted future demand, and general market conditions.
Write-downs may also be recorded based on our decision to discontinue the
marketing of certain products or product lines. If our forecasts are
incorrect, market conditions deteriorate, or we decide to exit other product
lines, further inventory write-downs may be required which result in an
increase to cost of sales and reduced gross profit. If market conditions or
demand are better than expected, we may sell inventories that have been
previously written down, resulting in reduced or zero cost of sales and
improved gross profit.
- Allowance for Uncollectible Accounts. We maintain allowances
for uncollectible accounts receivable resulting from the failure of our
customers to make required payments. Our estimate is based on, among other
things, the aging of accounts receivable, historical write-off experience,
and the current and projected financial condition of our customers. If we
misinterpret the financial condition of our customers or if the financial
condition of customers deteriorates, additional allowances for uncollectible
accounts may be required, which would increase operating costs and reduce
operating profit.
- Goodwill. In conjunction with the implementation of SFAS 142 as of
the beginning of fiscal year 2003, we no longer amortize goodwill, but
instead test for impairment at least annually. The first step of the
goodwill impairment test is a comparison of the fair value of a reporting
unit to its carrying value. The fair value of a reporting unit is the amount
which the unit as a whole could be bought or sold in a current transaction
between willing parties. The goodwill impairment test requires us to
identify our reporting units and obtain estimates of the fair values of
those units as of the testing date. We estimate the fair values of our
reporting units using discounted cash flow and public company market
multiple valuation models. Those models require estimates of future
revenues, profits, capital expenditures and working capital for each
reporting unit. We estimate these amounts by evaluating historical trends,
current budgets, operating plans and industry data. A decline in the fair
value of any of our reporting units below its carrying value is an indicator
that the underlying goodwill of the unit is potentially impaired. If that
occurs, we are required to complete the second step of the goodwill
impairment test to determine whether the unit's goodwill is impaired. The
second step of the goodwill impairment test is a comparison of the implied
fair value of a reporting unit's goodwill to its carrying value. An
impairment loss is required for the amount which the carrying value of a
reporting unit's goodwill exceeds its implied fair value. If an impairment
loss is recognized, the implied fair value of the reporting unit's goodwill
becomes the new cost basis of the unit's goodwill.
We conduct our annual goodwill impairment test as of April 1 of
each fiscal year when our budgets and operating plans for the forthcoming year
are finalized. The timing and frequency of our goodwill impairment tests are
based on an ongoing assessment of events and circumstances that would more than
likely reduce the fair value of a reporting unit below its carrying value. We
will continue to monitor our goodwill balance for impairment and conduct formal
tests when impairment indicators are present.
- Long-Lived and Intangible Assets
. We evaluate the carrying value of
long-lived and intangible assets whenever certain events or changes in
circumstances indicate that the carrying amount may not be recoverable.
These events or circumstances include, but are not limited to, a prolonged
industry or economic downturn, a significant decline in SBS' market value,
or significant reductions in projected future cash flows. An asset is
considered to be impaired if future undiscounted cash flows, without
consideration of interest, are insufficient to recover the carrying amount
of the asset. Once an asset is deemed impaired, a charge to expense is
recognized to the extent that the carrying amount of the asset exceeds fair
value. Fair value is generally determined by calculating the discounted
future cash flows using a discount rate based upon our weighted average cost
of capital. Estimates of future cash flows require significant judgment, and
any change in these estimates may result in additional impairment charges
and reduced operating profits.
- Income Taxes. Our estimate of current and deferred income taxes
reflects our assessment of current and future taxes to be paid or received
on items reflected in the financial statements, giving consideration to the
recoverability of certain of the deferred tax assets, which arise from
temporary differences between the tax and financial statement recognition of
revenue and expense. Estimates of current income taxes include benefits for
items such as general business and other credits, U.S. sales to foreign
jurisdictions, and utilization of foreign tax credits. Actual income taxes
may vary from our estimates due to future changes in tax laws or because of
a review of our tax returns by taxing authorities, which may result in an
increase or decrease to income tax expense. We must also assess the
likelihood that we will be able to recover our deferred tax assets. If
recovery is determined not to be more likely than not, we must increase our
provision for taxes by recording a reserve, in the form of a valuation
allowance, for the deferred tax assets that we estimate will not ultimately
be recoverable. As of June 30, 2004, excluding certain operating losses and
tax credits for U.S. State income purposes, we believe our recorded deferred
tax assets will ultimately be recovered. However, should there be a change
in our ability to recover the deferred tax assets, our tax provision would
increase in the period we determine that recovery is no longer more likely
than not.
Recent Acquisitions
We made no acquisitions during the fiscal year ended June 30,
2004. SBS completed the acquisitions described below during the fiscal year
ended June 30, 2003. The acquisition was accounted for using the purchase method
of accounting, and the results of operations of the acquired companies have been
combined with SBS' since the date of the acquisition. The purchase price has
been allocated to the underlying assets acquired and liabilities assumed based
on their estimated fair values with goodwill, if any, representing the excess of
the purchase price over the fair value of the net assets acquired.
On June 30, 2003, SBS acquired 100 percent of the outstanding
common stock of Avvida Holdings Corp. and its wholly-owned subsidiary, Avvida
Systems Inc. (Avvida), located in Waterloo, Canada. Avvida provides image
processing solutions to customers serving a wide variety of applications.
Avvida's focus is emerging programmable logic, including fully programmable
gateway array (FPGA) technology utilized in high performance video, image and
data processing solutions. We plan to incorporate FPGA technology into existing
and future products across all SBS product lines.
The aggregate purchase price of $6.2 million, including
acquisition costs of $0.6 million, was paid in cash and shares of SBS common
stock valued at $3,574,020. The value of the 386,940 shares of SBS common stock
was determined based on the average market price of SBS' common shares over the
two-day period before and after the terms of the acquisition were agreed to and
announced. In conjunction with the purchase price allocation, the estimated fair
value of identifiable intangible assets, specifically a core technology asset
valued at $970,000 and a covenant not-to-compete valued at $1.2 million, was
based on an assessment of their fair value determined by management, and
goodwill of approximately $3.5 million was recorded which is not deductible for
tax purposes. During the year ended June 30, 2004, we received an income tax
refund that exceeded the amount recorded at acquisition by $104,000 which was
recorded as a reduction to goodwill. The identifiable intangible assets will be
amortized over a period of 5 years based on the estimated economic useful life
of the core technology asset and the contractual period of the covenant.
Results of Operations
The following table sets forth for the periods indicated
certain operating data, including balances, as a percentage of
sales:
Years ended June 30,
------------------------------------------------------
Dollars in thousands 2004 % 2003 % 2002 %
--------- ------ --------- ------ --------- ------
Sales................................................. $ 133,874 100.0 % $ 115,521 100.0 % $ 118,856 100.0 %
Cost of sales......................................... 69,145 51.6 % 58,002 50.2 % 76,228 64.1 %
--------- ------ --------- ------ --------- ------
Gross profit.......................................... 64,729 48.4 % 57,519 49.8 % 42,628 35.9 %
Selling, general and administrative expense........... 32,504 24.3 % 33,608 29.1 % 38,817 32.7 %
Research and development expense...................... 20,552 15.4 % 18,077 15.6 % 18,461 15.5 %
Employee severance and consolidation costs............ 2,400 1.8 % 1,729 1.5 % 3,232 2.7 %
Impairment of intangible assets....................... -- -- % -- -- % 13,005 10.9 %
Amortization of goodwill ............................. -- -- % -- -- % 4,523 3.8 %
Amortization of intangible assets..................... 2,141 1.6 % 1,940 1.7 % 3,002 2.6 %
--------- ------ --------- ------ --------- ------
Operating income (loss) .............................. 7,132 5.3 % 2,165 1.9 % (38,412) (32.3)%
--------- ------ --------- ------ --------- ------
Interest and other income, net........................ 634 0.5 % 434 0.4 % 631 0.5 %
Foreign exchange losses............................... (348) (0.3)% (207) (0.2)% (29) (0.0)%
--------- ------ --------- ------ --------- ------
286 0.2 % 227 0.2 % 602 0.5 %
--------- ------ --------- ------ --------- ------
Income (loss) before income taxes and cumulative
effect of change in accounting principle.......... 7,418 5.5 % 2,392 2.1 % (37,810) (31.8)%
Income tax expense.................................... 2,225 1.6 % 784 0.7 % (13,450) (11.3)%
--------- ------ --------- ------ --------- ------
Income (loss) before cumulative effect of
change in accounting principle.................... 5,193 3.9 % 1,608 1.4 % (24,360) (20.5)%
Cumulative effect of change in accounting
principle (net of income tax benefit of $3,412)... -- -- % (6,058) (5.2)% -- -- %
--------- ------ --------- ------ --------- ------
Net income (loss)..................................... $ 5,193 3.9 % $ (4,450) (3.9)% $ (24,360) (20.5)%
========= ====== ========= ====== ========= ======
Year Ended June 30, 2004 Compared to Year Ended June 30,
2003
(References to fiscal 2004 and fiscal 2003 relate to the fiscal
years ended on June 30)
Sales
Our total sales during the fiscal year ended June 30, 2004
compared to the year ended June 30, 2003 and 2002 follows:
Fiscal Years Ended
---------------------------------------------------
June 30, June 30,
-------------------- % --------- %
Thousands 2004 2003 change 2002 change
--------- --------- --------- --------- ---------
Sales............................ $ 133,874 $ 115,521 15.9% $ 118,856 12.6%
========= ========= =========
For fiscal 2004, sales increased $18.3 million compared to
fiscal 2003, of which approximately $2.7 million was the result of the impact of
a weakening U.S. dollar on the translation of our Europe Group financial
statements. Sales for the fiscal year ended June 30, 2004 include approximately
$1.1 million contributed from the acquisition of SBS Canada (formerly Avvida
Systems) in June 2003. Sales by end market for fiscal 2004 compare to fiscal
2003 and 2002 as indicated below:
SALES BY END MARKET
(dollars in thousands)
June 30, % of June 30, % of June 30, % of
2004 total 2003 total 2002 total
--------- ------- --------- ------- --------- -------
Fiscal year ended:
Government............ $ 67,944 51% $ 60,465 52% 50,425 42%
Commercial............ 39,924 30% 37,689 33% 39,625 34%
Communications........ 26,006 19% 17,367 15% 28,806 24%
--------- ------- --------- ------- --------- -------
Total................... $ 133,874 100% $ 115,521 100% 118,856 100%
========= ======= ========= ======= ========= =======
For the year ended June 30, 2004, sales to government customers
increased 12.4%, sales to commercial customers increased 5.9% and sales to
communications customers increased 49.7%, all compared with the prior fiscal
year. To align with current management responsibility, sales to a majority of
our enterprise customers are reflected as sales to commercial customers. During
fiscal 2004, one commercial customer (Applied Materials) represented
approximately 10% of our total sales and one communications customer (Ericsson)
represented approximately 8% of our total sales. We had no other customer whose
sales represented more than 5% of our total sales in fiscal 2004, 2003 or
2002.
As we progress through calendar 2004 and start fiscal year
2005, we believe the government market will remain strong. We experienced growth
in this market in fiscal year 2004, and, as planned, the majority of design wins
and new opportunities were for system level solutions. The military budget is
still heavily focused on unmanned vehicles and upgrade programs. Both of these
are areas where SBS is positioned to win new business. Sales to communications
customers increased in fiscal year 2004, and we expect additional growth in
fiscal year 2005. Our traditional markets of wireless and network monitoring
continue to show positive growth, and, with the addition of Advanced Telecom
Computing Architecture based products we are expanding into new opportunities.
In the commercial market, sales increased in fiscal year 2004 and in fiscal year
2005, we expect steady demand from semiconductor and medical equipment
manufacturers, and we are optimistic that we will see growth in the industrial
automation market.
Looking forward, based on our forecasts, backlog, and timing of
new orders, we expect sales for the first quarter ending September 30, 2004 to
be between $36 million and $37 million, a 35% to 39% increase compared to the
first quarter of fiscal 2004; however, actual results may vary. We anticipate
growth in sales throughout the remainder of fiscal year 2005 resulting in total
fiscal year 2005 sales of between $150 million and $160 million, all from
organic growth; however, actual results may vary. The assumptions on which we've
based our sales projections include continued health of the markets we serve,
the expectation of several government system design wins to start production,
and sales to Applied Materials and Ericsson to continue at the same dollar sales
level as in fiscal year 2004, approximately $13.2 million and $10.3 million,
respectively. Based on forecasts from these two customers, and continued health
of the markets we serve as evidenced by our strong quoting activity and design
win funnel, we believe these assumptions are valid for the fiscal year ending
June 30, 2005.
Gross Profit
Gross profit during fiscal 2004 compared to fiscal 2003
follows:
Fiscal years ended
-----------------------------------
June 30,
---------------------- Increase/
Thousands 2004 2003 (decrease)
---------- ---------- ----------
Gross profit.................. $ 64,729 $ 57,519 7,210
========== ========== ==========
Gross profit as a percent
of sales.................... 48.4% 49.8%
========== ==========
Gross profit as a percent of sales for the year ended June 30, 2004,
decreased from levels noted in fiscal 2003 principally as a result of a higher
proportion of sales of lower margin products in relation to total sales. The
decrease was due to the impact of sales relating to several large, lower margin
communications and commercial production orders. The Company's policy is to
dispose of obsolete inventory as soon as practicable after such inventory has
been identified as having no value. During fiscal 2004, the sale of inventory
written down to zero cost amounted to approximately $0.8 million, increasing
gross margin as a percentage of sales by 0.6%. During fiscal 2003, we sold
approximately $1.0 million of inventory written down to zero cost, increasing
gross margin as a percentage of sales by 0.9%. For fiscal year 2005, we
anticipate gross profit as a percentage of sales to range from 46% to 50%;
however, actual results may vary.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense during the fiscal year
ended June 30, 2004 as compared to fiscal 2003 follows:
Fiscal years ended
----------------------------------
June 30,
---------------------- Increase/
Thousands 2004 2003 (decrease)
---------- ---------- ----------
SG&A expense.................. $ 32,504 $ 33,608 $ (1,104)
========== ========== ==========
As a percent of sales......... 24.3% 29.1%
========== ==========
For the year ended June 30, 2004, SG&A expense decreased 3.3%, compared
to the prior fiscal year, due primarily to the cost reduction efforts
implemented in connection with the consolidation of operations during fiscal
2004, partially offset by the costs added as a result of the acquisition of SBS
Canada in June 2003. For these reasons, together with increased sales, SG&A
expense as a percentage of sales declined in fiscal 2004 compared with fiscal
2003.
