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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 1998 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 1-10981
SBS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
New Mexico 85-0359415
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2400 Louisiana Blvd. NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
(Address of principal executive offices including zip code)
(505) 875-0600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on
September 1, 1998 as reported on NASDAQ was approximately $99,353,678. Shares
of Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock have been excluded because these
persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of September 1, 1998, Registrant had 5,838,725 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Part III
of this Form 10-K Report: (1) Definitive Proxy Statement for Registrant's
1998 Annual Meeting of Stockholders to be held November 9, 1998.
PART I
ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY,
AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD
LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND ECONOMIC
CONDITIONS; CUSTOMER ACCEPTANCE OF AND DEMAND FOR THE COMPANY'S PRODUCTS; THE
COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW PRODUCTS ON A
TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS;
AND OTHER RISK FACTORS LISTED HEREIN.
INTRODUCTION
SBS Technologies, Inc. (the "Company") is a leading designer and manufacturer
of open-architecture, standard bus embedded computer components that system
designers can easily utilize to create a custom solution specific to the
user's unique application. The Company's product lines include CPU boards
("CPU"), general purpose input/output ("I/O") modules, avionics interface
modules and analyzers, interconnection and expansion units, telemetry boards,
data acquisition software and industrial computer systems and enclosures. The
Company's products are used in a variety of applications, such as
telecommunications, medical imaging, industrial control, and flight
instrumentation in commercial and aerospace markets. The Company capitalizes
on its design expertise and customer service capabilities to enhance product
quality and reduce time to market for OEM customers.
The Company's objective is to become a leading supplier of board level
components to the standard bus embedded computer market. The Company intends
to continue its growth through a combination of internal growth and
acquisitions. Internal growth is achieved through expanding its existing
product lines through new product development and through increasing
penetration of its existing customer base.
Fiscal 1998 was a year of progress in the continued development of the
Company. The Company focused on continually enhancing and improving the
products it delivers and its ability to satisfy customer needs. During fiscal
1998 the Company instituted a program of business integration. The Company
renamed all of its subsidiary companies under the "SBS" trade name and
realigned them into two operating groups, the SBS Computer Group and the SBS
Aerospace Group. In addition, the Company combined its separate subsidiary
sales forces into two groups, one focused on SBS Computer Group customers and
one focused on the SBS Aerospace Group customers.
Revenues for the fiscal year ended June 30, 1998 increased 40.5% from $52.8
million to $74.2 million. The source of this revenue increase was twofold:
growth in the core businesses, and growth by acquisition.
The Company entered fiscal 1998 as a leader in several segments of the
multi-billion dollar embedded computer market, with the continuing goal of
expanding its market presence. In the computer mezzanine board I/O segment,
the Company broadened its line of IndustryPacks -Registered Trademark- ("IPs")
to over 120 variants and introduced a series of ruggedized mezzanine I/O boards
that serve a segment of the market in which the Company previously did not
participate. In the Avionics business, the Company's interface boards and bus
analyzers remained the industry standard for quality and innovation with a
broadening of the Company's customer base and participation in such programs
as the Joint Strike Fighter Replacement Program, the C130J next generation
military transport aircraft, and Sweden's GRIPEN fighter program. The
Company's telemetry product line is focused toward the satellite test and
control market in order to serve the rapidly expanding satellite market
driven by both telecommunications and defense applications.
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During the last two fiscal years, the Company acquired three business which
have expanded its products and marketing opportunities. It also divested one
part of its business which was not synchronous with its core businesses. In
August 1996, the Company expanded into the broader embedded computing market
with the acquisition of Logical Design Group, Inc. (renamed SBS Embedded
Computers, Inc. in fiscal 1998), a manufacturer of Intel processor-based CPU
boards. This acquisition positioned the Company to take advantage of the
growth in the use of both Intel processors and Microsoft software in the
embedded computer market.
In November 1996, the Company acquired Bit 3 Computer Corporation (renamed
SBS Bit 3 Operations, Inc. in fiscal 1998), a leading developer and
manufacturer of high performance bus interconnect hardware and software
products for many of the most widely used computer architecture standards in
the standard bus embedded computer market. This acquisition took advantage of
the introduction into the embedded computing market of new bus standards such
as PCI and CompactPCI, expanded the Company's customer base and opened the bus
interconnection and expansion market to the Company. In the quarter ended
December 31, 1996, the Company recorded a $11.0 million in-process
research and development charge to earnings associated with this acquisition.
