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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended JUNE 30, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-10981
SBS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New Mexico 85-0359415
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2400 Louisiana Blvd. NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
(505) 875-0600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on September
2, 1997 as reported on NASDAQ was approximately $110,375,605. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 2, 1997, Registrant had 5,467,428 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Part III of
this Form 10-K Report: (1) Definitive Proxy Statement for Registrant's 1997
Annual Meeting of Stockholders to be held November 11, 1997.
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PART I
ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, AND
ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING
STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND ECONOMIC CONDITIONS;
CUSTOMER ACCEPTANCE OF AND DEMAND FOR THE COMPANY'S PRODUCTS; THE COMPANY'S
OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS;
THE NATURE OF THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; AND OTHER RISK
FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE SEC.
INTRODUCTION
SBS Technologies, Inc. (the "Company") is a leading manufacturer of standard bus
embedded computer components that perform a broad range of central processing
unit ("CPU"), general purpose input/output ("I/O"), special purpose I/O
interface applications, and high performance interconnect hardware and
software. The Company capitalizes on its design expertise and customer service
capabilities to enhance product quality and reduce time to market for OEM
customers.
The Company's objective is to become a leading supplier of board level
components to the standard bus embedded computer market. The Company intends to
continue its growth through a combination of internal growth and acquisitions.
Internal growth is achieved through expanding its existing product lines through
new product development and through increasing penetration of its existing
customer base.
Fiscal 1997 was a year of progress in the continued development of the
Company. The Company focused on continually enhancing and improving the
products it delivers and its ability to satisfy customer needs. During
1997 the Company substantially broadened the range of product solutions
provided and added significantly to the number of customers served.
Revenues for the fiscal year ended June 30, 1997 increased 68.7% from $31.3
million to $52.8 million. The source of this revenue increase was twofold:
growth in the core businesses, and growth by the acquisition of two product
areas.
The Company entered fiscal 1997 as a leader in several segments of the
multi-billion dollar embedded computer market, with the continuing goal of
expanding its market presence. In the computer mezzanine board I/O segment,
the Company broadened its line of IndustryPacks-Registered Trademark- ("IPs")
to over 100 variants. During the year, IP's became an open standard
approved by the American National Standards Institute (ANSI) as an
internationally recognized standard meeting the criteria for open system
compatibility demanded by the industry. More and more engineers have
recognized the advantages of this I/O solution in time-to-market and design
flexibility. In the Avionics business, the Company's interface boards and
bus analyzers remained the industry standard for quality and innovation with
a broadening of the Company's customer base and participation on such
programs as the X-33 [Reusable Launch Vehicle (RLV)], the International Space
Station and the B-52 Life Extension Program. The Company repositioned its
telemetry product line toward the satellite test and control market in order
to serve the rapidly expanding satellite market driven by both
telecommunications and defense applications.
In August 1996, the Company expanded into the broader embedded computing
market with the acquisition of Logical Design Group, Inc. ("LDG"), a
manufacturer of Intel processor-based CPU boards. This acquisition
positioned the Company to take advantage of the growth in the use of both
Intel processors and Microsoft software in the embedded computer market.
In November 1996, the Company acquired Bit 3 Computer Corporation ("Bit 3"),
a leading developer and manufacturer of high performance bus interconnect
hardware and software products for many of the
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most widely used computer architecture standards in the standard bus embedded
computer market. This acquisition takes advantage of the introduction into
the embedded computing market of new bus standards such as PCI and
CompactPCI, expands the Company's customer base and opens the bus expansion
market to the Company. In the quarter ended December 31, 1996, the Company
took a one time $11.0 million in-process research and development charge to
earnings associated with this acquisition.
In June 1997, the Company divested its Judgmental Use of Force Training
business. The Company determined that this business was not consistent with the
Company's objective of becoming a leading supplier of board level components to
the standard bus embedded computer market.
Excluding the effect of the one time $11.0 million charge to earnings, net
income for the year would have increased 97.2% from $3.6 million to $7.1
million, and earnings per share would have increased 38.1% from $.97 to $1.34.
Including this charge, net income was $461,685, or $0.09 per share.
The Company was incorporated in New Mexico in November 1986 and began operations
in September 1987. The Company's executive offices are located at 2400
Louisiana Boulevard, NE, AFC Building 5, Suite 600, Albuquerque, New Mexico
87110, and its telephone number is (505) 875-0600. References to the "Company"
or "SBS" are to SBS Technologies, Inc. and its consolidated subsidiaries. The
Company has four subsidiaries, Berg Systems International, Inc. ("BSI"),
GreenSpring Computers, Inc. ("GreenSpring"), Logical Design Group, Inc. ("LDG"),
and Bit 3 Computer Corporation ("Bit 3"). IndustryPack-Registered Trademark- is
a registered trademark of the Company. All other trademarks or tradenames
referred to in this document are the property of their respective owners.
In fiscal 1998, the Company plans to rename its subsidiaries as follows:
NEW BUSINESS NAME FORMERLY KNOWN AS:
SBS Embedded Computers, Inc. Logical Design Group, Inc.
SBS GreenSpring Modular I/O, Inc. GreenSpring Computers, Inc.
SBS Bit 3 Operations, Inc. Bit 3 Computer Corporation
SBS Berg Telemetry Systems, Inc. Berg Systems International, Inc.
SBS' PRODUCTS
The Company's primary product lines are divided into two groups: general purpose
products including CPU products, general purpose I/O products and bus interface
products, and special purpose products including telemetry and avionics
interface products.
GENERAL PURPOSE PRODUCTS
CPU PRODUCTS. The Company entered the standard bus embedded computer CPU
board market with its acquisition of LDG in August 1996 (See "Management's
Discussion & Analysis: Recent Acquisitions"). CPU boards contain the
computational functionality of an embedded computer system. The Company
produces CPU boards for the VME segment of the embedded computer market, the
most widely accepted bus standard in the industry. The VME CPU board market
can be segmented by processor type. The largest segment is made up of boards
designed around the Motorola 680x0 series processors, upon which the VME
standard was based. A growing segment is comprised of boards based on Intel
80x86 and Pentium processors which provide access to the large base of
Windows and Windows NT software available from the PC market. The CPU boards
sold by LDG are based on Intel 80x86 and Pentium processors. At present, the
Company offers six Intel processor-based CPU boards ranging in price from
approximately $2,500 to approximately $8,500. In fiscal 1997, sales of these
products comprised 11.5% of the Company's total sales. As of September 2,
1997, backlog orders were $.7 million. All backlog orders are expected to be
filled in the current fiscal year.
GENERAL PURPOSE I/O PRODUCTS. In April 1995, the Company purchased
GreenSpring (See "Management's Discussion & Analysis: Recent Acquisitions"), a
leading developer and producer of I/O modules known as IPs. IPs are small
mezzanine boards that plug onto an embedded computer board or a carrier board
and provide specific types of I/O for embedded computer systems. The Company
has continued to expand the market for IP products by broadening its line of
carrier cards that can accommodate up to four IPs. The Company's offerings
currently include VME, PCI, Compact PCI and ISA bus carrier cards.
GreenSpring's product line of over 100 I/O products services a wide range of
applications in the embedded computer market including analog I/O, bus
interface functions, digital/parallel I/O, motion control,
telecommunications/serial I/O, telecommunications products, video/graphics
adapters and temperature measurement with prices ranging from approximately
$350 to approximately $3,500. In fiscal years 1997, 1996, and 1995, sales of
these products comprised approximately 26%, 35% and 9%, respectively, of the
Company's total sales. As of
4
September 2, 1997 and 1996, backlog orders were $14.2 and $2.5 million,
respectively. All backlog orders are expected to be filled in the current
fiscal year.
BUS INTERFACE PRODUCTS. In November 1996, the Company purchased Bit 3 (See
"Management's Discussion & Analysis: Recent Acquisitions"), a leading developer
and manufacturer of high performance bus interconnect hardware and software
products. Bit 3 was incorporated in 1980 and its management recognized early
on that the rapid expansion of microprocessor-based industrial computers had
resulted in the proliferation of a number of different computer architecture
standards. Bit 3 identified a market for products that interface and network
industrial computers designed around different computer architectures. In
1983, Bit 3 introduced its first adapter product, an interface device to
connect IBM PC equipment with Multibus architecture computers. Since then,
Bit 3 has expanded its product line to include computer networking and
interconnection hardware for many of the popular computer architecture
standards used in the standard bus embedded computer market, including VME,
PCI, CompactPCI, Sbus, ISA, EISA, Micro Channel, GIO, TURBOCHANNEL, Multibus
and Qbus. The development of Bit 3's new products is driven by the emergence
of significant new standard bus specifications and applications.
Bit 3 products are used in a wide variety of applications, including data
acquisition, image and visualization processing, industrial process control,
medical electronics, signal processing and system integration. Bit 3's
typical customer uses bus adapter products because of the need for high
speed, low-latency interconnections between computer platforms. This
connectivity cannot be provided at the required performance levels by common
local area networking solutions, such as Ethernet or Token Ring, nor can it
in most cases be provided by higher speed protocols, such as ATM or FDDI. Bit
3 currently provides interconnect products to a wide variety of commercial
users. In fiscal 1997, sales of these products comprised 17.1% of the
Company's total sales. As of September 2, 1997, backlog orders were $1.5
million. All backlog orders are expected to be filled in the current fiscal
year.
SPECIAL PURPOSE PRODUCTS
TELEMETRY PRODUCTS. In August 1992, the Company purchased BSI , a major
supplier of telemetry interface equipment for the embedded computer market.
Telemetry is the process used to send and receive digital data via radio
waves. The Company's telemetry interface products allow computers to receive,
interpret and process telemetry data. Telemetry is often used to transmit
data from some object under test, such as an aircraft, to a receiving station
while the test is underway. This allows engineers to monitor test performance
in real time, often decreasing total test costs and enhancing test safety.
Use of this technology has expanded to include continuous monitoring of
remote sites and transmission of digital data from satellites to the earth.
BSI pioneered the concept of using special purpose interface boards for
telemetry ground station applications based on standard bus embedded
computers. BSI has expanded its product offerings to include specialized
equipment designed to receive and process satellite data. The Company's
telemetry products serve a specialized market and include a significant
software component. BSI sells approximately 30 products for the VME, PCI,
and ISA bus telemetry markets at prices ranging from approximately $1,600 to
approximately $41,000. In fiscal years 1997, 1996 and 1995, sales of these
products comprised approximately 12%, 21% and 34%, respectively, of the
Company's total sales. As of September 2, 1997 and 1996, backlog orders were
$.9 million and $.7 million, respectively. All backlog orders are expected
to be filled within the current fiscal year.
AVIONICS INTERFACE PRODUCTS. The Company's avionics products interface an
embedded computer system with the MIL-STD-1553 avionics bus used in a wide
variety of military and space applications including aircraft, missiles, ground
vehicles, the International Space Station, the Space Shuttle and naval vessels.
Initial applications for the Company's products were support of system
development, system testing and simulation. Over the past several years, the
Company has expanded its product line to include ruggedized interface products
that are used in operational systems, and monitor and test systems that can be
used as diagnostic tools for operational systems. Like its telemetry products,
the Company's avionics products occupy a niche market and include a significant
software component. The Company offers approximately 20 avionics interface
boards at prices ranging from approximately $4,000 to approximately $20,000. In
fiscal years 1997, 1996 and 1995, sales of this product comprised approximately
31%, 40% and 50%, respectively, of
5
the Company's total sales. As of September 2, 1997 and 1996, backlog orders
were $2.0 and $1.9 million, respectively. All backlog orders are expected to
be filled within the current fiscal year.