Research and Development Expense
Research and development (R&D) expense during fiscal 2004
as compared to the fiscal year ended June 30, 2003 follows:
Fiscal years ended
----------------------------------
June 30,
---------------------- Increase/
Thousands 2004 2003 (decrease)
---------- ---------- ----------
R&D expense................... $ 20,552 $ 18,077 $ 2,475
========== ========== ==========
As a percent of sales......... 15.4% 15.6%
========== ==========
For the year ended June 30, 2004, R&D expense increased
13.7%, compared to the prior fiscal year, due primarily to the costs added as a
result of the acquisition of SBS Canada in June 2003. Increasing our
intellectual property is a key element of our growth strategy. During fiscal
2004, we introduced thirty-seven new products as we continue to implement this
segment of our strategy. Research and development expenses fluctuate from period
to period throughout the life cycle of our research and development efforts. As
a percentage of sales, R&D expense during fiscal 2004 was in line with our
current development plan and remained consistent with fiscal 2003 levels.
Employee Severance and Consolidation Costs
On June 12, 2003, we announced that we would be closing our
Carlsbad, California facility and consolidating its manufacturing operations
into our St. Paul, Minnesota facility, centralizing all manufacturing in the
United States into one facility. This consolidation was completed in August,
2003. As a result of these actions, we recorded employee severance and
consolidation costs totaling approximately $2.4 million during fiscal 2004.
These costs included the following:
- Employee severance and related costs of $470,000 (recorded over the
remaining service period in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities) due to the reduction
of our workforce. There were no amounts remaining to be paid at June 30,
2004.
- Other consolidation costs of $530,000 (recorded as incurred in
accordance with SFAS 146) as a result of the consolidation of our
communications operations into other facilities. There were no amounts
remaining to be paid at June 30, 2004.
- Lease termination costs of $1.4 million, (recorded on the cease use date
in accordance with SFAS 146) as a result of the closure of our Carlsbad,
California facility in August 2003. The lease termination costs represent
the estimated fair value of the remaining future lease payments and related
obligations, net of sublease income, over the term of the lease. The
remaining lease obligations are expected to be paid monthly through April
2006.
For fiscal 2003, we recorded employee severance and
consolidation costs totaling $1.7 million. This total includes approximately
$1.1 million recorded as a result of the announcement of the closure of our
Carlsbad California facility, of which $290,000 was employee severance and
related costs and $841,000 was a leasehold improvement impairment charge. The
fiscal 2003 total also includes $412,000 of employee severance costs due to the
elimination of 53 employees as a result of the economic and market conditions
facing our telecommunications customers and $186,000 of lease termination costs
as a result of our decision to exit certain locations during 2003. There were no
amounts remaining to be paid at June 30, 2004.
Amortization of Intangible Assets
For the fiscal year ended June 30, 2004, amortization of
intangible assets was $2.1 million, compared to $1.9 million for fiscal 2003.
Amortization expense increased in fiscal 2004 due to the amortization of the
purchased identifiable intangible assets recorded in connection with the
acquisition of SBS Canada (formerly Avvida Systems) in June 2003. Also, in
fiscal 2003, amortization expense included a write-down of $136,000 recorded in
connection with a prepaid license agreement for a product that SBS determined
during the quarter ended September 30, 2002 would not be brought to
market.
Interest and Other Income, Net
For the year ended June 30, 2004, net interest and other income
of $634,000, included interest received in September 2003 in connection with
income tax refunds of payments made in prior periods of approximately $250,000.
Excluding the interest on the tax refunds in fiscal 2004, net interest and other
income represented primarily interest income associated with surplus cash, which
declined from fiscal 2003 levels as a result of lower interest rates.
Foreign Exchange Losses
For fiscal 2004 and 2003, foreign exchange losses of $348,000
and $207,000, respectively, represent primarily realized and unrealized losses
on certain inter-company transactions that are denominated in non- functional
currencies due to changes in currency exchange rates as a result of the
weakening of the U.S. dollar during fiscal 2004 and 2003.
Income Tax Expense
For the year ended June 30, 2004 and 2003, income tax expense
was recorded using worldwide effective tax rates of 30.0% and 32.8%,
respectively. The change in the estimated worldwide effective income tax rate
was due to the impact of a shift in the mix of pre-tax income from domestic and
foreign sources together with benefits realized as a result of the
implementation of tax planning strategies during the fourth quarter of fiscal
2004.
In assessing the realizability of the Company's deferred tax
assets of approximately $13.2 million at June 30, 2004, management considers
projected future sources of taxable income together with tax planning
strategies. As of June 30, 2004, the valuation allowance, which increased
approximately $1.3 million during fiscal 2004, applies to certain U.S. State
operating loss and tax credit carryforwards that, in the opinion of management,
may expire unused due to uncertainty regarding future taxable income. Based on
SBS' historical taxable transactions, the timing of the reversal of existing
temporary differences, and the evaluation of tax planning strategies, management
believes it is more likely than not that SBS' future taxable income will be
sufficient to realize the benefit of the remaining deferred tax assets existing
at June 30, 2004.
SBS generally does not record deferred income taxes on the
undistributed earnings of its foreign subsidiaries in accordance with the
indefinite reversal criterion in APB Opinion No. 23, "Accounting for Income
Taxes - Special Areas", because the Company currently does not expect
those unremitted earnings to reverse and become taxable in the foreseeable
future. Upon distribution of these earnings, which amounted to approximately
$26.4 million at June 30, 2004, SBS may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to estimate the amount
of taxes that may be payable on the eventual remittance of these
earnings.
Cumulative Effect of Change in Accounting Principle
For the year ended June 30, 2003, we recorded a transitional
impairment charge of $9.5 million ($6,058,000 net of tax), reported as a
cumulative effect of change in accounting principle, as a result of our adoption
of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS 142) effective July 1, 2002.
Earnings Per Share
For the year ended June 30, 2004, net income per common share
and net income per common share - assuming dilution was $0.34. This compares to
income per share and income per share - assuming dilution before the cumulative
effect of the change in accounting principle of $0.11 during the fiscal year
ended June 30, 2003. Net loss per share and net loss per common share - assuming
dilution was $(0.30) during the fiscal year ended June 30, 2003, including the
impact of the cumulative effect of change in accounting for goodwill of $(0.41)
per common share as a result of our adoption of SFAS 142 effective July 1,
2002.
Review of Business Segments
As a result of changes in management responsibility, the
Company's desire to enhance its regional-based sales and service to the
Company's European customers and the June 2003 acquisition of SBS Canada
(formerly Avvida Systems), the Company changed its reportable segments to a
structure based on geographic markets. This change has enabled management to
focus on regional market development, alignment of sales channels with
customers' product needs, and enhancement of customer service and
satisfaction.
The Company is engaged in the
size=2>design, research, development, integration and production of embedded
computer products and we operate worldwide through two
operating segments: the Americas Group and the Europe Group.
face=Times New Roman size=2>Both the Americas Group and the Europe Group offer
our complete portfolio of embedded computer products to
customers in the government, commercial and communications end markets. Each
segment has management who report directly to the Company's Chief Executive
Officer and its own sales and distribution channels. The Americas Group consists
of the Company's operations based in the United States and Canada, and most
recently in Shenzhen, China. This includes the engineering, test, and assembly
activities in Albuquerque, New Mexico; Mansfield, Massachusetts; Newark,
California; Raleigh, North Carolina; St. Paul, Minnesota; and Waterloo, Ontario,
Canada; the manufacturing operations located in St. Paul, Minnesota; and the
sales and technical support activities based in Shenzhen, China. The Europe
Group consists of the Company's operations based in Germany which include the
engineering, test, assembly, and manufacturing activities located in Augsburg
and Mindelheim, Germany.
The following is a discussion of sales to external customers
and segment profit (loss) for each reportable segment. We measure the results of
operations for segments (Segment Profit (Loss)) based on income (loss) before
income taxes and the cumulative effect of change in accounting principle and
before:
- the allocation of corporate overhead expenses other than marketing
costs;
- substantially all amortization expense associated with acquisitions; and
- interest income earned on U.S. operations cash balances.
Americas Group
Fiscal Years Ended
-------------------------------
June 30,
-------------------- %
Thousands 2004 2003 change
--------- --------- ---------
Sales to External Customers.......... $ 97,066 $ 94,268 3.0%
========= =========
Segment Profit ...................... $ 12,864 $ 10,073 27.7%
========= =========
Sales to External Customers. For the year ended June 30,
2004, sales to external customers increased approximately $2.8 million, or 3.0%,
compared to the prior fiscal year, as unit shipments increased across all the
Group's product lines, with the exception of telecommunications product
shipments which declined from prior year levels. The Group's sales to external
customers for the year ended June 30, 2004 exclude approximately $3.5 million of
sales that, after the transfer of sales and support for our European customers
to our German operations, were included in sales for the Europe Group. Sales
contributed by the acquisition of SBS Canada (formerly Avvida Systems) in June
2003 were approximately $1.1 million for the year ended June 30, 2004.
Segment Profit. Segment profit increased $2.8 million, or
27.7%, for the year ended June 30, 2004, compared to the prior fiscal year.
Segment profit in fiscal 2004 increased over fiscal 2003 levels as a result of a
change in sales mix to higher margin products, together with reduced SG&A
expenses due to management actions taken as a result of market conditions
impacting the Company during fiscal 2003 and 2002. In addition, segment profit
in fiscal 2004 was unfavorably impacted by approximately $2.4 million of
employee severance and consolidation costs recorded from the consolidation of
our communications operations that resulted in the closure of our Carlsbad,
California facility in August 2003. This compares to approximately $1.7 million
of employee severance and consolidation costs recorded during fiscal 2003, of
which $1.1 million was due to our announcement to consolidate our communications
operations resulting in the closure of our Carlsbad, California facility during
the fourth fiscal quarter of 2003, $412,000 of employee severance costs due to
workforce reductions implemented as a result of the depressed market conditions
impacting our communications market customers throughout fiscal 2003, and
$186,000 of lease termination costs as a result of our decision to exit certain
locations during 2003. For these reasons, segment profit as a percentage of
sales to external customers increased to 13.3% for fiscal 2004, compared with
10.7% for fiscal 2003.
Europe Group
Fiscal Years Ended
-------------------------------
June 30,
-------------------- %
Thousands 2004 2003 change
--------- --------- ---------
Sales to External Customers.......... $ 36,808 $ 21,253 73.2%
========= =========
Segment Profit....................... $ 7,540 $ 5,138 46.7%
========= =========
Sales to External Customers. Unit shipments of the Group's
products increased resulting in increased sales to external customers. For the
fiscal year ended June 30, 2004, sales to external customers increased $15.6
million, compared to the prior fiscal year, of which approximately $2.7 million
was the result of changes in currency exchange rates used to translate the
Group's financial statements to U.S. dollars. The Group's sales to external
customers for fiscal 2004 included an increase of approximately $2.5 million of
sales that, before the transfer of sales and support for our European customers
to our German operations, would have been included in sales of the Americas
Group.
Segment Profit. For the year ended June 30, 2004, segment
profit increased $2.4 million, or 46.7%, compared to the prior year, due
primarily to the increase in sales, offset partially by an increase in SG&A
and R&D expenses commensurate with the growth in the business. For these
reasons, segment profit as a percentage was 20.5% for fiscal 2004, compared to
24.2% for fiscal 2003.
Year Ended June 30, 2003 Compared to Year Ended June 30,
2002
(References to fiscal 2003 and fiscal 2002 relate to the fiscal
years ended on June 30)
Sales
For the year ended June 30, 2003, sales decreased 3%, or $3.4
million, from $118.9 million for the year ended June 30, 2002, to $115.5
million. In fiscal 2003, by end market, sales to government customers increased
19.9%, or $10.0 million, sales to commercial customers declined 4.9%, or $1.9
million, and sales to communications customers decreased 39.7%, or $11.4
million, all compared with fiscal 2002 sales levels. During fiscal 2003, we
continued to experience the effects of the economic and market conditions that
were negatively impacting our telecommunications infrastructure customers.
Gross Profit
For the year ended June 30, 2003, gross profit increased 35%,
or $14.9 million, from $42.6 million for the year ended June 30, 2002, to $57.5
million. The increase in gross profit was primarily due to significant inventory
write-downs and other charges recorded in fiscal 2002. In fiscal 2002, we
recorded $15.1 million of inventory write-downs and $185,000 of expenditures
associated with our manufacturing consolidation and cost reduction efforts. The
write-downs consisted of inventory associated with programs that were not
anticipated to come back to their previous forecasts, inventory associated with
our decision to exit the legacy PCI chassis product line, inventory associated
with products that we will no longer market, and reduced demand for certain
Communications and Enterprise Group products. Additionally, the implementation
of a new inventory management methodology associated with the consolidation of
our manufacturing operations, contributed to the inventory write-down in fiscal
2002. The consolidation efforts and new inventory methodology resulted in a
reduction in required inventory levels. For these reasons, gross profit as a
percent of sales for fiscal 2003 improved to 49.8% compared with 35.9% for
fiscal 2002 (48.7% excluding the $15.3 million of charges noted above). During
the year ended June 30, 2003, we sold approximately $1.0 million of inventory
that had been previously written down to zero cost, increasing gross margin as a
percentage of sales by 0.9%.
Selling, General and Administrative Expense
For the year ended June 30, 2003, selling, general and
administrative (SG&A) expense decreased 13.4%, or $5.2 million from $38.8
million for the year ended June 30, 2002, to $33.6 million. This decrease was
primarily due to the benefits realized from the implementation of cost reduction
efforts which began during fiscal 2002 and continued in fiscal 2003. SG&A
expense as a percentage of sales decreased to 29.1% in the year ended June 30,
2003 from 32.7% in the year ended June 30, 2002, primarily as a result of the
cost reduction efforts, partially offset by reduced sales levels.
Research and Development Expense
For the year ended June 30, 2003, research and development
(R&D) expense decreased 2.1%, or $384,000 from $18.5 million for the year
ended June 30, 2002, to $18.1 million. This decrease was primarily due to the
cost reduction efforts implemented in both fiscal 2003 and fiscal 2002,
partially offset by the addition of research and development employees resulting
from the acquisition of the assets of Essential Communications completed in
March 2002. For the year ended June 30, 2003, R&D expense as a percentage of
sales remained consistent at 15.6% compared with 15.5% in the year ended June
30, 2002.
Employee Severance and Consolidation Costs
For the year ended June 30, 2003, we recorded employee
severance and consolidation costs of $1.7 million, which include the
following:
- a charge for the impairment of leasehold improvements of approximately
$841,000 recorded in the fourth quarter;
On June 12, 2003, we announced that we would be closing our
Carlsbad, California facility and consolidating its manufacturing operations
into our St. Paul, Minnesota facility, centralizing all manufacturing in the
United States to one facility. This consolidation was completed in August,
2003.
- employee severance and related costs of approximately $702,000; and
Due to the economic and market conditions facing our
telecommunications customers, on July 22, 2002, we notified 19 full and part-
time employees at our Madison, Wisconsin engineering design center that their
jobs had been eliminated. Additionally, for the same reason, on September 30,
2002, we notified 22 employees of that their jobs were being eliminated. We also
incurred severance costs for 12 other employees who were notified that their
jobs had been eliminated. As a result of these actions, we incurred $412,000 of
employee severance costs, of which there were no costs remaining to be paid as
of June 30, 2003.