In June 1997, the Company divested its Judgmental Use of Force Training
Business. The Company determined that this business was not consistent with
the Company's objective of becoming a leading supplier of board level
components to the standard bus embedded computer market.
In November 1997, the Company acquired Micro Alliance, Inc. (renamed SBS
Micro Alliance, Inc. in fiscal 1998), which specializes in the design and
manufacture of special-purpose PC-compatible computer systems. This company
offers a variety of CPU boards and system enclosures, including rack mount,
desktop and mobile systems. Most systems contain passive backplanes that
allow the addition of up to 20 ISA and PCI cards. These products are often
customized to meet the needs of particular OEM applications.
After the end of the 1998 fiscal year, the Company acquired two more
businesses. On July 1, 1998, the Company acquired, through its newly formed
subsidiary, SBS Holdings GmbH, a 50.1% interest in OR Industrial Computers
GmbH ("OR") (see "Management's Discussion & Analysis: Subsequent Events"), a
leading European designer of CPU boards utilized in a wide range of embedded
computer applications. Based in Augsburg, Germany, OR, designs, manufactures
and markets CPU boards based on Intel computer architecture available in the
VME, CompactPCI, and PCCompact form factors, as well as VME CPU boards based
on the Motorola 680X0 series processors and a series of computer input/output
boards. As part of this acquisition, the Company acquired, through its newly
formed subsidiary, SBS Holdings GmbH, a 50.2% interest in ORTEC Electronic
Assembly GmbH, ("ORTEC") based in Mindelheim, Germany, a related company
which manufactures OR's commercial products and electronic products for other
customers. The Company also acquired, through its wholly-owned subsidiary SBS
Embedded Computers, Inc. based in Raleigh, NC, 100% of the shares of OR
Computers, Inc, based in Fairfax, Virginia, which is the U.S. marketing
support organization for the OR product line. In addition, the Company and
the shareholders of both OR and ORTEC entered into exclusive option
agreements under which the Company may acquire the remaining shares of both
companies on February 28, 1999.
On August 12, 1998, the Company purchased 100% of the outstanding shares of
V-I Computer ("V-I") (see "Management's Discussion & Analysis: Subsequent
Events"). Based in Encinitas, California, V-I designs, manufactures and
markets CPU boards based on the Motorola PowerPC -Registered Trademark-
processor for embedded computer applications based on the VME and CompactPCI
bus architecture standards.
Excluding the effect of the $11.0 million charge to earnings taken in fiscal
1997 in conjunction with the acquisition of Bit 3, net income for the 1998
fiscal year would have increased 42.3% from $7.1 million in fiscal 1997 to
$10.1 million, and diluted earnings per common share would have increased
22.4% from $1.34 to $1.64. Including the effects for the 1997 charge to
earnings, net income for fiscal 1997 was $461,685, or $0.09 per diluted
common share.
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The Company was incorporated in New Mexico in November 1986 and began
operations in September 1987. The Company's executive offices are located at
2400 Louisiana Boulevard, NE, AFC Building 5, Suite 600, Albuquerque, New
Mexico 87110, and its telephone number is (505) 875-0600. References to the
"Company" or "SBS" are to SBS Technologies, Inc. and its consolidated
subsidiaries. As of June 30, 1998, the Company had five subsidiaries, SBS
Berg Telemetry Systems, Inc. ("Berg"), SBS GreenSpring Modular I/O, Inc.
("GreenSpring"), SBS Embedded Computers, Inc. ("SBS Embedded"), SBS Bit 3
Operations, Inc. ("Bit 3") and SBS Micro Alliance, Inc ("Micro Alliance").
After the end of the 1998 fiscal year, the Company added five additional
subsidiaries with the formation of SBS Holdings GmbH and the acquisitions of
OR, ORTEC, OR Industrial Computers, Inc. and V-I.
IndustryPack -Registered Trademark- is a registered trademark of the Company.
All other trademarks or tradenames referred to in this document are the property
of their respective owners.
SBS' PRODUCTS
The Company's primary product lines are divided into two groups: general
purpose products including CPU products, general purpose I/O products, bus
interface products and industrial computer systems and enclosures, and
special purpose products including telemetry products, avionics interface
products, and data acquisition software.