In June 1997, the Company sold its Judgmental Use of Force product (see
"Management's Discussion & Analysis: Sale of Judgmental Use Of Force
Business"). This product utilized an embedded computer in a device to train
police officers and military personnel in proper responses to crisis
situations. In fiscal years 1997, 1996 and 1995, sales of this product
comprised approximately 3%, 4% and 4%, respectively, of the Company's total
sales.
CUSTOMERS AND APPLICATIONS
The Company's broad range of products support a wide range of applications.
In fiscal 1997, 1996 and 1995, no one customer exceeded 10% of the Company's
sales. The following table highlights some of the Company's representative
customers and their applications utilizing the Company's products.
APPLICATION CUSTOMER COMPANY PRODUCT
COMMERCIAL AND INDUSTRIAL APPLICATIONS
Aircraft Simulation Flight Safety International Interconnect
Aircraft Simulation CAE Electronics Interconnect
Airport Baggage Inspection InVision Technologies Interconnect
Airport Ground Traffic Control Norden/Westinghouse CPU
"C" Size Copier Xerox I/O
Color Proof Copier Eastman Kodak I/O
Contact Lens Inspection Perceptics Interconnect
Currency Inspection System Currency Systems CPU
Document Scanner General Scanning I/O
OCR Mail Address Processing Bell & Howell Interconnect
Semiconductor Handler Delta Design I/O
Turbine Control System GE Motors CPU
Video Animation Sun Microsystems Interconnect
COMMUNICATIONS
Cellular Telephone Systems ArgoSystems CPU
Commercial Satellite Testing Loral Test & Information Telemetry
Communications Satellite Testing TRW Telemetry
GSP Testing Aerospatiale Telemetry
SS7 Telephone Protocol Undisclosed I/O
Telephone Protocol Undisclosed I/O
Telephone Switch Billing System ACECOM I/O
INDUSTRIAL AUTOMATION
Animatronics Walt Disney I/O
Automotive Brake Tester Burke Porter Machinery CPU
Automotive Test Stands W.M. Associates/ Digital Equipment Corp. Interconnect
Automotive Wheel Alignment Burke Porter Machinery CPU
Carpet Manufacturer Process Control MOOG I/O
Combustion Turbine Control Westinghouse Electric Corp. Interconnect
Packaging Machinery Triangle Package Machinery I/O
PLC Co-processor GE Fanuc CPU
Programmable Logic Controller Reliance Electric Interconnect
Real-time Control Systems Queue Systems, Inc./Digital Equipment Corp Interconnect
Robot Control Adept Technology I/O
Semiconductor Trim Equipment Control Automation CPU
Surface Mount Board Assembly Seiko Instruments Interconnect
6
MEDICAL DEVICES
Blood Analyzer IGEN I/O
Blood Analyzer Helena Laboratories CPU
CT Beam Scanner Imatron Interconnect
PET Imaging Systems UGM Medical Systems, Inc. Interconnect
Positron Emissions Topography Positron Corporation Interconnect
Ventilators Display NellCor I/O
MILITARY AND SPACE APPLICATIONS
Ariane V System Test and Simulation Aerospatiale Avionics
Ariane V Test Support Lockheed Martin Telemetry
B-2 Flight Testing Northrop Grumman Telemetry
C-17 Aircraft Testing McDonnell Douglas Telemetry
Mission Planning & Debriefing Lockheed-Sanders Interconnect
Satellite Imaging TRW Telemetry
TAC-3 Hughes Data Systems Interconnect
TAC-4 Hewlett Packard Interconnect
TEST AND MEASUREMENT APPLICATIONS
Cyclotron Controller Univ. of Wisconsin I/O
Particle Collision and Detection System CERN I/O
Temperature Control Therm-O-Disk I/O
VLSI Tester LTX/Trillium Interconnect
TRANSPORTATION
Aircraft Flight Testing Cessna Telemetry
Commercial Avionics System Test Honeywell Avionics
Commercial Avionics System Test Rockwell International Avionics
Jet Engine Testing Pratt & Whitney Telemetry
Lane Controllers NYSTA I/O
Maritime Systems NEC Avionics
Personal Rapid Transit Raytheon I/O
777 Aircraft Testing Boeing Telemetry
Train Track Alignment System Fairmont Tamper CPU
SALES AND MARKETING
The Company markets its products both domestically and internationally. As of
September 2, 1997, the Company had 32 employees, who typically hold
engineering degrees, in sales, marketing and customer relations. In
addition, during the year ended June 30, 1997, the Company utilized over 43
independent manufacturers' representatives and 35 international distributors.
During fiscal 1998, the Company plans to realign its sales force into
commercial and aerospace sales channels utilizing direct sales employees and
minimizing the use of independent manufacturers' representatives. The
aerospace sales force will be responsible for sales of the Company's avionics
interface and telemetry products and the commercial sales force will be
responsible for sales of the Company's CPU, I/O and interconnect products.
Employee sales personnel are educated on each of the Company's product lines
and refer opportunities to appropriate product line managers. Primary sales
methods vary among the Company's product lines. The Company's avionics
interface and telemetry products generally have the most complex applications
and, as a result, leads are generally identified by field sales personnel or
independent manufacturers' representatives and sales are closed by the sales
employees. In the case of the Company's CPU and I/O products, historically a
higher percentage of sales were either closed by independent manufacturers'
representatives or the result of catalog sales. Beginning with fiscal 1998,
sales will be closed by the commercial sales force or will result from
catalog sales. Sales of the Company's interconnect products primarily have
resulted from catalog
7
sales. Beginning with fiscal 1998 the commercial sales force
will also be responsible for these sales. In each of the Company's product
lines, sales employees generally pursue "design in" applications where the
Company's products are included as part of a system.
The Company sells approximately 16% of its products outside the United States
(See footnote 4 to the consolidated financial statements). It maintains sales
offices in Albuquerque for its avionics interface products; in Raleigh, North
Carolina, for its Intel processor-based CPU boards; in Menlo Park,
California, for its I/O products; in Carlsbad, California, for its telemetry
products; and, in Minneapolis, Minnesota for its interconnect products. The
Company also maintains an international sales office in Glasgow, Scotland to
support European sales of its avionics interface products. During fiscal
1998, the Company plans to open additional sales locations. Sales and sales
leads are generated through a range of activities performed by the Company
including identification of participants in key defense-related programs,
participation in numerous trade shows, direct mail catalogs, advertisements
in leading trade publications and corporate and subsidiary web sites on the
Internet.
COMPANY RESEARCH AND DEVELOPMENT
The Company invests in research and development programs to develop new
products in related markets and to integrate state of the art technology into
existing products. As of September 2, 1997, the Company had approximately 72
employees engaged in research and development activities. Of these employees,
46 have technical degrees and 17 have advanced degrees. The Company seeks to
combine special-purpose hardware, firmware and software in its products to
provide its customers with the desired functionality. Approximately 60% of
the Company's research and development efforts in fiscal year 1997 were
software related. The Company's research and development expense was $4.4
million, $2.8 million and $1.7 million in fiscal 1997, 1996 and 1995,
respectively, corresponding to 8.4%, 9.1% and 10.4% of sales, respectively.
LDG's current research and development activity is focused on evolutionary
improvement of its existing product line. GreenSpring's efforts are directed
towards broadening the scope of its market by developing new IPs and
upgrading existing products to state of the art technology. Examples include
a new IP designed to provide high speed fiber optic shared memory for
networked computer systems and an updated set of discrete and digital I/O IPs
with increased performance and functionality. The development of Bit 3's new
products is driven by the emergence of significant new bus specifications and
applications. For example, Bit 3 brought to market a family of PCI and
Compact PCI expansion products. BSI is continuing to upgrade its products'
performance by increasing the operating bit rates, a key performance measure
in the telemetry industry. BSI is also continuing to expand its offerings of
high performance, CCSDS packet switching products for the satellite ground
station market. The Company is also extending its avionics interface product
line. For example, the Company has completed development of a new ruggedized
avionics product for the operational system market. There can be no
assurance that the Company will be successful in developing and bringing to
market any products as a result of its research and development efforts.
SUPPLIERS
The Company uses contract manufacturing to produce substantially all of its
board-level products. The Company obtains parts from large electronics parts
suppliers and printed circuit boards from printed circuit board manufacturers
and provides these parts and boards as kits to contract manufacturing
companies that fabricate the Company's products. Following manufacturing, the
Company performs test, packaging and support functions for the Company's
products. Dependence on a particular contract manufacturer is reduced by
using multiple contract manufacturers for each of the Company's product
lines. However, the Company may choose in the future to consolidate its
contract manufacturing to gain economies of scale and to shift its inventory
control to the contract manufacturer, in which case the Company would become
increasingly dependent on a smaller number of manufacturers for the continued
timely and efficient production of all of its inventory.
Many of the Company's products consist in part of state-of-the-art digital
electronic components. The Company is dependent upon third parties for the
continuing supply of many of these components, some of which are obtained
from a sole supplier such as Xylinx, Inc. or a limited number of suppliers
and
8
alternative sources which would be difficult to locate. Moreover, suppliers
may discontinue or upgrade some of the products incorporated into the
Company's products, which could require the Company to redesign a product to
incorporate newer or alternative technology. Although the Company believes
that it has arranged for an adequate supply of components to meet short-term
requirements, the Company does not have contracts for the components which
assure availability and price. Lack of timely availability of components
could cause delays in shipment of product and affect the Company's revenues
during certain periods as well as lead to customer dissatisfaction. Limited
availability of components could also require the Company to pay premiums for
parts to make shipment deadlines and thus affect the Company's profit margin,
or cause the Company to increase its inventory of scarce parts and thus
affect the Company's cash flow. There is no assurance that the Company will
continue to be able to obtain all of the components it requires or that the
price of certain components in short supply will not materially and adversely
affect its business, financial condition or results of operations.
COMPETITION
The standard bus embedded computer industry is highly competitive and
fragmented, and the Company's competitors differ depending on product type,
company size, geographic market and application type. The Company faces
competition in each of its product lines. The Company believes that because
of the diverse nature of the Company's products and the fragmented nature of
the embedded computer market, there is little overlap of competitors for each
product line. Competitive factors across the Company's product lines include
performance, customer support, product longevity, supplier stability, breadth
of product offerings and reliability. Many of the Company's existing and
potential competitors have financial, technological and marketing resources
significantly greater than those of the Company and may have established
relationships with customers or potential customers that afford them a
competitive advantage. There can be no assurance that the Company will be
able to compete effectively in its current or future markets or that
competitive pressures will not adversely affect its business, financial
condition or results of operations.
In the Company's CPU product line, the Company competes with a number of
other suppliers of VME CPU boards. The Company's direct competitors include
other companies that build VME CPU boards based on Intel microprocessor
technology such as Force Computers, Inc. (a wholly owned subsidiary of
Solectron Corporation), Performance Technologies, Inc., RadiSys Corporation,
VME Microsystems, Inc. and XYCOM, Inc. Indirectly, however, the Company also
competes with suppliers of VME CPU boards based on other microcomputer
architectures such as Motorola 680x0, Sparc and PowerPC.