As a result of the June 2003 announcement of the closure of our
Carlsbad, California facility, we recorded severance and related costs of
approximately $290,000, due primarily to the planned reduction of the workforce
in August 2003. Of this amount, approximately $224,000 was accrued at June 30,
2003, and we paid all of these costs during the year ended June 30, 2004.
- lease termination costs of approximately $186,000, as a result of our
decision to exit certain locations.
These costs compare with total employee severance and related
costs of approximately $3.2 million incurred during fiscal 2002, as a result of
other actions taken by management in response to unfavorable economic and market
conditions.
Impairment of Intangible Assets
We recorded no intangible asset impairment charges in fiscal
2003, compared to impairment charges of $13.0 million recorded in fiscal 2002.
For the year ended June 30, 2002, $2.7 million of the $13.0 million asset
impairment charge represented the write-off of the remaining goodwill recorded
in connection with the acquisition of SBS Technologies, Inc., Industrial
Computers (formerly Micro Alliance) in November 1997. This write-off was the
result of SBS' decision in the quarter ended December 31, 2001 to exit the PCI
chassis business. The remaining $10.3 million represented the write-down of
goodwill and other identifiable intangible assets associated with the
acquisition of SDL in April of 2000. The write-down, which occurred in the
fourth quarter of fiscal 2002, was based on SBS' projection of undiscounted
future operating cash flows. This evaluation indicated that these cash flows
were not sufficient to recover the carrying amounts of the goodwill and other
identifiable intangible assets. As a result, the impairment charge was recorded
to the extent that the carrying value exceeded fair value of the assets. The
evaluation was performed as a result of continued order cancellations and a
continued decline in sales and bookings in the fourth quarter of fiscal
2002.
Amortization of Goodwill
There was no goodwill amortization expense in fiscal 2003,
whereas goodwill amortization amounted to approximately $4.5 million for the
year ended June 30, 2002. Effective July 1, 2002, we adopted SFAS 142 and no
longer amortize goodwill. As of the date of adoption, we had unamortized
goodwill of approximately $20.5 million, subject to the transition provisions of
SFAS 142. Included in the determination of net loss in fiscal 2003 is a
transitional goodwill impairment charge of $9.5 million ($6.1 million net of
income taxes), which is reported as a cumulative effect of change in accounting
principle, as a result of the Company's adoption of SFAS 142. We completed step
1 of our transitional impairment analysis during the quarter ended December 31,
2002 and noted an indication of potential impairment for two reporting units.
Accordingly, we completed step 2 of the required transitional impairment
analysis during the fourth quarter of fiscal 2003 and determined that the
carrying values of goodwill of the Communications and Enterprise reporting unit
and the Commercial reporting unit (both components of the Americas Group
segment) were in excess of their implied fair value as of July 1, 2002. We
completed our annual goodwill impairment test for fiscal 2003 as of April 1,
2003 and found no indication of impairment.
Amortization of Intangible Assets
For the year ended June 30, 2003, amortization of intangible
assets was $1.9 million, compared to $3.0 million for the same period of fiscal
2002. The decrease was primarily due to the intangible asset impairment charges
recorded during fiscal 2002 discussed previously.
Interest and Other Income, Net
For the year ended June 30, 2003, net interest and other income
of $434,000 consisted primarily of interest income associated with surplus cash.
For the year ended June 30, 2002, net interest and other income of $631,000
consisted primarily of a recovery from insurance of $307,000, and interest
income associated with surplus cash, partially offset by a $323,000 charge
related to an other-than-temporary decline in our investment in a software
company.
Foreign Exchange Losses
For the year ended June 30, 2003, net foreign exchange losses
of $207,000 were principally attributable to changes in exchange rates relating
to payments made by SBS to a foreign subsidiary for marketing and other
corporate costs borne by the foreign subsidiary. For fiscal 2002, net foreign
exchange losses were not significant.
Income Tax Expense (Benefit)
For the years ended June 30, 2003 and 2002, income tax expense
(benefit) from continuing operations (excluding taxes allocated to the
cumulative effect of the change in accounting principle of $3.4 million)
represented effective rates of 32.8% and (35.6)%, respectively. The change in
the effective income tax rate was due to the impact of a shift in the mix of
pre-tax income from domestic and foreign sources coupled with benefits realized
from tax planning strategies in excess of previous estimates. We recorded a tax
benefit related to the net loss in fiscal 2002 due to our ability to realize the
benefit through a tax loss carry back to prior periods.
Earnings Per Share
For the year ended June 30, 2003, income per common share and
income per common share - assuming dilution, before the cumulative effect of the
change in accounting principle, was $0.11 compared to a loss per common share
and a loss per common share - assuming dilution, before the cumulative effect of
the change in accounting principle, of $(1.67) for the same period in fiscal
2002. The per share impact of the transitional impairment charge as a result of
the Company's adoption of SFAS 142, reported as a cumulative effect of change in
accounting principle in fiscal 2003, was a loss per common share and a loss per
common share - assuming dilution of $(0.41). For the year ended June 30, 2003,
net loss per common share and net loss per common share - assuming dilution were
$(0.30) compared to $(1.67) for the same period in fiscal 2002.
Review of Business Segments
During fiscal 2004, we changed our reportable segments to a
structure based on geographic markets as a result of changes in management
responsibility, our desire to enhance our regional-based sales and service to
our European customers, and the June 2003 acquisition of SBS Canada (formerly
Avvida Systems). This change has enabled management to focus on regional market
development, alignment of sales channels with customers' product needs, and
enhancement of customer service and satisfaction.
The Company is engaged in the
size=2>design, research, development, integration and production of embedded
computer products and we operate worldwide through two
operating segments: the Americas Group and the Europe Group.
face=Times New Roman size=2>Both the Americas Group and the Europe Group offer
our complete portfolio of embedded computer products to
customers in the government, commercial and communications end markets. Each
segment has management who report directly to our Chief Executive Officer and
its own sales and distribution channels. The Americas Group consists of our
operations based in the United States and Canada, including the engineering,
test, and assembly activities in Albuquerque, New Mexico; Mansfield,
Massachusetts; Newark, California; Raleigh, North Carolina; St. Paul, Minnesota;
and Waterloo, Ontario, Canada; and the manufacturing operations located in St.
Paul, Minnesota. The Europe Group consists of our operations based in Germany,
which include the engineering, test, assembly, and manufacturing activities
located in Augsburg and Mindelheim, Germany.
The following is a discussion of sales to external customers
and segment profit (loss) for each reportable segment. We measure the results of
operations for segments (Segment Profit (Loss)) based on income (loss) before
income taxes and the cumulative effect of change in accounting principle and
before:
- the allocation of corporate overhead expenses other than marketing
costs;
- substantially all amortization expense associated with acquisitions; and
- interest income earned on U.S. operations cash balances.
Americas Group
Fiscal Years Ended
-------------------------------
June 30,
-------------------- %
Thousands 2003 2002 change
--------- --------- ---------
Sales to External Customers.......... $ 94,268 $ 106,288 -11.3%
========= =========
Segment Profit ...................... $ 10,073 $ (5,976) -268.6%
========= =========
Sales to External Customers. For the year ended June 30,
2003, sales to external customers decreased approximately $12.0 million, or
11.3%, compared to the prior fiscal year. Unit shipments in fiscal 2003
decreased slightly from fiscal 2002 levels for general purpose input/output
products, computer connectivity and expansion products, and avionics and
telemetry products. We believe the uncertainty caused by the military activity
in the Middle East during the quarter ended March 31, 2003 adversely affected
the placement of some customer orders. Unit shipments for the Group's
telecommunications products declined from prior year levels. This decrease was
due principally to the economic and market conditions negatively affecting the
telecommunications market. We continued to experience the effects of reduced
booking activities compared to prior periods, and delays of existing backlog
orders and prior order cancellations by our telecommunications infrastructure
customers.
Segment Profit. For the year ended June 30, 2003, the
increase in segment profit was due to a change in sales mix to products with
higher gross margins, decreases in SG&A expenses as a result of the cost
reduction efforts implemented during fiscal 2003 and 2002 and the significant
inventory write-downs recorded in fiscal 2002, partially offset by increased
R&D costs resulting from the Essential Communications asset acquisition in
March 2002. Total inventory write-downs of $15.1 million and $185,000 of
expenditures associated with our manufacturing consolidation and cost reduction
efforts were recorded in fiscal 2002. The inventory write-downs in fiscal 2002
were associated with programs that were not anticipated to come back to their
previous forecasts, products that will no longer be marketed and excess
component parts based on the implementation of the new inventory management
methodology associated with the consolidation of our manufacturing operations
and our decision to exit our legacy PCI chassis product line. In fiscal 2003, we
recorded employee severance and consolidation costs due to the cost reduction
efforts implemented in response to the economic and market conditions negatively
affecting the Group and the announcement, on June 12, 2003, of the closure of
our Carlsbad, California facility and the consolidation of its manufacturing
operations into our St. Paul, Minnesota facility, which we completed in August,
2003. For these reasons, segment profit (loss) as a percent of sales to external
customers improved to 10.7% for the year ended June 30, 2003, from (5.6)% for
the same period of fiscal 2002.
Europe Group
Fiscal Years Ended
-------------------------------
June 30,
-------------------- %
Thousands 2003 2002 change
--------- --------- ---------
Sales to External Customers.......... $ 21,253 $ 12,568 69.1%
========= =========
Segment Profit....................... $ 5,138 $ 3,287 56.3%
========= =========
Sales to External Customers. Unit shipments of the Group's
computer processor products increased resulting in increased sales to external
customers. For the fiscal year ended June 30, 2003, sales to external customers
increased $8.7 million, compared to the prior fiscal year.
Segment Profit. For the year ended June 30, 2004, segment
profit increased $1.9 million, or 56.3%, compared to the prior year, due
primarily to the increase in sales, offset partially by an increase in SG&A
and R&D expenses commensurate with the growth in the business. For these
reasons, segment profit as a percentage of sales to external customers was 24.2%
for fiscal 2003, compared to 26.2% for fiscal 2002.
Liquidity, Capital Resources and Financial Condition
Our objective is to maintain adequate financial resources and
liquidity to finance the operations of the Company. We use a combination of
proceeds from the sale or issuance of equity securities and internally generated
funds to finance our working capital requirements, capital expenditures,
acquisitions, and operations.
Our cash balance of $47.9 million at June 30, 2004 represents an increase of
$10.8 million during the year ended June 30, 2004. Net cash flows from operating
activities and proceeds from the exercise of employee stock options were the
principal sources of funding, and cash was used for a mix of activities
including working capital needs and capital expenditures. We anticipate that
this trend will continue in the fiscal year ending June 30, 2005, however,
future cash inflows as a result of employee stock option exercises are difficult
to predict with certainty.
Cash Flows
Changes to our cash balance during the years ended June 30,
2004, 2003 and 2002 follows:
Comparison of Condensed
Consolidated Statements of Cash Flows
Years Ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Cash Flow Provided by (Used in) Thousands
Operating activities............................ $ 8,289 16,832 20,571
Investing activities............................ (3,283) (4,390) (4,359)
Financing activities............................ 5,646 (456) (1,433)
Net effect on cash from:
Exchange rates............................... 161 333 298
Cumulative effect of change
in accounting principle................... -- 6,058 --
========== ========== ==========
Operating Activities
Cash flows from operating activities were principally the result of the
Company's net income, changes in working capital and the impact of non-cash and
non-operating activities including depreciation and amortization of $6.0 million
in fiscal 2004.
The underlying drivers of the changes in working capital during fiscal 2004
were as follows:
- The increase in accounts receivable used operating cash of $371,000,
prior to foreign currency translation adjustments of $241,000, due
principally to the growth in sales.
- The increase in inventory used operating cash of $9.1 million, prior to
foreign currency translation adjustments of $319,000. Throughout fiscal
2004, our customers required shorter lead times for our products, resulting
in a need to maintain higher levels of inventory. However, we believe that
we have reached a level of inventory necessary to satisfy customers'
requirements as of June 30, 2004.
- We recorded an income tax benefit associated with the exercise of
employee stock options of approximately $1.0 million in fiscal 2004. In
addition, we received income tax refunds, net of tax payments, of $0.7
million as a result of the carryback of tax losses to prior tax years.
- Our total liabilities increased by $3.0 million in fiscal 2004, which is
consistent with the growth in our operations and we continue to have no bank
debt as of June 30, 2004.
Investing Activities
Our principal recurring investing activity is the funding of capital
expenditures necessary to support the growth of our business and to enhance the
productivity of our operations. During fiscal 2004, we used $3.4 million for the
purchase of property and equipment and received an income tax refund which
exceeded the amount recorded at the acquisition of SBS Canada by $104,000, which
was recorded as a reduction to goodwill.
Financing Activities
We received proceeds of $5.6 million from the issuance of common stock
associated with the exercise of employee stock options in fiscal 2004.
Exchange Rates
Changes in foreign currency exchange rates impacted beginning cash balances
during the year ended June 30, 2004 by approximately $161,000. Due to the
Company's international operations, where transactions are recorded in
functional currencies other than the U.S. dollar, the effects of changes in
foreign currency exchange rates on existing cash balances during any given
period results in amounts on the consolidated statements of cash flows that may
not reflect the changes in the corresponding accounts on the consolidated
balance sheets.
Cash Requirements
We believe that our internally generated cash flows will provide us with
sufficient capital resources and liquidity to manage our operations, meet our
contractual obligations, and fund capital expenditures, excluding acquisitions,
for at least the next twelve months. Based upon our assessment of future cash
needs and sources of cash as of the date of this report, we believe that our
liquidity needs do not require us to maintain a credit facility at this time.
Because long-term cash flow cannot be predicted with certainty, it is
possible that SBS could require external financing in the future, and that such
financing may not be available on terms acceptable to SBS or at all.
Capital Resources
As of the date of this report, SBS does not have any material capital
expenditure commitments.
Contractual Obligations
SBS is committed under non-cancelable operating leases for
buildings and equipment that expire at various dates through fiscal 2015. The
following is a schedule of our contractual obligations at June 30,
2004:
CONTRACTUAL OBLIGATIONS
Payments due by fiscal years ending June 30,
----------------------------------------------------
2006 - 2008 - 2010 and
Thousands Total 2005 2007 2009 beyond
- ----------------------- --------- --------- --------- --------- ---------
Operating lease
obligations......... $ 10,926 2,358 2,772 1,414 4,382
--------- --------- --------- --------- ---------
Total.................. $ 10,926 2,358 2,772 1,414 4,382
========= ========= ========= ========= =========
Off-Balance Sheet Arrangements
As of June 30, 2004, we have no transactions that would be
considered off-balance sheet arrangements in accordance with the definition
under SEC rules.
Inflation
For the periods ended June 30, 2004, 2003 and 2002, there was
no significant impact from inflation.
Business Outlook
Consistent with our press release dated August 10, 2004, we are
pleased with the progress made in implementing our strategic plan. As a team, we
completed a major restructure of the company and developed an outward looking,
aggressive approach to the market. As an example, we opened a sales and
technical support office in Shenzhen, China in June 2004. In order for SBS to
continue to maintain and increase organic growth, we believe we must expand our
global presence and maintain our market diversity.