GENERAL PURPOSE PRODUCTS
CPU PRODUCTS. The Company entered the standard bus embedded computer CPU
board market with its acquisition of SBS Embedded in August 1996 (see
"Management's Discussion & Analysis: Recent Acquisitions"). CPU boards
contain the computational functionality of an embedded computer system. The
Company produces CPU boards for the VME segment of the embedded computer
market, the most widely accepted bus standard in the industry. The VME CPU
board market can be segmented by processor type. The largest segment is made
up of boards designed around the Motorola 680X0 series processors, upon which
the VME standard was based. A growing segment is comprised of boards based on
Intel 80X86, Pentium and Pentium II processors which provide access to the
large base of Windows and Windows NT software available from the PC market.
The CPU boards sold by SBS Embedded are based on Intel 80X86, Pentium and
Pentium II processors. At present, the Company offers nine Intel
processor-based CPU boards ranging in price from approximately $2,500 to
approximately $8,500. In fiscal 1998 and 1997, sales of these products
comprised 8.8% and 11.5%, respectively, of the Company's total sales. As of
September 1, 1998 and 1997, backlog orders were $.6 and $.7 million
respectively. All backlog orders are expected to be filled in the current
fiscal year.
The Company broadened its CPU product line with the recent acquisitions of OR
and V-I. The OR product line includes CPU boards based on Intel computer
architecture and is available in the VME, CompactPCI, and PCCompact form
factors. In addition, OR provides VME CPU boards based on the Motorola 680X0
series processors and a series of computer input/output boards. The OR
product line consists of boards and systems, including ruggedized products
for military and industrial applications, transportation, industrial
controls, factory automation, and various other commercial and industrial
applications. Like other SBS product lines, OR's products, can support some
application specific modifications with their line of component products. The
OR facility will serve as the European base of operations for the Company's
other product lines, and OR Computers, Inc. will operate as a wholly-owned
subsidiary of SBS Embedded Computers, Inc. for the foreseeable future. The
V-I Computer product line consists of products that are typically used in
telecommunication, industrial automation, and defense applications. The V-I
Computer product line complements the other CPU offerings and will enable the
Company to offer a more complete list of processor solutions to its customers.
GENERAL PURPOSE I/O PRODUCTS. In April 1995, the Company purchased
GreenSpring, a leading developer and producer of I/O modules known as IPs.
IPs are small mezzanine boards that plug onto an embedded computer
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board or a carrier board and provide specific types of I/O for embedded
computer systems. The Company has continued to expand the market for IP
products by broadening its line of carrier cards that can accommodate up to
six IPs. The Company's offerings currently include VME, PCI, PC\104, Compact
PCI and ISA bus carrier cards. GreenSpring's product line of over 120 I/O
products services a wide range of applications in the embedded computer
market including analog I/O, bus interface functions, digital/parallel I/O,
motion control, telecommunications/serial I/O, telecommunications products,
video/graphics adapters and temperature measurement with prices ranging from
approximately $350 to approximately $3,500. During fiscal 1998, the Company
introduced sixteen ruggedized conduction cooled mezzanine I/O boards
primarily used in military environments. These serve a portion of the
embedded computer market in which the Company previously did not participate
and have prices ranging from approximately $800 to approximately $5,000. In
fiscal years 1998, 1997 and 1996, sales of general purpose products comprised
approximately 22.8%, 25.8% and 35.3%, respectively, of the Company's total
sales. As of September 1, 1998, 1997 and 1996, backlog orders were $3.2, $2.4
and $2.5 million, respectively. All backlog orders are expected to be filled
in the current fiscal year.
BUS INTERFACE PRODUCTS. In November 1996, the Company purchased Bit 3 (see
"Management's Discussion & Analysis: Recent Acquisitions"), a leading
developer and manufacturer of high performance bus interconnect hardware and
software products. The rapid expansion of microprocessor-based industrial
computers has resulted in the proliferation of a number of different computer
architecture standards. Generally speaking, a computer designed on one
architectural standard cannot communicate with a computer designed on another
architectural standard. Products could not be configured using two or more
computer architectures unless a communications link between them could be
established. Bit 3 identified this market for products which permit
industrial computers designed around different computer architectures to
communicate. In 1983, Bit 3 introduced its first adapter product, an
interface device to connect IBM PC equipment with Multibus architecture
computers. Since then, Bit 3 has expanded its product line to include
computer networking and interconnection hardware for many of the popular
computer architecture standards used in the standard bus embedded computer
market, including VME, PCI, CompactPCI, Sbus, ISA, EISA, Micro Channel, GIO,
TURBOCHANNEL, Multibus and Qbus. The development of Bit 3's new products is
driven by the emergence of significant new standard bus specifications and
applications. In addition, Bit 3 provides a series of PCI expansion units,
which allows OEMs to increase the number of devices needed by their
particular application.