In the generalized computer I/O product area served by GreenSpring and its IP
product line, the Company has two classes of competition. The first class
includes companies that compete directly by selling IP products. The second
class includes companies that compete with I/O products using a different
implementation to provide functionally equivalent products. The Company's
competitors in each of these classes include Acromag, Inc., Systran, Inc.
and VME Microsystems, Inc.
In the telemetry market, the Company competes with other suppliers of open
architecture telemetry solutions. It also indirectly competes with suppliers
of traditional, closed architecture telemetry systems. The Company's
competitors include Aydin Vector Division, L3 Communications, Inc.,
Terametrix, Inc. and Veda, Inc.
In the avionics interface market, the Company competes with a number of other
companies that produce similar avionics interface products. The Company's
competitors include Ballard Technologies, Inc., Data Devices Corporation,
Systran, Inc., DY-4, Inc., Excalibur Technologies Corporation and
Gesellschaft Fur Angewandte Informatik und Mikroelekernik, GmbH.
In the Company's interconnect and expansion unit product line, the Company
competes with personal computer (PC) manufacturers that offer computer
motherboards with multiple PCI slots and with companies that have similar
product lines. There is no significant direct competitor in this market.
9
EMPLOYEES
As of September 2, 1997, the Company had approximately 231 employees at its
five locations: Albuquerque, New Mexico; Carlsbad, California; Menlo Park,
California; Raleigh, North Carolina; and Minneapolis, Minnesota. Of these
employees, 19 were in executive and administrative positions; 32 were in
sales, marketing and customer relations; 72 were in research and development;
36 were clerical, and 72 were employed in support of ongoing production.
ITEM 2. FACILITIES
The Company leases office and manufacturing space in Albuquerque, New Mexico,
Carlsbad, California, Menlo Park, California, Raleigh, North Carolina and
Minneapolis, Minnesota. The Company's standard practice is to obtain all of its
facilities through operating leases. The Company maintains an insurance plan
covering all its facilities and contents.
The Albuquerque, New Mexico leased facility consists of 19,225 square feet
located in a multi-floor office building which includes adequate assembly and
test space for the Company's avionics interface product line, as well as
serving as the Company's corporate headquarters. Management is currently
negotiating for additional space within this facility, which is available if
terms can be agreed upon. Currently the assembly and test operations utilize
approximately 85% of the productive floor space. The lease term for the
Albuquerque, New Mexico location is five years commencing July 1, 1995 with
one additional five year option.
The Carlsbad, California leased facility is a one story, approximately 12,000
square foot building, located in a business park, consisting of approximately
6,000 square feet of office space and 6,000 square feet of assembly and test
areas for the Company's telemetry products. Management believes that this
facility is capable of handling projected increases in production for the
foreseeable future as the current capacity utilization of the manufacturing
area is approximately 50%. The lease term for the Carlsbad, California
location runs through July 2000 with an option to extend the term for an
additional two years.
The Company's general purpose I/O business is located in Menlo Park,
California. The 16,394 square foot facility, which is leased for a four year
term expiring May 2000, is a one story multi-tenanted building in a business
park which consists of 6,000 square feet of office space and 10,394 square
feet of assembly and test areas. Management believes that the facility will
be sufficient to serve the general purpose I/O business needs through the
term of the lease.
The Company's CPU products business, located in Raleigh, North Carolina,
leases a one story multi-tenanted facility consisting of approximately 4,000
square feet of office space and approximately 7,000 square feet of assembly
and test areas. The lease expires on November 30, 2002. Management believes
that the facility is adequate at the Company's current level of business and
that expansion space is available if required.
The Company's interconnect business is located in an approximately 13,647
square foot facility in Minneapolis, Minnesota leased for a one year term
that expires October 1997. At the expiration of this lease, the Company plans
to relocate this operation to a 39,597 square foot facility located in a
business park in Eagen, Minnesota. The Company is currently finalizing lease
negotiations for this facility for a five year term. Management believes
that this facility will sufficiently serve the needs of this operation
through the term of the lease.
Before the sale of the Company's simulation business to Camber Corporation in
April 1995, the Company had additional leased facilities in Albuquerque, New
Mexico, Dallas and Houston, Texas. In conjunction with this sale, the
Company entered into sublease and lease assumption agreements with Camber
Corporation, transferring the obligations under these leases.
10
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in Virtual Systems Group, Inc.
(VSG) v. SBS Technologies, Inc., filed on June 19, 1996 in the Second
Judicial District Court, County of Bernalillo, State of New Mexico. The
plaintiff, a company engaged by SBS to market its Judgmental Use of Force
Trainers, claims that the Company failed to fulfill all its obligations under
an Agreement between the Company and VSG whereby VSG would market the
Company's Judgmental Use of Force Trainers. The Company is vigorously
defending the lawsuit and has filed a counter suit alleging misrepresentation
and failure to perform on the part of VSG, and on the advice of counsel, does
not believe that the outcome of the litigation will have a material effect on
the Company's financial condition or results of operations.
The Company is subject to various claims which arise in the ordinary course
of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of closing price of the Company's
common stock as reported on the NASDAQ National Market System for each full
fiscal quarter within the last two fiscal years:
HIGH LOW
1st Quarter 1996 $ 9.00 $ 5.00
2nd Quarter 1996 8.94 7.13
3rd Quarter 1996 10.13 7.63
4th Quarter 1996 17.13 8.88
1st Quarter 1997 19.75 10.625
2nd Quarter 1997 39.00 19.00
3rd Quarter 1997 35.00 15.25
4th Quarter 1997 24.75 10.875
The Company's common stock is traded over the counter on the NASDAQ National
Market System using the symbol SBSE.
Based on the Company's survey of brokerage houses, management believes that
as of September 2, 1997, the number of common stockholders of record was
approximately 206, at which date the closing market value of the Company's
common stock was $21.375 per share.
The Company has not paid any cash dividends on its common stock.
Management's current policy is to retain earnings for use in the Company's
operations and for expansion of the Company's business. The Company's bank
line of credit also requires bank approval before the payment of any cash
dividends. No future dividend payments are expected.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended June 30, 1993
through June 30, 1997 have been derived from the Company's audited
consolidated financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated financial statements
and related notes thereto included elsewhere herein.
YEAR ENDED JUNE 30
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- -----------
Sales - continuing operations $ 52,814,568 31,331,793 16,217,648 10,196,568 5,907,658
Income - continuing operations $ 461,685 3,580,907 1,844,876 870,750 168,099
Income per common and common
equivalent share - continuing operations $ 0.09 0.97 0.65 0.30 0.05
Income - continuing operations
(Excluding $11.0 million in-process R&D charge) $ 7,061,685 -- -- -- --
Income per common and common
equivalent share - continuing operations
(Excluding $11.0 million in-process R&D charge) $ 1.34 -- -- -- --
Total assets $ 61,165,014 20,443,672 19,904,922 13,476,737 11,732,328
Long-term debt, excluding current installments $ 2,816,251 5,188,320 5,341,649 273,573 329,979
Total liabilities $ 10,838,326 10,392,752 14,855,674 7,611,400 6,885,973
Total stockholders' equity $ 50,326,688 10,050,920 5,049,248 5,865,337 4,846,355
Note: The Company has not declared any dividends during the periods presented.
No future dividend payments are expected.
On November 18, 1996, the Company completed the purchase of Bit 3. In
connection with the acquisition of Bit 3, the Company recorded an $11.0
million in-process R&D charge in the second quarter of fiscal 1997.
On August 19, 1996, the Company completed a pooling of interests
transaction with LDG, the results of which are included in fiscal 1997
on a prospective basis.
On April 28, 1995 the Company completed the purchase of GreenSpring.
On April 26, 1995 the Company sold its flight simulation business to
Camber Corporation, which is reported as discontinued operations in the
consolidated financial statements.
The Selected Financial Data are for continuing operations only. The
financial statements herein reflect the separation of continuing
operations from discontinued operations.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING
STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND
ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE COMPANY'S
PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW
PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SEC.
OVERVIEW
The Company is a leading manufacturer of standard bus embedded computer
components that perform a broad range of CPU, general purpose I/O, special
purpose I/O interface applications, and high performance interconnect
hardware and software. In 1988, the Company entered the embedded computer
market with the development of its avionics interface board, which is used in
ground-based avionics systems development and test applications. In 1992, the
Company added a second embedded computer product line with the acquisition of
BSI, a developer of telemetry interface circuit boards. In recent years, the
Company has discontinued certain of its operations. From its inception in
1986 until 1995, the Company provided flight simulators for a variety of
military aircraft to U.S. and foreign entities. In April 1995, following a
decline in the defense industry, the Company divested this business and
recorded a related charge of $2.3 million. Additionally, from 1987 through
the first half of fiscal 1996, the Company provided engineering services that
generated minimal revenue and profit. The Company subsequently exited this
business. The Company marketed a Judgmental Use of Force Training System,
used to train police and military personnel in the appropriate situational
use of force, from 1993 through fiscal year 1997, when the Company sold this
business as discussed in "Sale of Judgmental Use of Force Business" below.
Since 1995, the Company has focused its efforts and investments in the
embedded computer marketplace, expanding its product offerings and marketing
with the acquisition of three embedded computer companies as discussed in
"Recent Acquisitions" and "Public Stock Offering" below.
RECENT ACQUISITIONS
On April 28, 1995, the Company acquired GreenSpring, based in Menlo Park,
California, for $7.5 million. GreenSpring is engaged in the design,
development, manufacturing and marketing of general purpose I/O products
utilized in multiple segments of the standard bus embedded computer market.
The acquisition was accounted for as a purchase. The Company recorded $5.8
million in goodwill with $1.2 million expensed through June 30, 1997 and the
remainder expected to be expensed through June 30, 2005, the estimated
benefit period. Had the acquisition taken place on July 1, 1994, the
Company's reported net loss and net loss per common and common equivalent
share for fiscal 1995 would have been decreased by approximately $804,000 and
$0.28, respectively.
On August 19, 1996, the Company completed a pooling of interests transaction
with LDG based in Raleigh, North Carolina. LDG manufactures Intel
processor-based CPU boards for the standard bus embedded computer market. The
financial results of LDG are not included in the Company's Consolidated
Financial Statements for the periods prior to July 1, 1996 as historical
results did not have a material effect on combined consolidated results of
operations. For its fiscal year ended March 31, 1996, LDG recorded sales of
approximately $4.0 million and income from continuing operations of
approximately $103,000.
14
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On November 18, 1996, the Company completed the purchase of Bit 3. Bit 3 is a
Minneapolis-based manufacturer of computer networking and interconnection
hardware for many of the most widely used computer architecture standards in the
standard bus embedded computer market. Under the terms of the purchase
agreement dated October 8, 1996 (the "Acquisition Agreement") among the Company
and the two shareholders of Bit 3 (the "Sellers"), the Company acquired all of
the outstanding capital stock of Bit 3 for a total purchase price of $24.0
million paid or to be paid from the proceeds from the public stock offering (see
"Public Stock Offering") and cash flow from the Company's operations. Of this
total purchase price, $20.0 million was paid to the Sellers in cash upon closing
of the offering. Of the balance of $4.0 million, $1.0 million was paid to the
Sellers on July 1, 1997 and $3.0 million will be paid to the Sellers on July 1,
1998, pursuant to secured promissory notes according to the terms of the
Acquisition Agreement. The financial results of Bit 3 have been included in the
Company's Consolidated Financial Statements from November 18, 1996. In
connection with the acquisition of Bit 3, the Company recorded an $11.0 million
earnings charge based on an assessment by the Company, in conjunction with an
independent valuation firm, of purchased technology of Bit 3. The assessment
determined that $11.0 million of Bit 3's purchase price represented technology
that does not meet the accounting definitions of "completed technology", and
thus should be charged to earnings under generally accepted accounting
principles. In addition, as a result of the acquisition, the Company recorded
$10.0 million of goodwill which is being amortized over a ten year period.