For the past two years, we maintained an annual book-to-bill
ratio of greater than one-to-one. Throughout fiscal 2004, our customers required
shorter lead times for our products, increasing our turn business and resulting
in more extensive variability of our bookings.
As we progress through calendar 2004 and start fiscal year
2005, we believe the government market will remain strong. We experienced growth
of 12.4% in this market in fiscal year 2004, and, as planned, the majority of
design wins and new opportunities were for system level solutions. The military
budget is still heavily focused on unmanned vehicles and upgrade programs. Both
of these are areas where SBS is positioned to win new business. Sales to
communications customers increased 49.4% in fiscal year 2004, and we expect
additional growth in fiscal year 2005. The wireless and network monitoring
markets, both traditionally served by SBS, continue to show positive growth,
and, with the addition of Advanced Telecom Computing Architecture based products
we anticipate new opportunities. Sales to commercial customers increased 6.1% in
fiscal year 2004. We expect steady demand from semiconductor and medical
equipment manufacturers, and we are optimistic that we will see growth in the
industrial automation market in fiscal year 2005.
Looking forward, based on our forecasts, existing order
backlog, and the timing of new orders, we expect sales for the quarter ending
September 30, 2004 to be between $36 million and $37 million, a 35% to 39%
increase from the first quarter of fiscal 2004; however, actual results may
vary. Further, we anticipate growth in sales throughout the remainder of fiscal
year 2005 resulting in total sales for the year ending June 30, 2005 to be
between $150 million and $160 million, all from organic growth; however, actual
results may vary.
The assumptions we based our sales projections on include the
continued health of the end markets we serve, the expectation of several
government system design wins to begin production, and for sales to Applied
Materials and Ericsson to continue at the same dollar level as in fiscal year
2004, approximately $13.2 million and $10.3 million, respectively. Based on
forecasts from these two customers, and the health of the end markets we serve
as evidenced by our strong quoting activity and design win funnel, we believe
these assumptions are valid for the coming year. We believe that our new product
and business development efforts will expand opportunities in each end market
contributing to our performance.
Management expects that corporate representatives of SBS will
meet privately during the year with investors, investment analysts, the media
and others, and may reiterate the Business Outlook published in this Form 10-K.
At the same time, this Form 10-K and the included Business Outlook will remain
publicly available on our Web site (
size=2>www.sbs.com). Unless a notice stating otherwise
is published, the public can continue to rely on this Business Outlook as
representing our current expectations on matters covered.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
The Company's principal investment is cash invested in either
money market accounts or in overnight repurchase agreements. Due to the nature
of these investments, we believe that the market risk related to these
investments is minimal. As a result of the Company's German and Canadian
operating and financing activities, we are exposed to market risk from changes
in foreign currency exchange rates. At present we do not utilize any derivative
instruments to manage this risk.
Currency translation. The results of operations of
our foreign subsidiaries are translated into U.S. dollars at the average
exchange rates for each period concerned. The balance sheets of foreign
subsidiaries are translated into U.S. dollars at the closing exchange rates. Any
adjustments resulting from the translation are recorded as translation
adjustments in other comprehensive income. As of June 30, 2004, assets of
foreign subsidiaries constituted approximately 31% of total assets. Foreign
currency exchange rate exposure is most significant with respect to the euro.
For the fiscal year ended June 30, 2004, net sales were positively impacted
by the appreciation of foreign currencies, primarily the euro, versus the U.S.
dollar by approximately $2.7 million.
Currency transaction exposure. Currency transaction
exposure arises where a business or company makes actual sales and purchases in
a currency other than its own functional currency. We generally source raw
materials and sell our products within our local markets in their functional
currencies and therefore have limited currency transaction exposure.
Item 8. Financial Statements and Supplementary
Data
Report of Independent Registered Public Accounting Firm
The Board of Directors
SBS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
SBS Technologies, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of SBS
Technologies, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2004 in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective July 1, 2002.
KPMG
LLP
Albuquerque, New Mexico
August 9, 2004
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 47,943 $ 37,130
Receivables, net ............................................... 23,776 23,164
Inventories..................................................... 26,249 16,816
Income tax receivable........................................... 983 4,830
Deferred income taxes........................................... 1,351 1,629
Prepaid expenses................................................ 1,573 1,661
Other current assets............................................ 332 431
------------- -------------
Total current assets.......................................... 102,207 85,661
Property and equipment, net....................................... 7,979 8,462
Goodwill.......................................................... 16,734 16,124
Intangible assets, net............................................ 4,764 6,906
Deferred income taxes............................................. 13,173 11,086
Other assets...................................................... 279 371
------------- -------------
Total assets.................................................. $ 145,136 $ 128,610
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 6,854 $ 3,990
Accrued representative commissions.............................. 889 688
Accrued compensation............................................ 4,893 4,595
Accrued severance and consolidation costs....................... 870 224
Other current liabilities ...................................... 1,986 2,977
------------- -------------
Total current liabilities..................................... 15,492 12,474
Other long-term liabilities....................................... 17 29
------------- -------------
Total liabilities............................................. 15,509 12,503
------------- -------------
Commitments and contingencies (notes 10, 12, 16 and 17)
Stockholders' equity:
Common stock, no par value; 200,000,000 shares authorized;
15,496,949 and 14,989,248 issued and outstanding
at June 30, 2004 and 2003, respectively....................... 96,601 89,916
Unearned compensation........................................... (29) (37)
Accumulated other comprehensive income.......................... 1,891 257
Retained earnings............................................... 31,164 25,971
------------- -------------
Total stockholders' equity.................................... 129,627 116,107
------------- -------------
Total liabilities and stockholders' equity.................... $ 145,136 $ 128,610
============= =============
See accompanying notes to consolidated financial statements
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Thousands (except per share amounts)
Sales.................................................... $ 133,874 $ 115,521 $ 118,856
Cost of sales............................................ 69,145 58,002 76,228
------------ ------------ ------------
Gross profit............................................. 64,729 57,519 42,628
Selling, general and administrative expense.............. 32,504 33,608 38,817
Research and development expense......................... 20,552 18,077 18,461
Employee severance and consolidation costs............... 2,400 1,729 3,232
Impairment of intangible assets.......................... -- -- 13,005
Amortization of goodwill ................................ -- -- 4,523
Amortization of intangible assets........................ 2,141 1,940 3,002
------------ ------------ ------------
Operating income (loss) ................................. 7,132 2,165 (38,412)
------------ ------------ ------------
Interest and other income, net........................... 634 434 631
Foreign exchange losses.................................. (348) (207) (29)
------------ ------------ ------------
286 227 602
------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle............. 7,418 2,392 (37,810)
Income tax expense....................................... 2,225 784 (13,450)
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle....................... 5,193 1,608 (24,360)
Cumulative effect of change in accounting
principle (net of income tax benefit of $3,412)...... -- (6,058) --
------------ ------------ ------------
Net income (loss)........................................ $ 5,193 $ (4,450) $ (24,360)
============ ============ ============
Earnings per share data:
Net income (loss) per share:
Income (loss) before cumulative effect................. $ 0.34 $ 0.11 $ (1.67)
Cumulative effect of change in accounting principle.... -- (0.41) --
------------ ------------ ------------
Net income (loss)........................................ $ 0.34 $ (0.30) $ (1.67)
============ ============ ============
Net income (loss) per share - assuming dilution:
Income (loss) before cumulative effect................. $ 0.34 $ 0.11 $ (1.67)
Cumulative effect of change in accounting principle.... -- (0.41) --
------------ ------------ ------------
Net income (loss)........................................ $ 0.34 $ (0.30) $ (1.67)
============ ============ ============
See accompanying notes to consolidated financial statements
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003 and 2002
Accumulated
other Total Compre-
Common Stock Unearned compre- stock- hensive
---------------------- compen- hensive Retained holders' income
Shares Amount sation income earnings Equity (loss)
----------- --------- --------- --------- --------- --------- ---------
Thousands (except share amounts)
Balances at June 30, 2001............................. 14,522,080 $ 85,476 $ (478) $ (5,983) $ 54,781 $ 133,796
Exercise of stock options............................. 179,129 1,555 -- -- -- 1,555
Stock-based compensation.............................. -- 45 56 -- -- 101
Stock repurchased and retired......................... (42,500) (488) -- -- -- (488)
Cancellation of stock issued to officer under
restricted stock award.............................. (30,000) (422) 422 -- -- --
Income tax benefit from stock option exercises ....... -- 172 -- -- -- 172
Net loss.............................................. -- -- -- -- (24,360) (24,360) $ (24,360)
Other comprehensive income:
Foreign currency translation adjustments............ -- -- -- 2,870 -- 2,870 2,870
---------
Comprehensive income.................................. $ (21,490)
----------- --------- --------- --------- --------- --------- =========
Balances at June 30, 2002............................. 14,628,709 $ 86,338 $ -- $ (3,113) $ 30,421 $ 113,646
Exercise of stock options............................. 5,560 13 -- -- -- 13
Restricted stock awards issued to directors .......... 14,039 312 (110) -- -- 202
Stock-based compensation.............................. -- -- 73 -- -- 73
Stock repurchased and retired......................... (46,000) (321) -- -- -- (321)
Acquisition of Avvida Systems, Inc.................... 386,940 3,574 -- -- -- 3,574
Net loss.............................................. -- -- -- -- (4,450) (4,450) $ (4,450)
Other comprehensive income:
Foreign currency translation adjustments............ -- -- -- 3,370 -- 3,370 3,370
---------
Comprehensive income.................................. $ (1,080)
----------- --------- --------- --------- --------- --------- =========
Balances at June 30, 2003............................. 14,989,248 $ 89,916 $ (37) $ 257 $ 25,971 $ 116,107
Exercise of stock options............................. 496,425 5,646 -- -- -- 5,646
Restricted stock awards issued to directors .......... 11,276 88 (88) -- -- --
Stock-based compensation.............................. -- -- 96 -- -- 96
Income tax benefit from stock option exercises ....... -- 951 -- -- -- 951
Net income............................................ -- -- -- -- 5,193 5,193 $ 5,193
Other comprehensive income:
Foreign currency translation adjustments............ -- -- -- 1,634 -- 1,634 1,634
---------
Comprehensive income.................................. $ 6,827
----------- --------- --------- --------- --------- --------- =========
Balances at June 30, 2004............................. 15,496,949 $ 96,601 $ (29) $ 1,891 $ 31,164 $ 129,627
=========== ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Thousands
Cash flows from operating activities:
Net income (loss)........................................ $ 5,193 $ (4,450) $ (24,360)
Cumulative effect of change in accounting principle, net. -- 6,058 --
----------- ----------- -----------
Income (loss) before cumulative effect of change......... 5,193 1,608 (24,360)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 6,040 6,851 11,311
Impairment of intangible assets...................... -- -- 13,005
Bad debt expense..................................... 81 458 799
Deferred income taxes................................ (1,794) 6,200 (10,204)
Income tax benefit from stock option exercises....... 951 -- 172
(Gain) loss on disposition of assets................. 6 16 (15)
Foreign exchange losses.............................. 348 207 29
Non-cash compensation................................ 80 -- --
Stock-based compensation, including restricted
stock awards issued to directors.................... 96 275 101
Changes in assets and liabilities (net of acquisition
Receivables........................................ (371) (288) 4,328
Inventories........................................ (9,114) 2,212 23,532
Income tax receivable.............................. 3,835 73 (1,473)
Prepaid expenses and other......................... 217 (614) 2,545
Accounts payable................................... 2,682 (667) 659
Accrued representative commissions................. 191 153 (324)
Accrued compensation............................... 229 455 (330)
Accrued severance and consolidation costs.......... 646 -- --
Other liabilities.................................. (1,027) (107) 796
----------- ----------- -----------
Net cash provided by operating activities.......... 8,289 16,832 20,571
Cash flows from investing activities:
Business acquisitions, net of cash acquired.............. 104 (2,643) (1,033)
Acquisition of property and equipment.................... (3,387) (1,431) (3,334)
Purchase of license agreement............................ -- (325) --
Other.................................................... -- 9 8
----------- ----------- -----------
Net cash used by investing activities.............. (3,283) (4,390) (4,359)
Cash flows from financing activities:
Payments on notes payable................................ -- (148) (2,500)
Repurchase and retirement of common stock................ -- (321) (488)
Proceeds from exercise of stock options.................. 5,646 13 1,555
----------- ----------- -----------
Net cash provided (used) by financing activities... 5,646 (456) (1,433)
Effect of exchange rate changes on cash.................... 161 333 298
----------- ----------- -----------
Net change in cash and cash equivalents............ 10,813 12,319 15,077
Cash and cash equivalents at beginning of period........... 37,130 24,811 9,734
----------- ----------- -----------
Cash and cash equivalents at end of period................. $ 47,943 $ 37,130 $ 24,811
=========== =========== ===========
(Continued)
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Thousands
Supplemental disclosure of cash flow information:
Interest paid............................................ $ -- $ 12 $ 15
=========== =========== ===========
Income taxes received, net............................... $ (727) $ (4,256) $ (1,991)
=========== =========== ===========
Non-cash financing and investing activities -
common stock issued for acquisition...................... $ -- $ 3,574 $ --
=========== =========== ===========
Summary of assets acquired and liabilities
assumed through acquisitions
Current assets $ -- $ 437 $ 603
Property and equipment, net $ -- $ 388 $ 417
Deferred income taxes $ -- $ 280 $ 224
Goodwill $ -- $ 3,496 $ --
Intangible assets $ -- $ 67 $ --
Identifiable intangible assets $ -- $ 2,170 $ 364
Current liabilities $ -- $ (473) $ (149)
Deferred revenue $ -- $ -- $ (426)
Notes payable $ -- $ (148) $ --
See accompanying notes to consolidated financial statements
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Overview
SBS Technologies, Inc. ("SBS" or "the Company") designs and
builds open-architecture embedded computer products that enable original
equipment manufacturers (OEM) to serve the government, commercial, and
communications end markets. Embedded computer products are put inside or made
part of larger systems to process information, control machines, move computer
data between machines, and interact with people. SBS' product line ranges from
individual embedded computer components like Input/Output (I/O) modules, bus
adapters, carrier cards, system enclosures, FPGA boards and single board
computers, to network switches, blades and fully integrated systems, and many of
these products are available in ruggedized or high availability versions. The
Company's products have application in diverse industries, including space and
aviation, telecommunications, military and government, transportation,
telemetry, robotics, networking, broadcasting, wireless communications and
medical imaging. SBS has operations in New Mexico, Minnesota, North Carolina,
California, Massachusetts, Germany, Canada and China.
1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All inter- company accounts
and transactions have been eliminated.
(b) Cash Equivalents
Temporary investments with original maturities of ninety days
or less are classified as cash equivalents. At June 30, 2004, substantially all
cash was held at two financial institutions.
(c) Inventories
Inventories are valued at standard cost, which approximates the
lower of weighted average cost or market.