Bit 3 products are used in a wide variety of applications, including data
acquisition, image and visualization processing, industrial process control,
medical electronics, signal processing and system integration. Bit 3's
typical customer uses bus adapter products because of the need for high
speed, low-latency interconnections between computer platforms. This
connectivity cannot be provided at the required performance levels by common
local area networking solutions, such as Ethernet or Token Ring, nor can it
in most cases be provided by higher speed protocols, such as ATM or FDDI. Bit
3 currently provides interconnect and expansion products to a wide variety of
commercial users. In fiscal 1998 and 1997, sales of these products comprised
22.7% and 17.1%, respectively, of the Company's total sales. As of September
1, 1998 and 1997, backlog orders were $.9 and $1.5 million, respectively. All
backlog orders are expected to be filled within the current fiscal year.
INDUSTRIAL COMPUTER SYSTEMS AND ENCLOSURES. In November 1997, the Company
purchased Micro Alliance, (see "Management's Discussion & Analysis: Recent
Acquisitions"), a leading designer and producer of PC-compatible industrial
computer systems for the embedded computer market. The systems are based on
PCI and ISA architectures and are typically passive backplane-based, allowing
up to 20 PCI or ISA cards to be added. The Micro Alliance computer systems
are designed for OEM customers in the industrial, telecommunication,
scientific and military markets. They come in a variety of shapes and sizes,
including rack mount, desktop and mobile. A majority of the systems are
specially designed to include custom paint colors, custom logos, custom face
plates, or custom chassis designs. In June of 1997, a new line of rugged
portable systems was introduced focusing on new segments of existing
business, including medical imaging, remote test and measurement and
telemetry applications. In fiscal 1998, sales of these products comprised
6.5% of the Company's total sales. As of September 1, 1998, backlog orders
were $2.8 million. All backlog orders are expected to be filled within the
current fiscal year.
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SPECIAL PURPOSE PRODUCTS
TELEMETRY PRODUCTS. In August 1992, the Company purchased Berg, a major
supplier of telemetry interface equipment for the embedded computer market.
Telemetry is the process used to send and receive digital data via radio
waves. The Company's telemetry interface products allow computers to receive,
interpret and process telemetry data. Telemetry is often used to transmit
data from some object under test, such as an aircraft, to a receiving station
while the test is underway. This allows engineers to monitor test performance
in real time, often decreasing total test costs and enhancing test safety.
Use of this technology has expanded to include continuous monitoring of
remote sites and transmission of digital data from satellites to the earth.
Berg pioneered the concept of using boards specially designed for telemetry
interface which would be added to standard ground station computers. Berg has
expanded its product offerings to include specialized equipment designed to
receive and process satellite data. The Company's telemetry products serve a
specialized market and include a significant software component. Berg sells
approximately 30 products for the VME, PCI, and ISA bus telemetry markets at
prices ranging from approximately $3,000 to approximately $30,000. In fiscal
years 1998, 1997 and 1996, sales of these products comprised approximately
9.7%, 11.9% and 20.8%, respectively, of the Company's total sales. As of
September 1, 1998, 1997, and 1996, backlog orders were $1.6 million, $0.9
million and $0.7 million, respectively. All backlog orders are expected to be
filled within the current fiscal year.