The following proforma consolidated results of operations have been prepared as
if the acquisition of Bit 3 had occurred at July 1, 1995 and 1996.
(in thousands except per share amounts)
JUNE 30 JUNE 30
1997 1996
------- -------
Sales . . . . . . . . . . . . . . . . . . . . . . . . $ 58,949 45,519
Net income. . . . . . . . . . . . . . . . . . . . . . 1,626 385
Net income per common and common equivalent share . . 0.31 0.07
--------- ------
--------- ------
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
PUBLIC STOCK OFFERING
On November 18, 1996, the Company consummated a fully underwritten public
offering of 1,500,000 shares of the Company's common stock at a price of
$25.625 per share. In addition, certain selling shareholders sold an
additional 300,000 shares in the offering. The proceeds of the sale of the
300,000 additional shares did not benefit the Company; however, the Company
did receive the exercise price of $4.80 per share from the exercise of
warrants covering 100,000 of the shares. The offering was managed by an
underwriting group led by Cowen & Co. and SoundView Financial Group, Inc.
The net proceeds to the Company from the public stock offering were used to
fund the acquisition of Bit 3 (see "Recent Acquisitions" above), to repay
long-term debt, and the balance will be used for general working capital
requirements.
15
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALE OF JUDGMENTAL USE OF FORCE BUSINESS
On June 26, 1997, the Company sold substantially all of the assets of the
Company's Judgmental Use Of Force Business to Fats, Inc. for $2.0 million.
This business marketed a Judgmental Use Of Force Training System used to
train police and military personnel in appropriate situational use of force.
The results of operations of this business were immaterial to the total
operating results of the Company. The sale of property, plant, and equipment
(net) and inventory were recorded at $139,296 and $409,421, respectively.
The Company recorded estimated future costs associated with the sale of
$1,262,207 on the date of sale. The balance of $793,677 is included in other
current liabilities at June 30, 1997. The Company recognized a gain on the
sale of approximately $189,000.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
operating data as a percentage of sales:
YEAR ENDED JUNE 30
------------------------------------
1997 1996 1995
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of Sales 47.2 46.3 41.7
------ ------ ------
Gross Profit 52.8 53.7 58.3
Selling, general and administrative expense 19.4 20.1 24.0
Research and development expense 8.4 9.1 10.4
Acquired in-process research and development charge 20.8 -- --
Amortization of intangible assets 2.8 2.8 3.0
------ ------ ------
Operating income from continuing operations 1.4 21.7 20.9
Interest income (expense) (net) 0.1 (2.7) (1.2)
------ ------ ------
Income from continuing operations before income taxes 1.5 19.0 19.7
Income taxes 0.6 7.6 8.4
------ ------ ------
Income from continuing operations 0.9% 11.4% 11.3%
------ ------ ------
------ ------ ------
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES. In fiscal 1997, sales increased 68.7%, or $21.5 million, from $31.3
million in fiscal 1996, to $52.8 million. Sales contributed by LDG, which was
acquired effective August 9, 1996 and pooled effective July 1, 1996, and
sales contributed by Bit 3, which was acquired on November 18, 1996,
comprised 48.2% of this increase and 20.5% of this increase was attributable
to the Company's other product lines. The increases in sales for 1997
resulted from increased sales of existing products, introduction of new
products, and sales of new and existing products to new customers in all of
the Company's product lines. Sales of the Company's products are recorded at
the time of shipment. Throughout fiscal 1997, prices for the Company's
products remained firm.
16
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT. In fiscal 1997, gross profit increased 66.1%, or $11.1 million,
from $16.8 million in fiscal 1996, to $27.9 million, as a result of increased
sales volume. In fiscal 1997, gross margin decreased to 52.8% of sales from
53.7% in fiscal 1996, as a result of sales mix. In fiscal 1997, although gross
margins of each of the Company's product lines remained relatively constant with
fiscal 1996, total sales were comprised of a higher percentage of commercial
products (i.e. general purpose I/O, CPU, and interconnect products), which
generally yield lower gross margins than the Company's avionics and telemetry
products. Reductions in component material costs in each of the Company's
product lines partially offset the effect on gross margin of this shift in sales
mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1997, selling, general
and administrative expense increased 61.9%, or $3.9 million from $6.3 million in
fiscal 1996, to $10.2 million, largely because of the increased staffing
resulting from the LDG and Bit 3 acquisitions and subsequent augmentation of
those staffs in an effort to increase productivity and efficiency, as well as
additional staffing and promotional costs related to the Company's avionics,
telemetry, and I/O product lines. However, selling, general and administrative
expense decreased as a percentage of sales from 20.1% in fiscal 1996 to 19.4% in
fiscal 1997 as the increase in sales more than offset the increase in expense.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1997, research and development
expense increased by 57.1%, or $1.6 million, from $2.8 million in fiscal 1996,
to $4.4 million. The increase resulted primarily from the added expenditures
resulting from the LDG and Bit 3 acquisitions, as well as additional staffing
required for new product development in the avionics, telemetry, and I/O product
lines. However, research and development expense decreased as a percentage of
sales from 9.1% in fiscal 1996, to 8.4% in fiscal 1997, as a result of sales
increasing at a faster rate than the expense.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. In conjunction with the
acquisition of Bit 3 completed on November 18, 1996, the Company recorded an
$11.0 million earnings charge based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of Bit
3. The assessment determined that $11.0 million of Bit 3's purchase price
represented technology that did not meet the accounting definitions of completed
technology, and thus should be charged to earnings under generally accepted
accounting principles.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1997, amortization of intangible
assets increased 70.1%, or $620,000, from $884,000 in fiscal 1996, to $1.5
million as a result of goodwill amortization associated with the acquisition of
Bit 3.
INTEREST INCOME, NET OF INTEREST EXPENSE. In fiscal 1997, interest income, net
of interest expense, was $14,000 compared to interest expense, net of income, of
$830,000 in fiscal 1996. This change is attributable to the reduction of debt
incurred primarily to finance the acquisition of GreenSpring in April 1995, the
elimination of all bank debt effective November 22, 1996, by application of some
of the proceeds of the public stock offering, and earnings on surplus cash from
operations as well as earnings on cash received above the Company's immediate
requirements from the public offering, offset by imputed interest of $144,000 on
notes payable to the former owners of Bit 3.
INCOME TAXES. For fiscal 1997 and fiscal 1996 income taxes represent an
effective income tax rate of 40.0%.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. For fiscal 1997, net income
per common and common equivalent share was $0.09 compared to $0.97 for fiscal
1996. This reduction is due to the $11.0 million charge to earnings associated
with the acquisition of Bit 3 in November 1996 and due to more shares
outstanding. For fiscal 1997, net income per common and common equivalent
share excluding the charge to earnings would have been $1.34.
17
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
SALES. In fiscal 1996, sales increased 93.2%, or $15.1 million, from $16.2
million in fiscal 1995, to $31.3 million. This increase reflects a full year
of sales in fiscal 1996 for GreenSpring, whereas fiscal 1995 includes only
two months of GreenSpring sales. As a result, $11.1 million in GreenSpring
sales were reflected in fiscal 1996 compared to $1.5 million in fiscal 1995.
In addition, sales of the Company's avionics and telemetry product lines
increased by 37.5%, or $5.5 million, in fiscal 1996. The increases in sales
in fiscal 1996 reflected increases in unit volume, new product introductions
and the addition of new customers in all of the Company's product lines.
Sales of the Company's products are recorded at the time of shipment.
Throughout fiscal 1996, prices for the Company's products remained firm.
GROSS PROFIT. In fiscal 1996, gross profit increased 77.8%, or $7.4 million,
from $9.5 million in fiscal 1995, to $16.8 million, as a result of increased
sales volume. In fiscal 1996, gross margin decreased to 53.7% of sales from
58.3% in fiscal 1995 as a result of a change in sales mix. While gross
margins on the Company's avionics and telemetry products remained relatively
constant in fiscal 1996, fiscal 1996 sales were comprised of a higher
proportion of GreenSpring products, which generally yield lower gross margins
than sales of the Company's other products. Reductions in component material
costs in each of the Company's product lines partially offset the effect on
gross margin of this shift in sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1996, selling,
general and administrative expense increased 61.7%, or $2.4 million, from
$3.9 million in fiscal 1995, to $6.3 million. The increase resulted primarily
from the addition of certain expenses of GreenSpring's operations, and
additional staffing and promotional expenses related to the Company's
avionics and telemetry product lines. However, selling, general and
administrative expense decreased as a percentage of sales from 24.0% in
fiscal 1995 to 20.1% in fiscal 1996, primarily due to a more rapid increase
in sales than in the expense.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1996, research and development
expense increased by 68.8%, or $1.2 million, from $1.7 million in fiscal
1995, to $2.9 million, reflecting the costs of GreenSpring's operations and
the additional staffing required for new product development in the avionics
product line. However, research and development expense decreased as a
percentage of sales from 10.4% in fiscal 1995 to 9.1% in fiscal 1996,
primarily due to a more rapid increase in sales than in the expense.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1996, amortization of
intangible assets increased 79.3%, or $391,000, from $493,000 in fiscal 1995,
to $884,000, due to the increase in intangible assets related to the
acquisition of GreenSpring.
INTEREST EXPENSE, NET OF INTEREST INCOME. In fiscal 1996, interest expense,
net of interest income increased by 342%, or $642,000, from $188,000 in
fiscal 1995, to $830,000, as a result of debt assumed late in fiscal 1995 as
part of the acquisition of GreenSpring.
INCOME TAXES. In fiscal 1996, tax expense increased 75.9%, or $1.0 million,
from $1.4 million in fiscal 1995, to $2.4 million, representing effective
income tax rates of 40% and 42%, respectively. The lower effective tax rate
in fiscal 1996 resulted primarily from the use of a foreign sales
corporation.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. For fiscal 1996, net income
per common and common equivalent share from continuing operations was $.97
compared to $.65 from continuing operations for fiscal 1995. For fiscal 1995,
net income per common and common equivalent share from discontinued operations,
resulting from the sale of the Company's simulation business to Camber
Corporation in April 1995, was $(1.10).
18
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company uses a combination of the sale of equity securities, internally
generated funds and bank borrowings to finance its acquisitions, working capital
requirements, capital expenses and operations.
Cash totaled $21.7 million at June 30, 1997, an increase of $20.6 million
from June 30, 1996. This increase is a result of cash flow provided by
operations, as well as cash received above immediate requirements, from the
Company's public stock offering effective on November 18, 1996 and closed
on November 22, 1996 (see "Public Stock Offering"). Net cash provided by
operating activities for the year ended June 30, 1997 was $10.2 million.