(d) Property and Equipment
Property and equipment are carried at cost. Depreciation of
property and equipment is provided for by straight-line and accelerated methods
over the estimated useful lives of the assets. Leasehold improvements are
depreciated over the shorter of the life of the lease or the estimated useful
lives of the assets.
(e) Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144).
The Company conducts its annual impairment test as of April 1
of each fiscal year. To accomplish this, the Company is required to identify its
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the test date. The Company is
required to perform the second step of the impairment test if the carrying
amount of a reporting unit exceeds its fair value. In this second step, the
Company would compare the implied fair value of the reporting unit goodwill with
the carrying amount of the reporting unit goodwill, both of which were measured
as of the date of the test. The implied fair value of goodwill would be
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS 141,
"Business Combinations." The residual fair value after this allocation would be
the implied fair value of the reporting unit goodwill.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), as of July 1, 2002. In connection with SFAS 142's
transitional goodwill impairment evaluation, the Company performed an assessment
of whether there was an indication that goodwill is impaired as of the date of
adoption. The implied fair value as of July 1, 2002 for two reporting units
tested was less than the carrying amount requiring an impairment loss to be
recognized.
Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over the expected period of benefit, generally 10 years, and
assessed for recoverability by determining whether the amortization of the
goodwill balance over its remaining life could be recovered through undiscounted
future operating cash flows of the acquired operation. All other intangible
assets were amortized on a straight-line basis, generally from 3 to
10 years. The amount of goodwill and other intangible asset impairment, if
any, was measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
(f) Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property, plant,
and equipment, and purchased intangibles subject to amortization, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with the provisions of SFAS No.
144. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized
equal to the excess of the carrying amount of the asset over the fair value of
the asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less costs
to sell, and the assets would no longer be depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
Goodwill and intangible assets not subject to amortization are
tested annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds the
asset's fair value.
The Company adopted SFAS 144 on July 1, 2002. Prior to the
adoption of SFAS 144, the Company accounted for long-lived assets in accordance
with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
(g) Revenue Recognition
Revenue from product sales is recognized upon shipment to
customers, provided the Company has received a valid purchase order, the price
is fixed, title has transferred, collection of the associated receivable is
reasonably assured, and there are no remaining significant obligations. Where
customer acceptance provisions exist, the Company defers revenue recognition
until acceptance by the customer unless the Company demonstrates the product
meets the customer specified criteria upon shipment provided all other revenue
recognition criteria have been met.
(h) Income Taxes
SBS accounts for income taxes under the asset and liability
method. Deferred income taxes are recognized for the tax consequences of
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities by applying enacted statutory tax rates
applicable to future years. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the change.
(i) Financial Instruments
SBS' financial instruments are cash and cash equivalents,
accounts receivable, and accounts payable. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable, because of their nature,
approximate fair value.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(j) Reclassifications
Certain amounts in the prior year financial statements have
been reclassified to conform to the current year presentation.
(k) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(l) Stock Based Compensation
The Company applies the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations,
to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Substantially all stock-based
compensation reflected in reported net income (loss) relates to restricted stock
award grants to members of the Company's Board of Directors, as all employee
stock options granted under the Company's stock option plans had an exercise
price equal to the market value of the underlying common stock on the grant
date.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
(SFAS 123) established accounting and disclosure requirements using a fair-
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-
value-based method of accounting described above, and has adopted only the
disclosure requirements of SFAS 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The following table
illustrates the effect on net income (loss) and net income (loss) per common
share if the company had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation.
Thousands Years ended June 30,
(except per share amounts) ----------------------------------
2004 2003 2002
---------- ---------- ----------
Net income (loss), as reported............................... $ 5,193 $ (4,450) $ (24,360)
Add: stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects......................... 58 167 62
Deduct: stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects................. (1,714) (3,341) (4,375)
---------- ---------- ----------
Pro forma net income (loss).................................. $ 3,537 $ (7,624) $ (28,673)
========== ========== ==========
Net income (loss) per common share:
As reported................................................ $ 0.34 $ (0.30) $ (1.67)
========== ========== ==========
Pro forma.................................................. $ 0.23 $ (0.52) $ (1.97)
========== ========== ==========
Net income (loss) per common share - assuming dilution:
As reported................................................ $ 0.34 $ (0.30) $ (1.67)
========== ========== ==========
Pro forma.................................................. $ 0.23 $ (0.52) $ (1.97)
========== ========== ==========
The per share weighted average fair value of stock options,
granted at a price equal to the market value of the underlying common stock on
the grant date was $5.89, $4.23, and $6.37 during the fiscal years ended June
30, 2004, 2003, and 2002, respectively.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The fair value was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
2004 2003 2002
---------- ---------- ----------
Expected life (years)........................................ 2.72 2.40 2.95
Risk free interest rate...................................... 2.28 % 2.39 % 3.74 %
Volatility................................................... 76.26 % 77.93 % 72.08 %
Dividend yield............................................... -- -- --
(m) Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) for
the period adjusted for non-owner changes in stockholders' equity in the
consolidated financial statements. Cumulative comprehensive income (loss) in the
Consolidated Statements of Changes in Stockholders' Equity consists of foreign
currency translation adjustments.
(n) Currency Translation
For foreign operations that prepare financial statements in
functional currencies other than the U.S. dollar, the Company translates the
assets and liabilities at the exchange rates in effect at the end of the period
and the statement of operations balances using average exchange rates from
throughout the period. Cumulative translation adjustments are presented as a
separate component of accumulated other comprehensive income (loss) within
stockholders' equity. Gains or losses from transactions denominated in
non-functional currencies are recognized in the statement of operations based on
changes in the exchange rates during the period the transactions remain
outstanding.
2) Business Acquisition
There were no business acquisitions during the year ended June
30, 2004. SBS completed the acquisition described below during the fiscal year
ended June 30, 2003. The acquisition was accounted for using the purchase method
of accounting, and the results of operations of the acquired companies have been
combined with SBS'
size=2> since the date of the acquisition. The purchase price has been allocated
to the underlying assets acquired and liabilities assumed based on their
estimated fair values with goodwill, if any, representing the excess of the
purchase price over the fair value of the net assets acquired.
On June 30, 2003, SBS acquired 100 percent of the outstanding
common stock of Avvida Holdings Corp. and its wholly-owned subsidiary, Avvida
Systems Inc. (Avvida), located in Waterloo, Canada. Avvida provides image
processing solutions to customers serving a wide variety of applications.
Avvida's focus is emerging programmable logic, including fully programmable
gateway array (FPGA) technology utilized in high performance video, image and
data processing solutions. The Company plans to incorporate FPGA technology into
existing and future products of SBS.
The aggregate purchase price of $6.2 million, including
acquisition costs of $0.6 million, was paid in cash and shares of SBS common
stock valued at $3,574,020. The value of the 386,940 shares of SBS common stock
was determined based on the average market price of SBS' common shares over the
two-day period before and after the terms of the acquisition were agreed to and
announced.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the estimated fair value
of the assets acquired and liabilities assumed at the date of acquisition.
Current assets............................ $ 437
Property and equipment.................... 388
Intangible assets......................... 2,237
Goodwill.................................. 3,496
Deferred income taxes..................... 280
-----------
Total assets acquired................ 6,838
-----------
Current liabilities....................... (473)
Notes payable............................. (148)
-----------
Total liabilities assumed............ (621)
-----------
Net assets acquired.................. $ 6,217
===========
In conjunction with the purchase price allocation, the
estimated fair value of identifiable intangible assets, specifically, a core
technology asset valued at $970,000 and a covenant not-to- compete valued at
$1.2 million, were based on an assessment of their fair value determined by
management and goodwill of approximately $3.5 million was recorded which is not
deductible for tax purposes. During the year ended June 30, 2004, the Company
received an income tax refund that exceeded the amount recorded at the
acquisition by $104,000 which was recorded as a reduction to goodwill. The
identifiable intangible assets are being amortized over a period of 5 years
based on the estimated economic useful life of the core technology asset and the
contractual period of the covenant.
3) Receivables
Receivables, net consisted of the following:
Thousands June 30,
------------------------
2004 2003
----------- -----------
Accounts receivable.............................. $ 24,335 $ 24,000
Allowance for doubtful accounts:
Beginning balance............................ (836) (1,373)
Provision for bad debts.................... (81) (458)
Accounts written off and foreign
currency translation adjustments......... 358 995
----------- -----------
Ending balance............................... (559) (836)
----------- -----------
Accounts receivable, net......................... $ 23,776 $ 23,164
=========== ===========
4) Inventories
Inventories consisted of the following:
June 30,
------------------------
Thousands 2004 2003
----------- -----------
Raw materials.................................... $ 11,444 $ 8,793
Work in process.................................. 6,596 5,414
Finished goods................................... 8,209 2,609
----------- -----------
$ 26,249 $ 16,816
=========== ===========
The Company's policy is to dispose of obsolete inventory as
soon as practicable after such inventory has been identified as having no value.
During fiscal 2004, the sale of inventory written down to zero cost amounted to
approximately $0.8 million, increasing gross margin as a percentage of sales by
0.6%. During fiscal 2003, we sold approximately $1.0 million of inventory
written down to zero cost, increasing gross margin as a percentage of sales by
0.9%.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SBS recorded a $12.4 million inventory write-down during the
second quarter of fiscal 2002, and a $2.7 million inventory write-down during
the fourth quarter of fiscal 2002. The second quarter write-down consisted of
inventory associated with programs that are not anticipated to come back to
their previous forecasts, inventory associated with SBS
face="Courier,Courier New" size=2>' decision to exit our
legacy PCI chassis product line, and inventory associated with SBS products that
were no longer marketed. Additionally, the implementation of a new inventory
management methodology associated with the consolidation of SBS
face="Courier,Courier New" size=2>' manufacturing operations
resulted in a reduction in required inventory levels. The fourth quarter write-
down was primarily due to customer order cancellations and reduced demand for
certain communications and enterprise products noted during the fourth quarter.
5) Property and Equipment
Property and equipment, net consisted of the following:
June 30,
Thousands Estimated ------------------------
useful life 2004 2003
----------- ----------- -----------
Computers........................................ 3 - 5 yrs $ 5,848 $ 5,392
Purchased software............................... 3 - 5 yrs 8,682 7,925
Furniture and equipment.......................... 3 - 10 yrs 7,478 6,001
Leasehold improvements........................... 2 - 7 yrs 3,488 3,278
----------- -----------
25,496 22,596
Less accumulated depreciation
and amortization............................... (17,517) (14,134)
----------- -----------
$ 7,979 $ 8,462
=========== ===========
During the quarter ended June 30, 2003, the Company recorded an
impairment charge of approximately $841,000, included in the caption "Employee
severance and consolidation costs" in the accompanying financial statements,
related to certain leasehold improvements in connection with the announcement of
the Company's consolidation of the communications operations resulting in the
closure of its Carlsbad, California facility. The impairment charge was
recognized based on the amount by which the carrying amount of the assets
exceeded the fair value of the assets as determined on the date of announcement
in accordance with SFAS 144.
6) Goodwill and Intangible Assets
Effective July 1, 2002, SBS adopted SFAS 142 and no longer
amortizes goodwill. As of the date of adoption, SBS had unamortized goodwill of
approximately $20.5 million subject to the transition provisions of SFAS 142,
which included approximately $434,000 for the net book value of acquired
assembled workforce intangibles, as these assets did not meet the criteria for
recognition apart from goodwill.
The Company completed step 1 of the required transitional
goodwill impairment analysis in accordance with SFAS 142 prior to December 31,
2002 and an indication of potential impairment was determined for two reporting
units, the Commercial reporting unit and the Communications and Enterprise
reporting unit (both components of the Americas Group segment). The Company
completed step 2 of the required transitional analysis during the quarter ended
June 30, 2003 and the results indicated the carrying value of goodwill for both
reporting units was greater than the implied fair value of the goodwill
determined in accordance with SFAS 142. As a result, the Company recorded a
transitional impairment charge of approximately $9.5 million ($6.1 million net
of tax) which has been reflected as a cumulative effect of a change in
accounting principle in the year ended June 30, 2003 in the accompanying
statements of operations.
On April 1, 2004 and 2003, the Company completed step 1 of the
required annual goodwill impairment analysis for the fiscal years ended June 30,
2004 and 2003, respectively, and the estimated fair value of goodwill was
determined to be in excess of its carrying value indicating the underlying
goodwill was not impaired at that date.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Changes in the carrying amount of goodwill for the years
ended June 30, 2004 and 2003 are as follows:
Total Goodwill by Operating Segment
Americas Europe
Thousands Group Group Total
----------- ----------- -----------
Balance at June 30, 2002......................... $ 9,470 $ 10,998 $ 20,468
Transitional impairment charge................. (9,470) -- (9,470)
Acquisition of Avvida.......................... 3,496 -- 3,496
Foreign currency translation
adjustments.................................. -- 1,630 1,630
----------- ----------- -----------
Balance at June 30, 2003......................... 3,496 12,628 16,124
Foreign currency translation
adjustments.................................. 24 690 714
Income tax refund in excess of
amount recorded at acquisition .............. (104) -- (104)
----------- ----------- -----------
Balance at June 30, 2004......................... $ 3,416 $ 13,318 $ 16,734
=========== =========== ===========
The following table presents the impact of the adoption of SFAS
142 on reported income (loss) before the cumulative effect of a change in
accounting principle and net income (loss) per applicable common share before
the cumulative effect of a change in accounting principle had SFAS 142 been in
effect in fiscal 2002:
Thousands (except per share amounts) Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Reported income (loss) before cumulative effect of
change in accounting principle............................. $ 5,193 $ 1,608 $ (24,360)
Adjustments:
Goodwill amortization...................................... -- -- 4,448
Workforce amortization..................................... -- -- 75
Income tax effect.......................................... -- -- (1,741)
---------- ---------- ----------
Net adjustments.......................................... -- -- 2,782
---------- ---------- ----------
Adjusted income (loss) before cumulative effect of
change in accounting principle............................. $ 5,193 $ 1,608 $ (21,578)
========== ========== ==========
Income (loss) per common share before cumulative
effect of change in accounting principle:
Reported................................................. $ 0.34 $ 0.11 $ (1.67)
Adjusted................................................. 0.34 0.11 (1.48)
Income (loss) per share - assuming dilution before
cumulative effect of change in accounting principle:
Reported................................................. $ 0.34 $ 0.11 $ (1.67)
Adjusted................................................. 0.34 0.11 (1.48)
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table discloses information regarding the
carrying amounts and associated accumulated amortization for intangible assets
subject to amortization.