Increased sales volume and demand for semiconductor parts during the year
ended June 30, 1997 caused the Company to increase accounts receivable and
inventory. Liabilities were in line with the current level of business. In
addition, the exercise and subsequent sale of stock related to stock option
plans reduced the Company's current tax liability. Net cash used in
investing activities for the year ended June 30, 1997 was $20.0 million.
Proceeds of $2.0 million from the sale of the Judgmental Use of Force
Business (see "Sale of Judgmental Use of Force Business") offset $20.5
million used for the acquisition of Bit 3 (see "Recent Acquisitions") and
$1.5 million used for the purchase of equipment . Net cash provided by
financing activities for the year ended June 30, 1997 was $30.3 million. Net
proceeds from the sale of common stock (see "Public Stock Offering") were
$35.5 million, with additional cash received from the exercise of stock
options and warrants of $1.9 million. A portion of these funds, $6.9
million, was used in November 1996 to pay down all existing debt, including
interest due, with NationsBank of Texas, N.A. ("NationsBank") incurred in
April 1995 primarily to finance the acquisition of GreenSpring.
In fiscal years ended June 30, 1996 and June 30, 1995, the Company generated
$3.4 million and $1.1 million, respectively, of positive cash flow from
operating activities. In fiscal 1996, the positive cash flow from operating
activities was partially used to pay down bank debt, to purchase equipment
and to acquire the IndustryPack-Registered Trademark--compatible product line
from Wavetron Microsystems, Inc. in January 1996. In fiscal 1995, the
positive cash flow from operating activities combined with bank borrowings
provided the Company sufficient funds to acquire GreenSpring in April 1995,
as well as to purchase required equipment.
On April 26, 1996 and November 15, 1996, the Company amended its bank financing
agreement with NationsBank, originally entered into in April 1995, to provide
the Company with a $6.8 million term loan and a $2.5 million revolving line of
credit. The term loan was completely paid down from the proceeds of the public
stock offering. The revolving line of credit matures on October 30, 1997. For
the entire year ended June 30, 1997, there were no borrowings drawn on the
revolving line of credit. The interest rate of the revolving line of credit is
NationsBank's prime rate or LIBOR plus 2.25% in 30, 60, or 90 day options. The
amended financing agreement provides for a security interest by NationsBank in
the Company's receivables, inventories, and equipment, except those of LDG and
Bit 3, and imposes certain performance ratios on the Company. The amendment
dated November 15, 1996 excludes the $11.0 million earnings charge associated
with the acquisition of Bit 3 from the performance ratios. These ratios include
a current maturities ratio which requires that the Company's net earnings plus
depreciation and amortization expense for the preceding four quarters from time
of measurement compared to the Company's current portion of its long-term debt
will not be less than a ratio of 2 to 1; a senior funded debt to EBITDA ratio
which requires that the Company's total debt evidenced by promissory notes, loan
agreements, bonds or similar instruments, but excluding subordinated debt, will
not be greater than a ratio of 1.5 to l when compared to the Company's profit
before tax plus interest, depreciation, and amortization expense for the
preceding four quarters from time of measurement; and a fixed charge coverage
ratio requiring that the Company's income before tax plus interest expense and
operating lease expense for the preceding four quarters from time of measurement
will not be less than a ratio of 2 to l when compared to the Company's interest
expense plus operating lease expense for the same preceding four quarters. The
Company is also prohibited from disposing of or acquiring certain assets and
businesses without the consent of the lender. At June 30, 1997, the Company
was in compliance with all of the covenants of the amended financing agreement.
19
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Management believes that financial resources, including its internally generated
funds, available bank borrowings and the net proceeds from the public stock
offering, will be sufficient to finance the Company's current operations,
capital expenditures and certain acquisitions, for the next twelve months.
For the three most recent fiscal years, there has been no impact from inflation
or changing prices to the Company's sales or income from continuing operations.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share." SFAS
128 establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS 128 replaces the currently required presentation
of primary EPS with a presentation of basic EPS, requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures, and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997, and
early application is not permitted. Management believes the application of
SFAS 128 will not have a material effect on the Company's future financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. Specifically, SFAS 130 requires that all items that meet the
definition of components of comprehensive income be reported in a financial
statement for the period in which they are recognized. However, SFAS 130
does not specify when to recognize or how to measure the items that make up
comprehensive income. SFAS 130 is effective for fiscal years beginning after
December 15, 1997, and early application is permitted. Management believes
the application of SFAS 130 will not have a material effect on the Company's
future financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Financial Reporting for Segments of Business Enterprise." SFAS 131
supersedes the "industry segment" concept of SFAS 14 with a "management
approach" concept as the basis for identifying reportable segments. SFAS 131
is effective for fiscal years beginning after December 15, 1997, and early
application is permitted. Management believes the application of SFAS 131
will not have a material effect on the Company's future financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SBS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SBS
Technologies, Inc. and subsidiaries as of June 30, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
Albuquerque, New Mexico
August 6, 1997
21
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
June 30
---------------------------
ASSETS 1997 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 21,661,671 1,130,030
Receivables, net (notes 5, 6 and 7) 9,244,269 6,421,224
Inventories (notes 6 and 7) 7,705,470 5,160,962
Deferred income taxes (note 8) 1,327,000 317,100
Prepaid expenses 232,283 303,846
Other current assets 128,560 104,249
------------ ------------
Total current assets 40,299,253 13,437,411
------------ ------------
Property and equipment, at cost (notes 6 and 7) 4,729,259 2,389,289
Less accumulated depreciation 2,247,408 1,041,719
------------ ------------
Net property and equipment 2,481,851 1,347,570
------------ ------------
Intangible assets, net 14,099,254 5,571,135
Deferred income taxes (note 8) 4,253,000 55,900
Other assets 31,656 31,656
------------ ------------
Total assets $ 61,165,014 20,443,672
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt (note 7) $ 13,316 1,458,976
Notes payable to related parties (note 7) 1,000,000 -
Accounts payable 1,541,846 1,243,748
Accrued representative commissions 449,699 353,278
Accrued salaries 1,868,623 1,077,121
Accrued compensated absences 560,061 340,342
Income taxes (note 8) 1,095,162 223,381
Other current liabilities (note 3) 1,493,368 507,586
------------ ------------
Total current liabilities 8,022,075 5,204,432
Long-term liabilities:
Long-term debt, excluding current installments (note 7) - 5,188,320
Notes payable to related parties (note 7) 2,816,251 -
------------ ------------
Total long-term liabilities 2,816,251 5,188,320
------------ ------------
Total liabilities 10,838,326 10,392,752
------------ ------------
Stockholders' equity:
Common stock, no par value; 30,000,000 shares authorized,
5,405,378 and 3,178,133 issued and outstanding
at June 30, 1997 and 1996, respectively 43,889,754 4,690,786
Common stock warrants (note 10) 111,286 180,000
Retained earnings 6,325,648 5,180,134
------------ ------------
Total stockholders' equity 50,326,688 10,050,920
------------ ------------
Total liabilities and stockholders' equity $ 61,165,014 20,443,672
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
22
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Year Ended June 30
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Sales $ 52,814,568 31,331,793 16,217,648
Cost of sales 24,910,271 14,510,106 6,756,560
------------ ------------ ------------
Gross Profit 27,904,297 16,821,687 9,461,088
Selling, general and administrative expense 10,223,374 6,292,954 3,891,408
Research and development expense 4,422,152 2,846,300 1,686,590
Acquired in-process research and
development charge 11,000,000 - -
Amortization of intangible assets 1,504,524 884,438 493,409
------------ ------------ ------------
Operating income from continuing operations 754,247 6,797,995 3,389,681
------------ ------------ ------------
Interest income 523,115 9,210 3,315
Interest expense (508,677) (839,028) (191,120)
------------ ------------ ------------
14,438 (829,818) (187,805)
------------ ------------ ------------
Income from continuing operations
before income taxes 768,685 5,968,177 3,201,876
Income taxes (note 8) 307,000 2,387,270 1,357,000
------------ ------------ ------------
Income from continuing operations 461,685 3,580,907 1,844,876
Discontinued operations (net of tax benefit
of $1,160,000) - - (1,781,235)
Loss on disposal of discontinued operations
(net of tax benefit of $896,000) - - (1,354,000)
------------ ------------ ------------
Loss from discontinued operations - - (3,135,235)
------------ ------------ ------------
Net income (loss) $ 461,685 3,580,907 (1,290,359)
------------ ------------ ------------
------------ ------------ ------------
Income (loss) per common and
common equivalent share:
Continuing operations $ 0.09 0.97 0.65
Discontinued operations 0.00 0.00 (1.10)
------------ ------------ ------------
Net income (loss) per common and
common equivalent share $ 0.09 0.97 (0.45)
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements
23
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Common Total
stock Common stock-
------------------------ stock Retained holders'
Shares Amount warrants earnings equity
--------- ------------ --------- ----------- ------------
Balance at June 30, 1994 2,810,426 $ 2,975,751 $ - $ 2,889,586 $ 5,865,337
Exercise of stock options 8,228 18,020 - - 18,020
Common stock issued under
employee stock bonus plan 75,000 381,250 - - 381,250
Warrants issued for business
acquisition (note 2) - - 75,000 - 75,000
Net loss - - - (1,290,359) (1,290,359)
--------- ------------ --------- ----------- ------------
Balance at June 30, 1995 2,893,654 3,375,021 75,000 1,599,227 5,049,248
Exercise of stock options and warrants 284,479 1,315,765 (20,000) - 1,295,765
Warrants issued for business
acquisition (note 2) - - 125,000 - 125,000
Net income - - - 3,580,907 3,580,907
--------- ------------ --------- ----------- ------------
Balance at June 30, 1996 3,178,133 4,690,786 180,000 5,180,134 10,050,920
Exercise of stock options and warrants 527,245 1,960,780 (68,714) - 1,892,066
Income tax benefit from stock
options exercised - 1,645,740 - - 1,645,740
Acquisition of Logical Design
Group Inc. (note 2) 200,000 68,000 - 683,829 751,829
Common stock issued in
public offering 1,500,000 35,524,448 - - 35,524,448
Net income - - - 461,685 461,685
--------- ------------ --------- ----------- ------------
Balance at June 30, 1997 5,405,378 $ 43,889,754 $ 111,286 $ 6,325,648 $ 50,326,688
--------- ------------ --------- ----------- ------------
--------- ------------ --------- ----------- ------------
See accompanying notes to consolidated financial statements
24
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Year Ended June 30
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 461,685 3,580,907 (1,290,359)
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 705,160 316,494 384,057
Amortization of intangible assets 1,504,524 884,438 536,328
Bad debt expense 223,004 56,933 -
Loss (gain) on disposition of assets (189,579) 44,218 -
Imputed interest 144,072 - -
Acquired in-process research and development charge 11,000,000 - -
Deferred income taxes (5,141,037) (13,000) (360,000)
Loss from sale of discontinued operations - - 2,250,000
Stock issued under employee stock bonus plan - - 399,270
Changes in assets and liabilities:
Receivables (888,824) 673,406 3,314,458
Inventories (541,340) (1,192,938) (1,101,607)
Prepaids and other assets 260,367 144,862 (476,828)
Accounts payable (143,036) (635,049) 1,172,798
Accrued representative commissions 79,181 27,810 218,669
Accrued salaries 683,403 562,603 277,433
Accrued compensated absences 65,584 58,270 (155,833)
Income taxes 2,519,073 (127,532) (1,500,209)
Other current liabilities (555,158) (943,359) (2,559,768)
------------ ----------- -------------
Net adjustments 9,725,394 (142,844) 2,398,768
------------ ----------- -------------
Net cash provided by operating activities 10,187,079 3,438,063 1,108,409
------------ ----------- -------------
Cash flows from investing activities:
Business acquisitions (note 2) (20,511,319) (317,746) (5,196,815)
Acquisition of property and equipment (1,451,643) (764,191) (426,769)
Proceeds from businesses divested
and asset sales (note 3) 2,000,000 - -
Proceeds from sale of discontinued
operations (note 12) - - 400,300
------------ ----------- -------------
Net cash used by investing activities (19,962,962) (1,081,937) (5,223,284)
------------ ----------- -------------
25
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -------------------------------------------------------------------------------
Year Ended June 30
-----------------------------------------
1997 1996 1995
------------ ------------- ----------
Cash flows from financing activities:
Proceeds from notes payable to bank - 4,095,000 6,950,437
Payments on notes payable to bank - (4,717,383) (7,690,517)
Proceeds from long-term borrowings - - 7,000,000
Payments on long-term borrowings and capitalized leases (7,108,990) (3,332,390) (1,344,567)
Net proceeds from refinancing long-term borrowings - 549,108 -
Proceeds from exercise of stock options and warrants 1,892,066 1,295,765 -
Net proceeds from sale of common stock 35,524,448 - -
------------ ------------ -----------
Net cash provided (used) by financing activities 30,307,524 (2,109,900) 4,915,353
------------ ------------ -----------
Net increase in cash and cash equivalents 20,531,641 246,226 800,478
Cash and cash equivalents at beginning of period 1,130,030 883,804 83,326
------------ ------------ -----------
Cash and cash equivalents at end of period $ 21,661,671 1,130,030 883,804
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosure of cash flow information:
Interest paid $ 275,415 875,736 497,002
Income taxes paid 2,922,519 2,431,749 700,000
Noncash financing and investing activities:
Acquisition of GreenSpring Computers, Inc. (note 2):
Common stock warrants issued $ - 125,000 75,000
Long-term debt issued - - 1,000,000
------------ ------------ -----------
$ - 125,000 1,075,000
------------ ------------ -----------
------------ ------------ -----------
Assets acquired through capital leases $ 70,733 - -
Income tax benefit from stock options exercised $ 1,645,740 - -
------------ ------------ -----------
------------ ------------ -----------
See accompanying notes to consolidated financial statements
26
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The consolidated financial statements include the accounts of SBS
Technologies, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
SBS Technologies, Inc. and subsidiaries (the "Company") is a leading
manufacturer of standard bus embedded computer components that perform
a broad range of central processing unit, general-purpose input/output
and special-purpose input/output interface applications, and high
performance interconnect hardware and software. The Company has
operations in New Mexico, Minnesota, North Carolina and California.
(b) SALES RECOGNITION
Sales are recognized when goods are shipped to the customer.
(c) CASH AND CASH EQUIVALENTS
Temporary investments with original maturities of ninety days or less
are classified as cash and cash equivalents.
(d) INVENTORIES
Inventories are valued at average cost which does not exceed market.
JUNE 30
------------------------
1997 1996
------------ ---------
Raw materials $ 3,211,502 2,254,788
Work in process 2,953,140 1,546,800
Finished goods 1,540,828 1,359,374
------------ ---------
$ 7,705,470 5,160,962
------------ ---------
------------ ---------
(e) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30
-------------------------
1997 1996
------------ ---------
Computers $ 1,862,814 1,194,888
Software 946,608 411,839
Furniture and equipment 1,919,837 782,562
------------ ---------
$ 4,729,259 2,389,289
------------ ---------
------------ ---------
Depreciation of property and equipment is provided over the estimated
useful lives (three to twelve years) of the respective assets using
straight-line and accelerated methods.
27
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following:
JUNE 30
-------------------------
1997 1996
------------ ---------
Noncompete covenants $ 1,540,000 1,540,000
Goodwill 16,584,314 6,551,671
------------ ---------
18,124,314 8,091,671
Less accumulated amortization (4,025,060) (2,520,536)
------------ ---------
$ 14,099,254 5,571,135
------------ ---------
------------ ---------
Noncompete covenants are amortized over the life of the covenants
using the straight-line method. Goodwill is amortized over the
estimated useful lives (three to ten years) of the respective assets
using the straight-line method. The Company assesses the
recoverability of goodwill by determining whether the amortization of
the goodwill balance over its remaining life can be recovered through
projected undiscounted future results. Impairment would be
recognized in operating results if a permanent diminution in value
were to occur.
(g) INCOME TAXES
The Company 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 affect on
deferred taxes of a change in tax rates is recognized in income in the
period that includes the change.
(h) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are based on the
weighted average shares of common stock and, if dilutive, common
equivalent shares (options and warrants) outstanding during the
period.
The numbers of shares used in the earnings per share computations are
as follows:
YEAR ENDED JUNE 30
------------------------------------
1997 1996 1995
--------- --------- ----------
Weighted average shares of common
stock outstanding during the year 4,535,746 3,017,575 2,810,426
Common equivalent shares - assumed
exercise of options and warrants 744,475 1,377,923 48,514
Shares assumed to be repurchased with
proceeds from exercise subject to 20% of
average shares outstanding maximum - (603,515) -
--------- --------- ---------
Total common and common
equivalent shares 5,280,221 3,791,983 2,858,940
--------- --------- ---------
--------- --------- ---------
28
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(i) FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Values of Financial
Instruments," requires the fair value of financial instruments be
disclosed. The Company's financial instruments are accounts
receivable, accounts payable, and long-term variable rate debt.
The carrying amounts of accounts receivable, accounts payable,
and long-term variable rate debt, because of their nature,
approximate fair value.
(j) RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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 OPTION PLANS
Prior to July 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On July 1, 1996, the
Company adopted SFAS 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB Opinion 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants
made in 1996 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion 25 and provide the pro
forma disclosure provisions of SFAS 123.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on July 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
29
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(n) NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings Per Share." SFAS 128 establishes new standards for
computing and presenting earnings per share ("EPS"). Specifically,
SFAS 128 replaces the currently required presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities
with complex capital structures, and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the
financial statements issued for periods ending after December 15,
1997, and early application is not permitted. Management believes the
application of SFAS 128 will not have a material effect on the
Company's future financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. Specifically, SFAS 130 requires that
all items that meet the definition of components of comprehensive
income be reported in a financial statement for the period in which
they are recognized. However, SFAS 130 does not specify when to
recognize or how to measure the items that make up comprehensive
income. SFAS 130 is effective for fiscal years beginning after
December 15, 1997, and early application is permitted. Management
believes the application of SFAS 130 will not have a material effect
on the Company's future financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 supersedes the "industry segment" concept of SFAS 14 with a
"management approach" concept as the basis for identifying reportable
segments. SFAS 131 is effective for fiscal years beginning after
December 15, 1997, and early application is permitted. Management
believes the application of SFAS 131 will not have a material effect
on the Company's future financial statements.
(2) BUSINESS ACQUISITIONS
On November 18, 1996, the Company completed the purchase of Bit 3.
Bit 3 is a Minneapolis-based developer and manufacturer of high
performance bus interconnect hardware and software products. The
Company acquired all of the outstanding capital stock of Bit 3 for a
total purchase price of $24.0 million. The initial cash payment to
the two shareholders of Bit 3 (the "Sellers") of $20.0 million was
funded by an offering of SBS common stock. Subsequent cash payments
of $1.0 million and $3.0 million will be paid to the Sellers on July
1, 1997, and July 1, 1998, respectively. In connection with the
acquisition, the Company made an assessment, in conjunction with an
independent valuation firm, of purchased technology of Bit 3. The
assessment determined that $11.0 million of Bit 3's purchase price
represented technology that does not meet the accounting definitions
of "completed technology," and thus was charged to earnings under
generally accepted accounting principles. The acquisition was
accounted for using the purchase method of accounting, and
accordingly, Bit 3's results of operations have been included in the
consolidated financial statements since the date of acquisition.
Goodwill is being amortized over 10 years.
30
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets acquired and liabilities assumed in the acquisition are as follows:
Cash and equivalents $ 22,138
Accounts receivable 1,715,946
Inventory 1,591,448
Prepaid and other assets 207,086
Property and equipment (net) 200,570
Deferred tax asset 39,463
Goodwill 10,032,643
Accounts payable (184,150)
Accrued salaries (88,099)
Accrued compensated absences (87,700)
Other accrued liabilities (242,358)
-----------
13,206,987
In-process research and development 11,000,000
-----------
$24,206,987
-----------
-----------
The purchase price was paid as follows:
Cash $20,000,000
Notes payable issued 4,000,000
Discount of notes payable (327,821)
Acquisition costs 534,808
-----------
$24,206,987
-----------
-----------
The following proforma consolidated results of operations have been prepared as
if the acquisition of Bit 3 had occurred at July 1, 1995, and 1996.
(in thousands except per share amounts)
June 30 June 30
1997 1996
-------- -------
Sales . . . . . . . . . . . . . . . . . $ 58,949 45,519
Net income . . . . . . . . . . . . . . 1,626 385
Net income per common and common
equivalent share . . . . . . . . . . 0.31 0.07
-------- -------
-------- -------
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor
is it intended to be a projection of future results.
31
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 19, 1996, the Company acquired LDG, a Raleigh, North Carolina-based
designer and manufacturer of Intel processor-based CPU boards for the
standard bus embedded computer market. The acquisition qualified as a
pooling of interests for accounting purposes and constituted a tax-free
reorganization for federal income tax purposes. Under the terms of the
agreement, LDG shareholders exchanged all outstanding shares of LDG stock for
200,000 shares of the Company's stock.
Assets, liabilities, and equity assumed in the acquisition are as follows:
Cash and equivalents $ 1,351
Accounts receivable 441,279
Inventory 821,141
Deferred income tax 26,500
Prepaid and other assets 6,029
Property and equipment 864,610
Accumulated depreciation (609,322)
Income taxes 1,552
Accounts payable (256,984)
Accrued representative commissions (17,240)
Accrued salaries (20,000)
Accrued compensated absences (66,435)
Debt (404,277)
Other current liabilities (36,375)
Common stock (68,000)
Retained earnings (683,829)
The financial position and results of operations of the Company and
LDG are combined in fiscal 1997 on a prospective basis. LDG's
historical results do not have a material effect on combined financial
position or results of operations.
On January 10, 1996, the Company's wholly owned subsidiary,
GreenSpring, completed an asset purchase of the
IndustryPack-Registered Trademark--compatible product line from
Wavetron Microsystems, Inc. The purchase price, including
capitalizable expenses, was $236,626. In conjunction with the
acquisition, goodwill of $172,559 was recorded and is being amortized
over five years. The reported net income and net income per common
and common equivalent share for the reported periods would not have
been materially different from that reported had the acquisition taken
place at the beginning of the respective fiscal year.
On April 28, 1995, the Company acquired GreenSpring, a corporation
based in Menlo Park, California, for $7,450,000. GreenSpring is
engaged in the design, development, marketing and manufacturing of
general purpose I/O products utilized in multiple segments of the
standard bus embedded computer market. The acquisition was accounted
for using the purchase method of accounting, and goodwill is being
amortized over 10 years.