Amortized Intangible Assets
Estimated Gross Net
useful carrying Accumulated carrying
Thousands life amount amortization amount
---------- ---------- ------------ ----------
As of June 30, 2004
Core-developed technology..... 2 - 7 yrs $ 9,724 $ 6,767 $ 2,957
License agreements............ 2 - 5 yrs 2,425 1,781 644
Covenant not-to-compete....... 3 - 5 yrs 2,852 1,890 962
Other intangibles............. 8 - 17 yrs 368 167 201
---------- ------------ ----------
Total $ 15,369 $ 10,605 $ 4,764
========== ============ ==========
As of June 30, 2003
Core-developed technology..... $ 9,723 $ 5,679 $ 4,044
License agreements............ 2,561 1,424 1,137
Covenant not-to-compete....... 2,842 1,365 1,477
Other intangibles............. 368 120 248
---------- ------------ ----------
Total................... $ 15,494 $ 8,588 $ 6,906
========== ============ ==========
During the fourth quarter of fiscal 2002, due to order
cancellations and a continued decline in sales and bookings, SBS recorded a
$10.3 million write-down of the core-developed technology and related goodwill
associated with the acquisition of SDL Communications, Inc. in April 2000. This
write-down was based on SBS' projection of undiscounted future operating cash
flows over the remaining useful lives of the core-technology asset and related
goodwill, which indicated that these cash flows were not sufficient to recover
the carrying amounts of the assets. As such, impairment charges were recorded to
the extent that the carrying amount of the assets exceeded fair value.
Additionally, on December 26, 2001, the SBS Board of Directors approved SBS'
plan to exit our legacy PCI chassis product line. This product line was
associated with SBS' acquisition of SBS Technologies, Inc. Industrial Computers
(formerly Micro Alliance) in November 1997. In conjunction with the acquisition,
SBS recorded approximately $4.5 million of goodwill, of which $2.7 million was
unamortized at December 26, 2001. Based on SBS' decision to exit the PCI Chassis
product line, the remaining unamortized goodwill was determined to be impaired
and was written off in the quarter ended December 31, 2001, as the fair value of
projected future cash flows was zero.
The following table summarizes estimated future amortization
expense.
Estimated amortization expense: Thousands
For the fiscal years ending:
June 30, 2005.................................... $ 1,736
June 30, 2006.................................... 1,311
June 30, 2007.................................... 1,183
June 30, 2008.................................... 493
June 30, 2009.................................... 5
Thereafter....................................... 36
----------
$ 4,764
==========
7) Product Warranty Liability
The Company
size=2>'s customers receive a warranty, generally for a
period of two years, upon purchase of products. The Company accrues estimated
costs to repair or replace potentially defective products when products are
shipped and revenue is recognized. Estimated warranty costs are based upon prior
actual warranty costs for substantially similar transactions.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table presents the activity in the
Company's
product warranty liability for the years ended June 30, 2004 and 2003.
Years ended June 30,
----------------------
2004 2003
Thousands ---------- ----------
Balance at beginning of period......................... $ 548 567
Estimated warranty costs for product sales........... 917 554
Adjustments to settle warranty activity.............. (866) (573)
---------- ----------
Balance at end of period............................... $ 599 548
========== ==========
8) Income Taxes
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle is comprised of the
following:
Thousands Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
U.S.......................................................... $ 1,663 $ (2,142) $ (38,833)
Foreign...................................................... 5,755 4,534 1,023
---------- ---------- ----------
$ 7,418 $ 2,392 $ (37,810)
========== ========== ==========
Total income taxes for the years ended June 30, 2004, 2003 and
2002 were allocated as follows:
Thousands Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Income from continuing operations............................ $ 2,225 $ 784 $ (13,450)
Cumulative effect of change in
accounting principle....................................... -- (3,412) --
---------- ---------- ----------
$ 2,225 $ (2,628) $ (13,450)
========== ========== ==========
Income tax expense (benefit) from continuing operations is
comprised of the following:
Thousands Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Current:
U.S. Federal............................................... $ -- $ (6,793) $ (3,911)
State...................................................... 230 107 32
Foreign.................................................... 2,168 1,271 722
Deferred:
U.S. Federal............................................... 757 5,345 (8,953)
State...................................................... (508) 506 (1,540)
Foreign.................................................... (422) 348 200
---------- ---------- ----------
$ 2,225 $ 784 $ (13,450)
========== ========== ==========
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income tax expense (benefit) from continuing operations was
provided for at effective rates of 30.0, 32.8, and 35.6 percent in 2004, 2003,
and 2002, respectively. Actual tax expense (benefit) differ from the "expected"
income taxes (computed by applying the statutory U.S. Federal tax rate to income
before income taxes) as follows:
Thousands Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Computed "expected" tax expense (benefit).................... $ 2,596 $ 837 $ (13,234)
State income taxes, net of federal benefit
and impact of valuation allowance.......................... (181) 398 (980)
Non-deductible goodwill...................................... -- -- 1,599
Foreign operations, net...................................... (116) 600 433
Benefit from foreign sales................................... (131) (105) (646)
Research and experimental tax credits........................ 23 (76) (648)
Change in federal valuation allowance........................ -- (789) --
Other........................................................ 34 (81) 26
---------- ---------- ----------
$ 2,225 $ 784 $ (13,450)
========== ========== ==========
The significant components of deferred income tax assets and
liabilities are as follows:
Thousands June 30,
----------------------
2004 2003
---------- ----------
Deferred tax assets:
Operating loss and tax credit carryforwards............................ $ 7,571 $ 2,622
Amortization........................................................... 5,584 7,352
Foreign tax credits.................................................... 2,747 1,557
Inventory.............................................................. 1,376 1,751
Accrued expenses and reserves.......................................... 1,351 1,604
Other.................................................................. 342 166
---------- ----------
18,971 15,052
Valuation allowance for State operating loss
and tax credit carryforwards........................................... 1,336 --
---------- ----------
Total deferred tax assets.......................................... 17,635 $ 15,052
---------- ----------
Deferred tax liabilities:
Foreign dividends...................................................... (1,812) (847)
Occupancy and other expenses........................................... (1,299) (1,490)
---------- ----------
Total deferred tax liabilities..................................... (3,111) $ (2,337)
---------- ----------
Net deferred tax assets............................................ $ 14,524 $ 12,715
========== ==========
At June 30, 2004, the Company has net operating loss
carryforwards for U.S. Federal income tax purposes of $7.1 million which are
available to offset future U.S. Federal taxable income, if any, through 2024. At
June 30, 2004, the Company has general business credit carryforwards for U.S.
Federal income tax purposes of approximately $0.9 million which are available to
offset future U.S. Federal tax payments, if any, through 2024. At June 30, 2004,
the Company has net operating loss carryforwards for U.S. State income tax
purposes, the tax effect of which, after reduction by the associated valuation
allowance, is approximately $1.6 million, which are available to offset future
State taxable income, if any, through 2009. The valuation allowance, which
increased approximately $1.3 million during the year ended June 30, 2004,
applies to certain U.S. State operating loss and tax credit carryforwards that,
in the opinion of management, may expire unused due to uncertainty regarding
future taxable income.
As of June 30, 2004, SBS has foreign tax credit carryforwards
of approximately $2.7 million, which are available to offset future U.S. Federal
tax liabilities from foreign source income, if any, through 2009. Excess foreign
tax credits may be carried back two years and forward five years. During the
quarter ended June 30, 2003, in conjunction with the execution of certain tax
planning strategies management believed that it was more likely than not that the
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Company would realize the benefits of the foreign tax credit carryforwards.
Accordingly, during the year ended June 30, 2003, the Company released the
federal valuation allowance of approximately $0.8 million established in prior
periods associated with foreign tax credit carryforwards. In addition, due to
the consideration of the repatriation of undistributed foreign earnings, to the
extent necessary to utilize excess foreign tax credits, as a source of foreign
income in future periods, management established a deferred tax liability of
approximately $1.8 million and $0.8 million as of June 30, 2004 and 2003,
respectively.
At June 30, 2004, the Company has foreign net operating loss
and tax credit carryforwards of approximately $3.9 million which are available
to offset future taxable income, some of which are scheduled to begin to expire
in 2013, and others that have an indefinite carryforward period.
In assessing the realizability of the remaining deferred tax
assets, management considered projected future taxable income and tax planning
strategies. Based on SBS' historical taxable transactions, the timing of the
reversal of existing temporary differences, and the evaluation of tax planning
strategies, management believes it is more likely than not that SBS' future
taxable income will be sufficient to realize the benefit of the remaining
deferred tax assets existing at June 30, 2004.
SBS generally does not record deferred income taxes on the
undistributed earnings of its foreign subsidiaries in accordance with the
indefinite reversal criterion in
APB Opinion
No. 23, "Accounting for Income Taxes - Special Areas",
size=2>because the Company currently does not expect those unremitted earnings
to reverse and become taxable in the foreseeable future. At June 30, 2004, the
undistributed earnings of foreign subsidiaries amounted to approximately $26.4
million. Upon distribution of these earnings, SBS may be subject to U.S. income
taxes and foreign withholding taxes. It is not practical, however, to estimate
the amount of taxes that may be payable on the eventual remittance of these
earnings.
9) Earnings Per Share
Net income (loss) per common share is based on weighted average
shares outstanding. Net income (loss) per common share - assuming dilution
includes the dilutive effects of potential common shares outstanding during the
period.
Thousands (except per share amounts) Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Income (loss) before cumulative effect of change
in accounting principle............................. $ 5,193 $ 1,608 $ (24,360)
Cumulative effect of change in accounting principle.... -- (6,058) --
---------- ---------- ----------
Net income (loss)...................................... $ 5,193 $ (4,450) $ (24,360)
========== ========== ==========
Net income (loss) per common share
Weighted-average common shares outstanding
used in earnings per share computations............. 15,146 14,605 14,559
========== ========== ==========
Income (loss) before cumulative effect of change
in accounting principle............................. $ 0.34 $ 0.11 $ (1.67)
Cumulative effect of change in accounting principle.... -- (0.41) --
---------- ---------- ----------
Net income (loss)...................................... $ 0.34 $ (0.30) $ (1.67)
========== ========== ==========
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Thousands (except per share amounts) Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Net income (loss) per common share -
assuming dilution
Weighted-average common shares outstanding
used in earnings per share computations............. 15,477 14,630 14,559
========== ========== ==========
Income (loss) before cumulative effect of change
in accounting principle............................. $ 0.34 $ 0.11 $ (1.67)
Cumulative effect of change in accounting principle.... -- (0.41) --
---------- ---------- ----------
Net income (loss)...................................... $ 0.34 $ (0.30) $ (1.67)
========== ========== ==========
Shares used in net income (loss) per share
computations
Average outstanding common shares...................... 15,146 14,605 14,559
Incremental shares from assumed conversions -
potential common shares ............................ 331 25 --
---------- ---------- ----------
Shares used in net income (loss) per common
share - assuming dilution............................ 15,477 14,630 14,559
========== ========== ==========
Due to the reported net loss for the year ended June 30, 2002,
190,757 potential common shares were not included in the computation of net loss
per common share - assuming dilution because the effect would be anti-dilutive.
For the years ended June 30, 2004, 2003, and 2002, options to purchase
1,551,073, 3,243,859, and 2,381,237 shares of common stock, respectively, were
outstanding but were not included in the computation of net income per common
share - assuming dilution, because the options
size=2>' exercise price was greater than the average market
price of the common shares.
10) Leases
SBS leases its main facilities in Albuquerque, New Mexico; St.
Paul, Minnesota; Raleigh, North Carolina; Mansfield, Massachusetts; Newark,
California; Waterloo, Ontario, Canada; Augsburg and Mindelheim, Germany; and a
sales and technical support office in Shenzhen, China under noncancelable
operating leases which expire at various dates through fiscal 2008. SBS also
leases equipment under noncancelable operating leases which expire at various
dates through fiscal 2009.
On June 12, 2003, the Company announced the closure of its
Carlsbad, California facility and the consolidation of its manufacturing
operations into the Company's St. Paul, Minnesota facility, centralizing all
manufacturing in the United States to one facility (see note 16). As a result,
the Company recorded a lease termination charge associated with the former
Carlsbad, California facility that represents the estimated fair value of the
remaining future lease payments and related obligations, net of sublease income,
over the remaining term of the lease. The remaining accrued severance and
consolidation costs at June 30, 2004 represent primarily lease obligations
expected to be paid monthly through April 2006. Accordingly, the future minimum
lease payments for the Carlsbad lease are excluded from the minimum lease
payments reflected below.
Effective in July 2004, we executed a lease for a one-story
build-to-suit facility
to be located in Albuquerque, New
Mexico. The term of the lease will commence upon
the later of substantial completion of construction or May 1, 2005 and will run
for a period of approximately 122 months after the commencement of the lease
term. The lease payments for this new facility are included in the future
minimum lease payments reflected below.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a five-year schedule of future minimum
lease payments:
Building Equipment
Lease Lease
Year ending Payments Payments Total
------------- ---------- ---------- ----------
(dollars in thousands)
June 30, 2005.......................................... $ 2,168 $ 190 $ 2,358
June 30, 2006.......................................... 1,565 102 1,667
June 30, 2007.......................................... 1,037 68 1,105
June 30, 2008.......................................... 726 2 728
June 30, 2009.......................................... 685 1 686
---------- ---------- ----------
$ 6,181 $ 363 $ 6,544
========== ========== ==========
Total rental expense for operating leases for the years ended
June 30, 2004, 2003, and 2002, was approximately
$3.1 million, $3.6 million,
and $3.5 million, respectively.
11) Stock Option Plans
(a) Incentive Stock Option Plans
SBS has Incentive Stock Option Plans (the 1996 Plan and the
1997 Plan) whereby a total of 1,200,000 shares of its common stock are reserved
for discretionary grant of options by the Board to officers and employees. The
plans terminate ten years after inception, in 2005 and 2006. The options are
intended to qualify as "incentive stock options" within the meaning of Section
422A of the Internal Revenue Code (the "Code"). The plans generally permit
options to be granted (i) only to employees or officers and not to directors as
such; (ii) for a period of up to ten years; and (iii) at prices not less than
fair market value of the underlying common stock at the date of grant. Under the
Code, holders of more than 10 percent of SBS
size=2>' stock cannot be granted options with a duration of
more than five years or exercisable at a price less than 110 percent of the fair
market value of the underlying common stock on the date of grant. Options
granted under the plans may be exercised as provided by the administering
committee or Board of Directors of SBS. All of these options are exercisable at
the quoted market value of SBS'
size=2> common stock in effect on the respective dates of the grants.
(b) 1993 Director and Officer Stock Option Plan
SBS has a 1993 Director and Officer Stock Option Plan whereby a
total of 5% of the number of shares of its common stock outstanding at the first
day of each fiscal year plus shares not awarded in prior years and underlying
expired or terminated options are reserved for grant of options to all Directors
of SBS who are not employees and all Executive Officers of SBS. Directors who
are not employees of SBS receive automatic grants upon appointment to the Board
of Directors and annually for service as a Director. Executive Officers receive
grants at the discretion of the Board of Directors. All options are granted at a
price equal to fair market value of the underlying common stock on the date of
grant. The Directors' options
become exercisable one year from the date of grant and terminate twelve months
from the date the optionee ceases to be a member of the Board of Directors or in
five years, whichever occurs first.
(c) 1996 Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan was adopted by the Board
of Directors on January 21, 1996 and was subsequently approved at the November
1996 Annual Shareholders'
Meeting. Options are eligible to be exercised beginning 18 months after the date
of grant for a period of nine months, at which time they will expire. The plan,
as amended, provided for the grant of options to eligible employees through
January 21, 2003. As a result, there are no more shares available for grant in
this plan as of June 30, 2004.