32
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets acquired and liabilities assumed in the acquisition are as follows:
Cash and equivalents $ 1,053,185
Accounts receivable 1,725,641
Inventory 1,216,904
Other assets 39,908
Property and equipment 129,695
Goodwill and other intangible assets 5,752,440
Accounts payable (2,467,773)
-----------
$ 7,450,000
-----------
-----------
The purchase price was paid as follows:
Notes payable issued $ 1,000,000
Warrants issued 200,000
Cash 6,250,000
-----------
$ 7,450,000
-----------
-----------
Had the acquisition taken place on July 1, 1994, the reported net
loss and net loss per common and common equivalent share for the year
ended June 30, 1995 would have been decreased by approximately
$804,000 and $0.28, respectively.
(3) SALE OF JUDGMENTAL USE OF FORCE BUSINESS
On June 26, 1997, the Company sold substantially all of the assets of
the Company's Judgmental Use Of Force Business to Fats, Inc., for $2.0
million. This business marketed a Judgmental Use Of Force Training
System used to train police and military personnel in appropriate
situational use of force. The results of operations of this business
were immaterial to the total operating results of the Company. The
sale of property, plant, and equipment (net) and inventory were
recorded at $139,296 and $409,421, respectively. The Company recorded
estimated future costs associated with the sale of $1,262,207 on the
date of sale. The balance of $793,677 is included in other current
liabilities at June 30, 1997. The Company recognized a gain on the
sale of approximately $189,000.
(4) SIGNIFICANT CUSTOMERS AND FOREIGN SALES
In fiscal 1997, 1996 and 1995, no one customer exceeded 10% of the
Company's sales. All of the Company's operations are conducted in the
United States. International sales are denominated in U.S. dollars.
During the years ended June 30, 1997, 1996 and 1995, export sales from
continuing operations, with minimal attendant risk, all of which were to
unaffiliated customers, were approximately $8.6 million, $5.1 million and
$1.6 million, respectively. Export sales from discontinued operations in
1995 were $2.4 million. Export sales from continuing operations were made
primarily in the following foreign markets:
33
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 1996 1995
-------------- ----------- ----------- -----------
Sales % Sales % Sales %
Foreign Market (000's) (000's) (000's)
-------------- ----------- ----------- -----------
United Kingdom $1,100 12.8 1,000 19.6 -- --
Germany 800 9.3 800 15.7 -- --
Korea 1,000 11.6 500 9.8 -- --
France 700 8.1 400 7.8 600 37.5
Japan 1,300 15.1 400 7.8 -- --
Canada 1,400 16.3 600 11.8 600 37.5
Belgium 50 0.6 300 5.9 -- --
All Others 2,250 26.2 1,100 21.6 400 25.0
------ ----- ----- ----- ------ -----
Total $8,600 100.0 5,100 100.0 1,600 100.0
------ ----- ----- ----- ------ -----
------ ----- ----- ----- ------ -----
Sales from
continuing operations $52,800 16.3 31,300 16.3 16,200 9.9
------- ---- ------ ---- ------ -----
------- ---- ------ ---- ------ -----
(5) RECEIVABLES
Receivables, net consisted of the following:
JUNE 30
--------------------------
1997 1996
----------- ---------
Accounts receivable $ 9,033,935 5,527,620
Contract receivables:
Amounts billed 268,913 721,803
Recoverable costs and accrued profit
on progress completed - not billed 242,416 242,038
----------- ---------
511,329 963,841
9,545,264 6,491,461
----------- ---------
Less: allowance for doubtful accounts (300,995) (70,237)
----------- ---------
$ 9,244,269 6,421,224
----------- ---------
----------- ---------
Recoverable costs and accrued profit not billed are comprised
principally of amounts of revenue recognized on contracts for which
billings had not been presented to the contract owners since the
amounts were not billable at the balance sheet date, because progress
billings are restricted by the contract to a percentage of costs
incurred until the contracts are closed.
34
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCING
The Company has an available bank line of credit of $2,500,000, which
matures October 1997. Interest is payable monthly at LIBOR plus 2.25
percent or the bank's prime lending rate. The bank's prime lending
rate at June 30, 1997 was 8.50 percent. During the year ended June
30, 1996, the Company refinanced through long-term borrowings
$2,337,537 previously outstanding on the line of credit. The Company
had no amounts drawn on this line of credit at June 30, 1997. The
line of credit provides for security interests in the Company's
receivables, inventories and equipment, except those of LDG and Bit 3.
Management anticipates that the line of credit will be renewed at
maturity in the normal course of business.
(7) LONG-TERM DEBT
Long-term debt consisted of the following:
JUNE 30
----------------------
1997 1996
---------- ----------
Note payable to bank, $5,000,000 at LIBOR plus
2.5% (8% at June 30, 1996), $1,525,000 at prime
plus .25% (8.5% at June 30, 1996), secured by
receivables, inventories and equipment,
due in monthly installments of $112,500 $ -- 6,525,000
Notes payable to former shareholders of Bit 3,
including imputed interest at 6.46% through
June 30, 1997, secured by all Company assets,
due July 1, 1998 2,816,251 --
Notes payable to former shareholders of Bit 3,
including imputed interest at 6.46% through
June 30, 1997, secured by all Company assets,
due July 1, 1997 1,000,000 --
Note payable, non-interest-bearing,
payable in monthly installments through
August 1997 13,316 113,316
8.24% note due in monthly installments of $2,215
including interest through August 1996 -- 4,385
8.14% note due in monthly installments of
$2,321 including interest through
August 1996 -- 4,595
--------- ---------
3,829,567 6,647,296
Less current installments (1,013,316) (1,458,976)
--------- ---------
$2,816,251 5,188,320
--------- ---------
--------- ---------
Principal maturities of long-term debt as of June 30, 1997 are as follows:
1998 $1,013,316
1999 2,816,251
----------
$3,829,567
----------
----------
35
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
YEAR ENDED JUNE 30
----------------------------------
1997 1996 1995
------------ --------- ----------
Current:
U.S. Federal $ 4,432,000 1,916,770 1,211,000
State 1,082,000 483,500 352,000
Deferred:
U.S. Federal (4,204,000) (11,000) (145,000)
State (1,003,000) (2,000) (61,000)
Income tax before
discontinued operations 307,000 2,387,270 1,357,000
Income tax expense (benefit) from:
Discontinued operations -- -- (1,160,000)
Loss on disposal -- -- (896,000)
------------ --------- ----------
Total income tax expense $ 307,000 2,387,270 (699,000)
------------ --------- ----------
------------ --------- ----------
Income tax expense was provided for at an effective rate of 40.0,
40.0 and 42.4 percent in 1997, 1996 and 1995, respectively. The
actual tax expense differs from the "expected" tax expense (computed
by applying the U.S. Federal corporate tax rate of 34 percent to
income from continuing operations before income taxes) as follows:
YEAR ENDED JUNE 30
----------------------------------
1997 1996 1995
------------ --------- ----------
Computed "expected" tax expense $ 261,350 2,029,180 1,089,000
State income tax, net of federal income
tax benefit 51,050 319,112 212,000
Goodwill amortization -- 21,508 66,000
Nondeductible merger expenses 62,800 -- --
Dividend from foreign sales corporation (102,000) (45,000) --
Other 33,800 62,470 (10,000)
----------- --------- ---------
$ 307,000 2,387,270 1,357,000
----------- --------- ---------
----------- --------- ---------
36
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The significant components of deferred income tax assets are as follows:
YEAR ENDED JUNE 30
-------------------------
1997 1996
---------- ----------
Vacation and severance accruals $ 179,200 136,136
Inventory capitalization 519,100 198,792
Acquired in-process R&D charge 4,217,700 -
Accrued expenses 277,900 -
Amortization 234,900 -
Allowance for uncollectible accounts 120,400 -
Other 30,800 38,072
---------- -------
$5,580,000 373,000
---------- -------
---------- -------
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based on the
Company's 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 the
Company's future taxable income will be sufficient to realize the
benefit of the deferred tax assets existing at June 30, 1997.
Accordingly, management has no allowance for deferred tax assets at
June 30, 1997 or 1996.
(9) LEASES
The Company leases its main facilities in Albuquerque, New Mexico,
Carlsbad, California, Menlo Park, California, Minneapolis, Minnesota,
and Raleigh, North Carolina, under noncancelable operating leases
which expire at various dates through the year 2000. The Company also
leases various items of equipment under noncancelable operating leases
which expire at various dates through the year 2002.
BUILDINGS EQUIPMENT
YEAR ENDING MINIMUM MINIMUM
JUNE 30 LEASE PAYMENTS LEASE PAYMENTS TOTAL
----------- -------------- -------------- -----------
1998 $ 754,900 48,540 803,440
1999 650,605 48,540 699,145
2000 635,754 48,540 684,294
2001 108,789 14,087 122,876
2002 100,546 -- 100,546
-------------- ------------- -----------
$2,250,594 159,707 2,410,301
-------------- ------------- -----------
-------------- ------------- -----------
Total rental expense for operating leases for the years ended June
30, 1997, 1996, and 1995 was $886,965, $521,885 and $511,150,
respectively.
37
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTION PLANS AND WARRANTS
(a) 1992, 1993, 1995, 1996 AND 1997 INCENTIVE STOCK OPTION PLANS
The Company has 1992, 1993, 1995, 1996 and 1997 Incentive Stock Option
Plans ("Plans") whereby a total of 1,400,000 shares of its common
stock are reserved for discretionary grant of options by the Board to
officers and employees who are not directors. The Plans all terminate
ten years after inception, from the years 2001 to 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 option plan generally permits 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 at the date of grant. Under the Code, holders of more
than 10 percent of the Company's 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 on the date of grant. Options
granted under the plan may be exercised as provided by the
administering committee or Board of Directors of the Company. All of
these options are exercisable at the quoted market value of the
Company's stock in effect on the respective dates of the grants.
(b) 1993 DIRECTOR AND OFFICER STOCK OPTION PLAN
The Company has a 1993 Director and Officer Stock Option
Plan whereby a total of 2,000,000 shares of its common stock
are reserved for grant of options to all Directors of the
Company who are not employees and all Executive Officers of
the Company. Directors who are not employees of the Company
receive automatic grants on the anniversary date of their
service as a Director of the Company. Executive Officers
receive grants subject to the discretion of the Board. All
options are granted at a price equal to fair market value.
The options become exercisable in one to three years 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. The Plan provides
for the grant of options to eligible employees on January 21,
1996, 1997 and 1998. Individual grants are issued for a
percentage of the employee's annual base salary, (as determined
each year by the Board of Directors, up to 10%), divided by the
fair market value of one share of the Company's stock on the date
of grant. 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.
38
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) WARRANTS
In connection with the acquisition of GreenSpring, warrants to
purchase 400,000 shares of common stock at $4.50 were issued to the
former shareholders and option holders of GreenSpring. Of these
warrants, 150,000 were exercisable immediately upon closing and the
remaining 250,000 warrants vested during fiscal year 1996. At June
30, 1997, 143,132 warrants had been exercised and 34,297 were
forfeited under the net issuance method. Of the balance, 139,238
were exercisable at June 30, 1997 with the remaining exercisable at
June 30, 1998.
In connection with the 1992 Initial Public Offering, warrants to
purchase 100,000 common shares at $4.80 per share were issued to the
underwriter. All of the warrants issued vested in January 1993 and
were exercised in fiscal year 1997.
Information regarding the Company's stock option plans and warrants
is summarized below:
1991 ALL 1993 1996
NSOP ISOPs D&O ESPP WARRANTS TOTAL
------- --------- -------- ------- ---------- ----------
------- --------- -------- ------- ---------- ----------
OUTSTANDING AT 6/30/94 26,512 736,296 30,000 -- 100,000 892,808
Granted -- 135,000 10,000 -- 400,000 545,000
Exercised 8,228 -- -- -- -- 8,228
Cancelled -- 211,772 -- -- -- 211,772
------- --------- -------- ------- ---------- ----------
OUTSTANDING AT 6/30/95 18,284 659,524 40,000 -- 500,000 1,217,808
Granted -- 360,000 118,500 44,171 -- 522,671
Exercised 18,284 234,334 5,000 -- 26,861 284,479
Cancelled -- 36,716 -- 672 13,139 50,527
------- --------- -------- ------- ---------- ----------
OUTSTANDING AT 6/30/96 -- 748,474 153,500 43,499 460,000 1,405,473
Granted -- 399,997 170,000 25,510 -- 595,507
Exercised -- 294,474 16,500 -- 216,271 527,245
Cancelled -- 56,663 -- 10,154 21,158 87,975
------- --------- -------- ------- ---------- ----------
OUTSTANDING AT 6/30/97 -- 797,334 307,000 58,855 222,571 1,385,760
------- --------- -------- ------- ---------- ----------
------- --------- -------- ------- ---------- ----------
EXERCISABLE AT 6/30/95 18,284 346,191 -- -- 250,000 614,475
EXERCISABLE AT 6/30/96 -- 478,474 115,000 -- 293,334 886,808
EXERCISABLE AT 6/30/97 -- 217,333 108,500 -- 139,238 465,071
------- --------- -------- ------- ---------- ----------
------- --------- -------- ------- ---------- ----------
AVAILABLE FOR GRANT -- 73,858 146,740 241,145 -- 461,743
AT 6/30/97
------- --------- -------- ------- ---------- ----------
------- --------- -------- ------- ---------- ----------
Weighted average option exercise price information for the years 1997, 1996,
and 1995 follows:
1997 1997 1995
------- ------ ------
Outstanding at July 1 $ 6.27 4.62 4.70
Granted during the year:
Price = Fair Value 22.28 11.25 4.55
Price > Fair Value -- 5.50 --
Exercised during the year 4.74 4.65 2.19
Cancelled during the year 9.37 4.53 4.78
Outstanding at June 30 13.53 6.27 4.62
Exercisable at June 30 6.71 4.83 4.67
39
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant option groups outstanding and exercisable at June 30, 1997
and related weighted average price and life information follows:
Weighted Weighted
Average Average Weighted
Number Remaining Exercise Number Average
Range of Exercise Prices Outstanding Contractual Price Exercisable Exercise Price
Life
- ------------------------ ------------ ----------- -------- ----------- ---------------
$ 4.13 - $ 5.50 488,621 7.44 $ 4.80 405,288 $ 4.86
$ 5.63 - $ 16.50 467,311 8.04 $ 11.85 19,783 $ 5.75
$ 18.25 - $ 34.00 429,828 7.29 $ 25.29 40,000 $ 25.88
- ------------------------ ------------ ----------- -------- ----------- ---------------
$ 4.13 - $ 34.00 1,385,760 7.59 $ 13.53 465,071 $ 6.71
- ------------------------ ------------ ----------- -------- ----------- ---------------
The per share weighted-average fair value of stock options granted at a price
greater than fair value during 1997 and 1996 was $0 and $1.63, respectively,
on the date of grant. The per share weighted-average fair value of stock
options granted at a price equal to fair value during 1997 and 1996 was
$11.49 and $5.99, respectively, on the date of grant. The fair value of
options at date of grant was estimated using the Black-Scholes Model with the
following weighted-average assumptions:
1997 1996
------- -------
Expected life (years) 2.26 2.58
Risk free interest rate 06.05% 06.25%
Volatility 63.30% 63.30%
Dividend yield -- --
The Company applies APB Opinion 25 accounting for its plans and
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on fair value at grant date for its stock
options under SFAS 123, the Company's net income and EPS would have
been reduced to the pro forma amounts indicated below:
1997 1996
---------- ---------
Net income, as reported $ 461,685 3,580,907
Net income (loss), pro forma (1,694,626) 3,110,685
EPS, as reported $ 0.09 0.97
EPS, pro forma (0.30) 0.90
Pro forma net income reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting
periods and compensation cost for options granted prior to July 1, 1995 is
not considered.
40
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) RETIREMENT PLAN
The Company maintains a retirement plan under Section 401(k) of the
Internal Revenue Code for all employees of the Company. The plan
provides for employees to selectively defer a percentage of their
wages, which the Company matches at a predetermined rate not to exceed
4 percent of the employee's wages. The plan also provides for
additional contributions at the discretion of the Board of Directors.
Total Company contributions to the plan during the years ended
June 30, 1997, 1996 and 1995 were $342,029, $185,387 and $251,493,
respectively.
Bit 3 and LDG maintained retirement plans under Section 401(k) of the
Internal Revenue Code for all of their employees. Subsequent to the
Company's acquisition of Bit 3 and LDG, these plans were terminated
and merged into the Company's plan.
In addition, LDG maintained a profit sharing plan qualified under
Section 401(a) of the Internal Revenue Code for all of their
employees. Subsequent to the Company's acquisition of LDG, this plan
was terminated and plan participants had the option to take a
distribution from the plan or rollover their balances into the
Company's 401(k) plan.
(12) DISCONTINUED OPERATIONS
On April 26, 1995, the Company sold its flight simulation business
for $400,300. Included in the sale were net assets of approximately
$1,225,000. The purchaser has agreed to complete simulation contracts
in progress at the time of the sale on a time and material and fixed
price basis. The Company is responsible for completion of these
contracts, until novation of the contracts by the customer, to the
purchaser of the simulation operations. As of June 30, 1997, the
majority of these contracts have been substantially completed.
The disposition of the flight simulation business has been accounted
for as a discontinued operation. Revenues of the discontinued
operations were approximately $8,700,000 in 1995.
(13) CONTINGENCIES
The Company has been named as a defendant in a lawsuit filed on June
19, 1996. The Company is vigorously defending the lawsuit and has
filed a counter suit. Management does not believe that the outcome of
the litigation will have a material affect on the Company's financial
condition or results of operations.
The Company is subject to various claims which arise in the ordinary
course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is incorporated by reference to the
Company's definitive proxy statement pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting to be held November 11, 1997.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the section entitled "Directors and Executive
Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the section entitled "Compensation of Executive
Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated by reference to the
corresponding section of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement under the section entitled "Directors and Executive
Officers".
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 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.
(b) Financial Statement Schedules. The schedules are omitted inasmuch as the
required information is not present or not present in amounts sufficient
to require submission of the respective schedules, or the information is
included in the financial statements, including the notes thereto.
(c) Reports on Form 8-K during the fourth quarter.
None.
43
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.
By: /S/ Christopher J. Amenson
Christopher J. Amenson
Chairman of the Board and
Chief Executive Officer
Date: September 26, 1997
44
SBS Technologies, Inc.
Annual Report on Form 10-K
Fiscal Year Ended June 30, 1997
Index to Exhibits
Exhibit
No. DESCRIPTION PAGE
- ------- ----------- ----
3.i(4) Articles of Incorporation, as amended on June 28, 1995 - -
3.ii(4) By-laws, as amended on May 8, 1995 - -
4.a(5) Article VI of the Articles of Incorporation, as amended, as
included in the Articles of Incorporation of SBS Technologies, Inc. - -
4.b(5) Articles I, II of the Bylaws of SBS Engineering, Inc., as amended - -
4.c(5) Form of certificate evidencing Common Stock - -
10.a(6) Employment agreement between Registrant and
Dr. Andrew C. Cruce, dated October 1, 1993,
as amended - -
10.b(6) Employment agreement between Registrant and
Scott A. Alexander, dated October 1, 1993,
as amended
10.c(7) 1997 Employee Incentive Stock Option Plan - -
10.d(6) Employment agreement between Registrant and
Christopher J. Amenson, dated April 24, 1992,
as amended - -
10.e(1) 1991 Key Employee Stock Option Plan - -
10.f(1)(7) 1992 Incentive Stock Option Plan - -
10.g(1) Stock Bonus Plan - -
10.h(2)(7) 1993 Incentive Stock Option Plan - -
10.i(2)(7) 1993 Director and Officer Stock Option Plan
10.j Employment Agreement between Registrant and Stephen D. Cooper
dated May 13, 1997 Filed herewith electronically
10.k First Amendment to Amended and Restated Credit Agreement
and Related Loan Documents between Registrant and NationsBank
of Texas, N.A. dated November 15, 1996 Filed herewith electronically
10.l(8) Stock Purchase Agreement between Bit 3 Computer Corporation
and Registrant dated October 8, 1996 - -
10.m Asset Purchase between Fats, Inc. and Registrant
dated June 26, 1997 Filed herewith electronically
10.q(3) Asset Purchase Agreement dated April 26, 1995 between registrant
and Camber Corporation. - -
10.r(3) Purchase Agreement dated April 28, 1995 between Registrant and GreenSpring
Computers, Inc. et al - -
10.s(3) Credit Agreement dated April 28, 1995 with NationsBank of Texas, N.A. - -
10.t(3) Lease dated May 25, 1995 between Registrant and PARS Asset
Management Company - -
10.v(6)(7) 1996 Employee Stock Purchase Plan, adopted January 21, 1996 - -
10.w(6) Amended and Restated Term Loan and Revolver
Credit Facility from NationsBank of Texas, N.A.
dated April 26, 1996. - -
10.x(6) Lease dated March 5, 1996, between Registrant and
Bohannon Trust Partnership II. - -
10.y(6) Pooling Agreement dated August 19, 1996 between
Registrant and Logical Design Group, Inc. et al - -
10.z Management Incentive Plan Filed herewith electronically
45
11(6) Statement Re: Computation of Per-Share Income
21 Subsidiaries of the registrant Filed herewith electronically
23 Consent of KPMG Peat Marwick LLP Filed herewith electronically
25 Power of attorney Filed herewith electronically
27 Financial Data Schedules Filed herewith electronically
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-18 (No 33-43256-D), originally filed
October 8, 1991, which Registration Statement became effective
January 9, 1992.
(2) Incorporated by reference to Exhibits "A" & "B" of the Registrant's
Proxy Statement for its annual meeting held November 10, 1992.
(3) Incorporated by reference to Exhibits 10.q, 10.r, 10.s and 10.t of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995.
(4) Incorporated by reference to Exhibits 3.1 and 3.2 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
(5) Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 of Registrant's
Registration Statement on Form S-3 originally filed on January 5, 1996
and Amendment No. 1 filed on March 14, 1996.
(6) Incorporated by reference to Exhibits 10.a, 10.b, 10.d, 10.v, 10.w,
10.x, 10.y, and 11 of the Registrants Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
(7) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 originally filed on March 10, 1997 and Amendment No.1
filed on April 4, 1997.
(8) Incorporated by reference from the Registrant's Registration Statement
on Form S-2 dated October 9, 1996 Amendment No.1 dated October 22,
1996 and Amendment No.2 dated November 14, 1996.
46