(d) 1998 Long-Term Equity Incentive Plan
The 1998 Long-Term Equity Incentive Plan was adopted by the
Board of Directors on September 15, 1997 and subsequently approved at the
December 1997 reconvened Annual Shareholders
size=2>' Meeting. All full-time employees of
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SBS and its subsidiaries and all non-employee Directors of SBS are eligible to
participate in the plan, except that no person owning, directly or indirectly,
more than 15% of the total combined voting power of all classes of stock shall be
eligible to participate. The plan provides for the grant of any or all of the following
types of awards: (i) stock options, including incentive stock options; (ii)
stock appreciation rights; (iii) restricted stock; (iv) performance shares and
units; and (v) other stock-based awards. The maximum number of shares of common
stock that shall be available for grant of awards under the plan shall not
exceed 3,000,000, subject to adjustment in accordance with the provisions of the
plan. The exercise price of each option granted under (i) is determined by the
Board of Directors but cannot be less than 100% of the fair market value of the
underlying common stock on the date of grant. The exercise price of each option
granted under (v) is determined by the Board of Directors and can be less than
the fair market value of the underlying common stock on the date of grant. The
term of these options cannot exceed ten years from grant date. The plan expires
in January 2008.
(e) 2000 Long-Term Equity Incentive Plan
The 2000 Long-Term Equity Incentive Plan was adopted by the
Board of Directors on August 31, 2000 and subsequently approved at the December
2000 reconvened Annual Shareholders'
size=2> Meeting. Any employee of SBS or its subsidiaries, and any consultants,
directors, or other persons providing services to SBS or its subsidiaries are
eligible to participate in the plan. The plan provides for the grant of
nonqualified stock options and a limited number of grants of restricted stock.
The number of shares of stock available for award under the plan during any
fiscal year of SBS is equal to ten percent of the adjusted average of the
outstanding stock, as that number is determined by SBS to calculate net income
per common share - assuming dilution for the preceding fiscal year, reduced by
any shares of stock under the plan subject to unexercised options and any shares
of stock under the plan subject to restrictions. The exercise price of each
option granted shall be the fair market value of the underlying common stock on
the date of grant unless otherwise specified by the Board at the time of grant.
If options are awarded in exchange for previously earned cash compensation, or
in connection with an acquisition, merger, combination or other similar event
involving SBS, or in substitution or replacement for options granted to
employees by the other entities, the Board has the authority to establish an
exercise price that is less that 100% of the fair market value of the underlying
common stock on the date of grant. The term of these options cannot exceed ten
years from grant date. The plan expires in July 2010.
Information regarding SBS
size=2>' stock option plans is summarized in the table
below:
ALL 1993 1996 1998 LT 2000 LT
ISOPs D&O ESPP Plan Plan Total
---------- ----------- ---------- ---------- ----------- ------------
Outstanding at June 30, 2001 389,572 518,883 185,102 1,569,079 674,500 3,337,136
Granted -- 404,479 188,650 25,000 482,337 1,100,466
Exercised 41,000 10,000 -- 128,129 -- 179,129
Cancelled -- 256,883 147,552 230,695 268,988 904,118
---------- ----------- ---------- ---------- ----------- ------------
Outstanding at June 30, 2002 348,572 656,479 226,200 1,235,255 887,849 3,354,355
Granted -- 159,000 159,050 58,105 250,100 626,255
Exercised 566 -- -- 4,994 -- 5,560
Cancelled -- 127,500 110,900 163,375 219,966 621,741
---------- ----------- ---------- ---------- ----------- ------------
Outstanding at June 30, 2003 348,006 687,979 274,350 1,124,991 917,983 3,353,309
Granted -- 30,000 -- 72,684 472,300 574,984
Exercised 53,000 96,000 47,250 165,094 135,081 496,425
Cancelled 45,004 36,979 107,450 129,460 160,470 479,363
---------- ----------- ---------- ---------- ----------- ------------
Outstanding at June 30, 2004 250,002 585,000 119,650 903,121 1,094,732 2,952,505
========== =========== ========== ========== =========== ============
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ALL 1993 1996 1998 LT 2000 LT
ISOPs D&O ESPP Plan Plan Total
---------- ----------- ---------- ---------- ----------- ------------
Exercisable at June 30, 2002 315,234 252,000 74,650 835,750 279,079 1,756,713
Exercisable at June 30, 2003 331,336 372,661 124,350 976,138 542,892 2,347,377
Exercisable at June 30, 2004 250,000 356,000 119,650 767,536 537,465 2,030,651
========== =========== ========== ========== =========== ============
Available for grant at
June 30, 2004 137,000 1,405,824 -- 798,893 452,921 2,794,638
========== =========== ========== ========== =========== ============
Weighted average option exercise price information follows:
Years ended June 30,
----------------------------------
2004 2003 2002
---------- ---------- ----------
Outstanding at July 1........................................ $ 15.08 $ 16.60 $ 17.78
Granted at market during the year............................ 12.23 9.53 13.20
Exercised during the year.................................... 11.37 2.41 8.68
Cancelled during the year.................................... 16.57 17.84 18.58
Outstanding at June 30....................................... 14.91 15.08 16.60
Exercisable at June 30....................................... 16.40 16.68 17.00
Significant option groups outstanding and exercisable at June
30, 2004 and related weighted average price and life information follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------- ------------ ----------- ---------- ------------ ----------
$ 5.44 - $ 9.91 678,417 6.65 $ 9.00 267,347 $ 8.64
$ 10.05 - $ 12.31 589,782 7.42 11.65 403,632 11.64
$ 12.69 - $ 14.76 669,006 6.51 14.01 400,372 13.69
$ 14.81 - $ 18.22 616,800 3.96 16.26 560,800 16.37
$ 19.58 - $ 36.13 398,500 6.20 29.20 398,500 29.20
------------ ------------
$ 5.44 - $ 36.13 2,952,505 6.15 $ 14.91 2,030,651 $ 16.40
============ ============
12) Retirement Plan
SBS maintains a retirement plan under Section 401(k) of the
Code for all U.S. employees of SBS. The plan provides for employees to
selectively defer a percentage of their wages, which SBS matches at a
predetermined rate not to exceed 4 percent of the employee
face=Times New Roman size=2>'s wages. The plan also provides for
additional contributions at the discretion of the Board of Directors.
SBS' contributions to the
plan during the years ended June 30, 2004, 2003, and 2002, were approximately
$0.9 million, $1.0 million, and $1.1 million, respectively.
13) Segment Financial Data
As a result of changes in management responsibility, the
Company's desire to enhance its regional-based sales and service to the
Company's European customers and the June 2003 acquisition of SBS Canada
(formerly Avvida Systems), the Company changed its reportable segments to a
structure based on geographic markets. This change has enabled
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
management to focus on regional market development, alignment of sales channels
with customers' product needs, and enhancement of customer service and satisfaction.
The Company is engaged in the
size=2>design, research, development, integration and production of embedded
computer products and we operate worldwide through two
operating segments: the Americas Group and the Europe Group.
face=Times New Roman size=2>Both the Americas Group and the Europe Group offer
our complete portfolio of embedded computer products to
customers in the government, commercial and communications end markets. Each
segment has management who report directly to the Company's Chief Executive
Officer and its own sales and distribution channels. The Americas Group consists
of the Company's operations based in the United States and Canada including the
engineering, test, and assembly activities in Albuquerque, New Mexico;
Mansfield, Massachusetts; Newark, California; Raleigh, North Carolina; St. Paul,
Minnesota; and Waterloo, Ontario, Canada; the manufacturing operations located
in St. Paul, Minnesota; and the sales and support activities based in Shenzhen,
China. The Europe Group consists of the Company's operations based in Germany
which include the engineering, test, assembly, and manufacturing activities
located in Augsburg and Mindelheim, Germany.
SBS measures the results of operations for segments (segment
profit (loss)) based on income (loss) before income taxes and the cumulative
effect of change in accounting principle and prior to (a) the allocation of
corporate overhead expenses other than marketing costs, (b) substantially all
amortization associated with acquisitions and (c) interest and other income from
our U.S. operations. The accounting policies used to measure segment profit
(loss) are the same as those referred to in Note 1,
size=2>Summary of Significant Accounting Policies.
Reportable segments for all periods presented have been reclassified to conform
to the current segment reporting structure.
Americas Europe Corporate &
Thousands Group Group Unallocated (1) Total
---------- --------- --------------- -----------
Years ended June 30:
Gross Sales 2004 $ 103,202 $ 44,505 $ -- $ 147,707
Inter-segment sales (6,136) (7,697) -- (13,833)
---------- --------- --------------- -----------
Sales to external customers $ 97,066 $ 36,808 $ -- $ 133,874
Gross Sales 2003 $ 97,459 $ 26,734 $ -- $ 124,193
Inter-segment sales (3,191) (5,481) -- (8,672)
---------- --------- --------------- -----------
Sales to external customers $ 94,268 $ 21,253 $ -- $ 115,521
Gross Sales 2002 $ 106,901 $ 16,767 $ -- $ 123,668
Inter-segment sales (613) (4,199) -- (4,812)
---------- --------- --------------- -----------
Sales to external customers $ 106,288 $ 12,568 $ -- $ 118,856
Interest and other income, net 2004 $ -- $ 134 $ 500 $ 634
2003 -- $ 109 $ 325 $ 434
2002 382 67 182 631
Depreciation and 2004 $ 2,437 $ 343 $ 3,260 $ 6,040
amortization 2003 2,768 $ 214 $ 2,998 $ 5,980
2002 2,575 169 8,567 11,311
Segment profit (income (loss)
before taxes) 2004 $ 12,864 $ 7,540 $ (12,986) $ 7,418
2003 10,073 $ 5,138 $ (12,819) $ 2,392
2002 (5,976) $ 3,287 $ (35,121) $ (37,810)
As of June 30:
Total assets 2004 $ 39,640 $ 26,531 $ 78,965 $ 145,136
2003 35,798 $ 17,540 $ 75,272 $ 128,610
(1) The corporate and unallocated column includes amounts
for corporate items. With regard to results of operations, corporate and
unallocated includes corporate overhead expenses other than corporate
marketing costs, interest and other income, net from our U.S. operations,
and substantially all amortization associated with acquisitions. Corporate
assets primarily include cash and cash equivalents from our U.S.
operations, deferred and current income tax assets, goodwill and
intangible assets. |
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14) Geographic Areas and Major Customers
Geographic information for sales to external customers
(attributed based on the location of the product shipment) and long-lived assets
by country of domicile are as follows:
United
Thousands States Germany Canada Total
---------- --------- --------------- -----------
Years ended June 30:
Sales to external customers 2004 $ 95,966 $ 36,808 $ 1,100 $ 133,874
2003 94,268 $ 21,253 $ -- $ 115,521
2002 106,288 $ 12,568 $ -- $ 118,856
As of June 30:
Long-lived assets, net 2004 $ 6,028 $ 1,516 $ 435 $ 7,979
2003 7,473 $ 601 $ 388 $ 8,462
Geographic information for sales to external customers
attributed based on the location of the customer are as follows:
Years ended June 30,
------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
------------------ ------------------ ----------------
Sales % Sales % Sales %
--------- ------ --------- ------ --------- ------
United States $ 91,636 68.4 % $ 83,298 72.1 % $ 88,499 74.5 %
Sweden 11,930 8.9 % 2,002 1.7 % 3,250 2.7 %
Germany 7,205 5.4 % 6,533 5.7 % 5,139 4.3 %
Japan 5,231 3.9 % 3,835 3.3 % 3,066 2.6 %
France 4,054 3.0 % 2,964 2.6 % 3,636 3.1 %
Denmark 2,665 2.0 % 3,019 2.6 % 659 0.6 %
United Kingdom 2,289 1.7 % 3,107 2.7 % 1,640 1.4 %
Canada 1,046 0.8 % 1,546 1.3 % 3,494 2.9 %
Korea 963 0.7 % 1,167 1.0 % 1,240 1.0 %
Hong Kong 769 0.6 % 812 0.7 % 284 0.2 %
All others 6,086 4.6 % 7,238 6.3 % 7,949 6.7 %
--------- ------ --------- ------ --------- ------
$ 133,874 100.0 % $ 115,521 100.0 % $ 118,856 100.0 %
========= ====== ========= ====== ========= ======
In fiscal 2004, sales to one customer represented approximately
10% of SBS' sales ($13.2 million from the Americas Group), sales to another
customer represented approximately 8% of SBS' sales ($10.3 million from the
Europe Group) and no other customer exceeded 5% of SBS' sales. In fiscal 2003
and 2002, no single customer, or group of entities known to be under common
control, exceeded 10% of SBS
'
sales.
15) Related Party Transactions
Effective March 9, 2001, Grahame E. Rance was appointed to the
positions of President and Chief Executive Officer of SBS and member of the
Board of Directors. Mr. Rance succeeded Christopher J. Amenson, who remained as
Chairman of the Board of Directors of SBS until November 8, 2001, at which time
Mr. Rance was appointed as Chairman. As part of his compensation package, Mr.
Rance received a $1,893,750 interest free loan from SBS, paid in cash on April
4, 2001. Forgiveness of the loan was to occur ratably over six annual
anniversaries of Mr. Rance
's
employment with SBS. Additionally, Mr. Rance received a $570,000 interest free
loan from SBS that was repaid upon the sale of his former home during the
quarter ended December 31, 2001.
On April 26, 2002, at its regularly scheduled Board meeting,
Christopher J. Amenson was elected Chairman of the Board of Directors and Chief
Executive Officer and David H. Greig was elected President and Chief Operating
Officer. Former Chairman and Chief Executive Officer, Grahame E. Rance, resigned
to pursue other business opportunities. As part of the Separation Agreement
between Mr. Rance and SBS, the unamortized portion of the loan to Mr. Rance of
$1,573,700 was
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
forgiven, Mr. Rance received 8 months base pay, and he returned
30,000 shares of restricted SBS common stock, 5,000 of which were vested and
25,000 of which were unvested. This resulted in severance and other costs of
approximately $2.0 million in the quarter ended June 30, 2002.
16) Employee Severance and Consolidation Expenses
On June 12, 2003, the Company announced the closure of its
Carlsbad, California facility and the consolidation of its manufacturing
operations into the Company's St. Paul, Minnesota facility, centralizing all
manufacturing in the United States to one facility. The total employee severance
and consolidation costs incurred as a result of the consolidation were
approximately $3.4 million. The total costs include employee severance and
related costs recorded over the remaining service period, consolidation costs
recorded as incurred, lease termination costs recorded on the cease use date
(all in accordance with SFAS 146), and leasehold improvement impairment charges
recorded as a result of the announcement in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
The following table summarizes the accounting for the
consolidation of the Company's Carlsbad, California facility:
Thousands Employee Property Lease
severance and and termination Other
Description related costs equipment charge costs Total
- ---------------------------------------------- --------------- ---------- ------------ --------- ----------
Quarter ended June 30, 2003
Employee severance and consolidation costs.... $ 290 $ 841 $ -- $ -- $ 1,131
Cash payments................................. (66) -- -- -- (66)
Write-offs.................................... -- (841) -- -- (841)
--------------- ---------- ------------ --------- ----------
Accrued at June 30, 2003...................... 224 -- -- -- 224
Year ended June 30, 2004
Employee severance and consolidation costs.... 470 -- 1,400 530 2,400
Cash payments................................. (694) -- (530) (530) (1,754)
--------------- ---------- ------------ --------- ----------
Accrued at June 30, 2004...................... $ -- $ -- $ 870 $ -- $ 870
=============== ========== ============ ========= ==========
The lease termination charge, recorded on the cease use date as
a result of closure of the Company's Carlsbad, California facility, represents
the estimated fair value of the remaining future lease payments and related
obligations, net of estimated sublease income, over the term of the lease. The
remaining costs represent primarily lease obligations expected to be paid
monthly through April 2006.
During the year ended June 30, 2003, due to the continued
depressed economic and market conditions impacting the Company's communications
customers, on July 22, 2002, SBS notified 19 full and part-time employees at our
Madison, Wisconsin engineering design center that their jobs had been
eliminated. For the same reasons, on September 30, 2002, SBS notified 22
additional employees that their jobs were being eliminated and 12 other
employees were notified that their jobs had been eliminated during the three
months ended December 31, 2002. Also, SBS paid lease termination fees of
approximately $186,000 in connection with the closure of certain locations
during the three months ended December 31, 2002. As a result, for the year ended
June 30, 2003, SBS recorded employee severance and consolidation costs of
$598,000. There are no costs remaining to be paid related to these activities at
June 30, 2004.
During the year ended June 30, 2002, based on unfavorable
economic and market conditions, facility consolidation actions, and the decision
to exit the legacy PCI Chassis product line, SBS reduced its employee base,
resulting in elimination of 159 positions in manufacturing, research and
development, administration, and sales and marketing. As a result, for the year
ended June 30, 2002, employee severance and other termination charges of
approximately $1,253,000 were recorded. As of June 30, 2002, cash payments of
$963,000 had been made, $21,000 of the original charge was reversed as a result
of the decision not to terminate certain originally notified employees, and the
remaining $269,000 was paid during the year ended June 30, 2003.
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
17) Contingencies
SBS is subject to various claims that arise in the ordinary
course of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position, results of operations, or liquidity of SBS.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Controls Evaluation and Related CEO and CFO Certifications
As of the end of the period covered by this Annual Report on
Form 10-K, the company evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange
Act")). The controls evaluation was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO).
Attached as Exhibits to this Annual Report on Form 10-K are
certifications of the CEO (Exhibit 31.1) and the CFO (Exhibit 31.2), which are
required in accordance with Rule 13a-14 of the Exchange Act. This Controls and
Procedures section includes the information concerning the controls evaluation
referred to in the certifications and it should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this Annual Report, is recorded, processed, summarized and reported
within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures are also
designed to ensure that the information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
Internal control over financial reporting (as defined in
Rules13a-15(f) and 15d-15(f) of the Exchange Act) are procedures designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles and includes those policies
and procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the financial statements.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that
our disclosure controls and procedures or internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Conclusions
Based on our controls evaluation (with the participation of our
CEO and CFO), as of the end of the period covered by this report, our CEO and
CFO have concluded that, subject to the limitations noted above, our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There was no change in our internal control over financial
reporting during our fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
PART III
Certain information required by Part III is incorporated by
reference from SBS' definitive Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for SBS'
2004 Annual Meeting of Shareholders (the "Proxy Statement") pursuant to
Regulation 14A.
Item 10. Directors and Executive Officers of the
Registrant
The information required by this item is incorporated by
reference to SBS' Proxy Statement under the sections entitled "Board of
Directors," pertaining to information on directors, and "Compensation of Named
Executive Officers," pertaining to information on executive officers.
Item 11. Executive Compensation
The information required by this item is incorporated by
reference to SBS' Proxy Statement under the section entitled "Compensation of
Named Executive Officers."
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this item is incorporated by
reference to SBS' Proxy Statement under the section entitled "Ownership of SBS
Common Stock."
Item 13. Certain Relationships and Related
Transactions
The information required by this item is incorporated by
reference to SBS' Proxy Statement under the section entitled "Reportable
Transactions."
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by
reference to SBS' Proxy Statement under the section entitled "Independent Public
Accountants."
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
(b) Financial Statement Schedules
Not applicable
(c) Exhibits
The Exhibits listed on the accompanying Index to Exhibits at
the end of this Report are filed as part of, or incorporated by reference into,
this Report. Management contracts or compensatory plans or arrangements are
indicated in the index by an asterisk (*).
(d) Reports on Form 8-K during the Fourth Quarter
- On April 15, 2004, SBS Technologies, Inc. filed a Form 8-K furnishing
information regarding its financial results for the quarter ended March 31,
2004.
- On April 21, 2004, SBS Technologies, Inc. filed a Form 8- K announcing
that at its regularly scheduled meeting the Board of Directors accepted the
resignation for personal reasons of Director Louis C. Golm.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SBS TECHNOLOGIES,
INC.
Date: September 10, 2004
By: /s/ Clarence W. Peckham
Clarence W. Peckham
Chief
Executive Officer
Date: September 10, 2004
By: /s/ James E. Dixon, Jr.
James E. Dixon, Jr.
Executive
Vice President, Chief Financial Officer, and Treasurer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clarence W. Peckham, his attorney-in- fact, for
such person in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that the said attorney-in-fact may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
/s/ Clarence W. Peckham
Clarence W. Peckham |
|
Chief Executive Officer
and Director
|
|
September 10, 2004 |
/s/ James E. Dixon, Jr.
James E. Dixon, Jr. |
|
Executive Vice President,
Chief Financial Officer
and Treasurer
|
|
September 10, 2004 |
/s/ Christopher J. Amenson
Christopher J. Amenson |
|
Chairman of the Board
of Directors and Executive
Chairman
|
|
September 10, 2004 |
/s/ Warren W. Andrews
Warren W. Andrews
|
|
Director |
|
September 10, 2004 |
/s/ Lawrence A. Bennigson
Lawrence A. Bennigson
|
|
Director |
|
September 10, 2004 |
/s/ Peter D. Fenner
Peter D. Fenner
|
|
Director |
|
September 10, 2004 |
/s/ Richard A. Szafranski
Richard A. Szafranski
|
|
Director |
|
September 10, 2004 |
/s/ Alan F. White
Alan F. White
|
|
Director |
|
September 10, 2004 |
INDEX TO EXHIBITS |
|
|
Incorporated by Reference |
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Fiscal period ended |
Filed Here-with |
3.i |
Restated Articles of Incorporation dated November 10,
2000 |
10-Q |
001-10981 |
3.i |
9-30-2000 |
|
3.ii |
Second Restated and Amended By-laws dated November 13,
2003 |
10-Q |
001-10981 |
3.ii |
12-31-2003 |
|
4.a |
Article VI of the Articles of Incorporation, as amended, as included in
the Articles of Incorporation of SBS Technologies, Inc. |
10-Q |
001-10981 |
3.i |
9-30-2000 |
|
4.b |
Articles I and II of the Second Restated and Amended By-laws of SBS
Technologies, Inc. |
10-Q |
001-10981 |
3.ii |
12-31-2003 |
|
4.c |
Form of certificate evidencing Common Stock |
10-Q |
001-10981 |
4.c |
3-31-2001 |
|
4.1 |
Rights Agreement dated as of September 15, 1997 between SBS
Technologies, Inc. and First Security Bank (now Wells Fargo), National
Association, as Rights Agent, which includes the form of Right Certificate
as Exhibit A, and the Summary of Rights to Purchase Common Stock as
Exhibit B.2. Agreement to Serve as Rights Agent. On January 21, 1998,
pursuant to Section 21 of the Rights Agreement, SBS appointed Norwest Bank
Minnesota, N.A. (now Wells Fargo) as Successor Rights Agent.
|
10-K |
001-10981 |
4.1 |
6-30-2002 |
|
10.c* |
1997 Employee Incentive Stock Option Plan. |
10-K |
001-10981 |
10.c |
6-30-2002 |
|
10.i * |
1993 Director and Officer Stock Option Plan (as amended).
|
10-K |
001-10981 |
10.i |
6-30-2002 |
|
10.v * |
1996 Employee Stock Purchase Plan (as amended). |
10-K |
001-10981 |
10.v |
6-30-2002 |
|
10.ac |
Office/Warehouse Lease Between Lutheran Brotherhood, (a Minnesota
Corporation), and Bit 3 Computer Corporation, a wholly-owned subsidiary of
SBS Technologies, Inc., dated September 5, 1997 |
10-Q |
001-10981 |
10.ac |
9-30-2002 |
|
10.ad |
Amendment #1 to Lease between Lutheran Brotherhood, a Minnesota
Corporation, and Bit 3 Computer Corporation, a wholly owned subsidiary of
SBS Technologies, Inc., dated December 23, 1997 |
10-Q |
001-10981 |
10.ad |
9-30-2002 |
|
10.ah |
Standard Industrial Lease Between Carlsbad Business Park, LLC, (a
California Limited Liability Company), and SBS Technologies, Inc. dated
September 10, 1998 |
|
|
|
|
X |
10.al |
Lease Agreement between Mair GmbH & Co. KG and or Industrial
Computers GmbH, a wholly-owned subsidiary of SBS Holding GmbH, a
wholly-owned subsidiary of SBS Technologies, Inc. |
|
|
|
|
X |
10.am * |
1998 Long-Term Equity Incentive Plan. |
10-K |
001-10981 |
10.am |
6-30-2003 |
|
10.an |
Partnership Agreement between SBS or Industrial Computer GmbH & Co.
KG and SBS or Industrial Computers Verwaltungs GmbH, general partner, and
SBS Technologies Holding GmbH, limited partner |
|
|
|
|
X |
INDEX TO EXHIBITS |
|
|
Incorporated by Reference |
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Fiscal period ended |
Filed Here-with |
10.ao |
Lease Agreement between 8-L Newark 8371, LLC and SBS Technologies, Inc.
dated August 14, 1999 |
|
|
|
|
X |
10.ax |
Lease between AFC-5, LLC, a New Mexico limited liability Company, and
SBS Technologies, Inc., dated May 16, 2000 |
10-K |
001-10981 |
10.ax |
6-30-2000 |
|
10.ay |
Lease between Long Gate, LLC, a Delaware limited liability company, and
SDL Communications, Inc., a Massachusetts corporation, dated June 15,
2000 |
10-K |
001-10981 |
10.ay |
6-30-2000 |
|
10.be * |
2000 Long-Term Equity Incentive Plan |
DEF 14A |
001-10981 |
Exhibit "A" |
10-2-2000 |
|
10.bt |
Amendment #2 to Lease between Oakview Eagan Investors, LLC (a Delaware
Limited Liability Company), as successor in interest to Lutheran
Brotherhood, (a Minnesota Corporation), and SBS Technologies, Inc.,
Commercial Group, formerly known as Bit 3 Computer Corporation, a
wholly-owned subsidiary of SBS Technologies, Inc., dated May 22, 2002.
|
10-K |
001-10981 |
10.bt |
6-30-2002 |
|
10.bu |
Amendment #1 to Lease between AFC-5, LLC (a New Mexico Limited
Liability Company) and SBS Technologies, Inc., dated February 1, 2001.
|
10-K |
001-10981 |
10.bu |
6-30-2002 |
|
10.bv |
Amendment #2 to Lease between AFC-5, LLC (a New Mexico Limited
Liability Company) and SBS Technologies, Inc., dated April 1, 2002.
|
10-K |
001-10981 |
10.bv |
6-30-2002 |
|
10.bw |
Lease Agreement between Teal Properties, LLC and SBS Technologies, Inc.
dated October 2, 2002. |
10-Q |
001-10981 |
10.bw |
9-30-2002 |
|
10.by * |
Employment agreement between Christopher J. Amenson and SBS
Technologies, Inc., effective April 17, 2003, dated April 17,
2003 |
10-Q |
001-10981 |
10.by |
9-30-2003 |
|
10.bz * |
Employment agreement between Clarence W. Peckham and SBS Technologies,
Inc., effective April 17, 2003, dated April 17, 2003 |
10-Q |
001-10981 |
10.bz |
9-30-2003 |
|
10.ca * |
Employment agreement between James E. Dixon, Jr. and SBS Technologies,
Inc., effective July 29, 2003, dated July 29, 2003 |
10-Q |
001-10981 |
10.ca |
9-30-2003 |
|
10.cb * |
Employment agreement between David Greig and SBS Technologies, Inc.,
effective July 29, 2003, dated July 29, 2003 |
10-Q |
001-10981 |
10.cb |
9-30-2003 |
|
10.cc * |
Employment agreement between Bruce E. Castle and SBS Technologies,
Inc., effective July 29, 2003, dated July 29, 2003 |
10-Q |
001-10981 |
10.cc |
9-30-2003 |
|
10.cd |
Sublease agreement between SBS Technologies, Inc., and Viasat, Inc., a
Delaware corporation, dated October 29, 2003 |
10-Q |
001-10981 |
10.cc |
12-31-2003 |
|
INDEX TO EXHIBITS |
|
|
Incorporated by Reference |
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Fiscal period ended |
Filed Here-with |
10.ce |
Lease Agreement between Sabine u. Hermann Gotzfried GbZ and ortec
Electronic Assembly GmbH dated August 2003 |
|
|
|
|
X |
10.cf |
Amendment #4 to Lease between AFC-5, LLC (a New Mexico Limited
Liability Company) and SBS Technologies, Inc., dated August 1, 2003.
|
|
|
|
|
X |
10.cg |
Amendment to lease agreement between 8-L Newark 8371, LLC and SBS
Technologies, Inc. dated May 5, 2004 |
|
|
|
|
X |
10.ch |
Lease Agreement between Shenzhen Jiannian Travel Limited and SBS
Technologies, Inc. Foreign Holding Company dated June 2004 |
|
|
|
|
X |
14 |
Code of Ethics. |
8-K |
001-10981 |
14 |
11-21-2003 |
|
21 |
Subsidiaries of the registrant. |
|
|
|
|
X |
23.1 |
Consent of KPMG LLP, Independent Registered Public Accounting
Firm |
|
|
|
|
X |
24.1 |
Power of Attorney (see page 62 of this Form 10-K) |
|
|
|
|
X |
31.1 |
Section 302 certification of Clarence W. Peckham, Chief Executive
Officer |
|
|
|
|
X |
31.2 |
Section 302 certification of James E. Dixon Jr., Chief Financial
Officer |
|
|
|
|
X |
32.1 |
Section 906 certification of Clarence W. Peckham, Chief Executive
Officer |
|
|
|
|
X |
32.2 |
Section 906 certification of James E. Dixon Jr., Chief Financial
Officer |
|
|
|
|
X |
* Indicates a management contract or compensatory plan or
arrangement.
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