AVIONICS INTERFACE PRODUCTS. The Company's avionics products interface an
embedded computer system with the MIL-STD-1553 avionics bus used in a wide
variety of military and space applications including aircraft, missiles,
ground vehicles, the International Space Station, the Space Shuttle and naval
vessels. Initial applications for the Company's products were support of
system development, system testing and simulation. Over the past several
years, the Company has expanded its product line to include ruggedized
interface products that are used in operational systems, and monitor and test
systems that can be used as diagnostic tools for operational systems. Like
its telemetry products, the Company's avionics products occupy a niche market
and include a significant software component. The Company offers
approximately 20 avionics interface products at prices ranging from
approximately $4,000 to approximately $20,000. In fiscal years 1998, 1997 and
1996, sales of this product comprised approximately 29.5%, 30.6% and 39.9%,
respectively, of the Company's total sales. As of September 1, 1998, 1997 and
1996, backlog orders were $1.8 million, $2.0 million and $1.9 million,
respectively. All backlog orders are expected to be filled within the current
fiscal year.
DATA ACQUISITION SOFTWARE PRODUCT. The Company announced its first software
product development effort in October 1997, with the introduction of
DataXpress-TM-, a data acquisition software product designed for the
Microsoft Windows NT operating environment. The first commercial release of
DataXpress was shipped in July 1998. DataXpress acquires data from a variety
of interfaces, displays the data in real-time using multiple, animated
graphical views per screen, and distributes this information on a network.
Because it can run on PC's, laptops and workstations, DataXpress can be
easily and inexpensively expanded without sacrificing quality or
capabilities. This new product is designed to meet the needs of telemetry
ground and flight test applications, commercial and military avionics test
and integration, and industrial automation applications. DataXpress can also
expand existing data acquisition systems by providing object-oriented
interfaces that enable system administrators and programmers to easily
integrate DataXpress systems with the existing, third party software
applications. The Company offers a complete software product including
manuals, training and customer support for implementation and continuing
service.
OTHER BUSINESS. In June 1997, the Company sold its Judgmental Use of Force
product (see "Management's Discussion & Analysis: Sale of Judgmental Use of
Force Business"). Sales of this product line were immaterial to the Company's
operations.
CUSTOMERS AND APPLICATIONS
The Company's broad range of products support a wide range of applications.
In fiscal 1998, 1997 and 1996, no one customer exceeded 10% of the Company's
sales. The following table highlights some of the Company's representative
customers and their applications utilizing the Company's products.
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APPLICATION CUSTOMER COMPANY PRODUCT
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COMMERCIAL AND INDUSTRIAL APPLICATIONS
Aircraft Simulation Flight Safety International I/O, Interconnect
Aircraft Simulation CAE Electronics Interconnect
Airport Baggage Inspection InVision Technologies Interconnect
Airport Ground Traffic Control Norden/Westinghouse CPU
Airport Ground Traffic Control ARINC I/O
Automated Plasma Processing Systems Plasma Therm Industrial Systems & Enclosures
"C" Size Copier Xerox I/O
Color Proof Copier Eastman Kodak I/O
Currency Inspection System Currency Systems CPU
Document Scanner General Scanning I/O
License Plate Readers Perceptics Interconnect
OCR Mail Address Processing Bell & Howell Interconnect
Semiconductor Handler Delta Design I/O
Semiconductor Handler Lamm Research I/O
Turbine Control System GE Motors CPU
Video Compression Sun Microsystems Interconnect
COMMUNICATIONS
Cellular Telephone Systems ArgoSystems CPU
Commercial DAMA Viasat I/O
Communications Satellite Testing TRW Telemetry
GSP Testing Aerospatiale Telemetry
Integrated Voice and Data Systems Dictaphone Industrial Systems & Enclosures
Network Switching Platforms Netrix Industrial Systems & Enclosures
PBX Systems Allstar Systems Industrial Systems & Enclosures
Satellite Power Supply Testing Elgar Corporation Industrial Systems & Enclosures
Telephone Switch Billing System ACECOM I/O
INDUSTRIAL AUTOMATION
Automotive Brake Tester Burke Porter Machinery CPU
CNC Controller MDSI I/O
CNC Controller Herkules I/O
CNC Machine UVA I/O
Carpet Manufacturer Process Control MOOG I/O
Packaging Machinery Triangle Package Machinery I/O
Robot Control Adept Technology I/O
Automotive Test Stands W.M. Associates/Digital Equipment Interconnect
Corp.
Automotive Wheel Alignment Burke Porter Machinery CPU
Carpet Manufacturer Process Control MOOG I/O
Packaging Machinery Triangle Package Machinery I/O
PLC Co-processor GE Fanuc CPU
Programmable Logic Controller Reliance Electric Interconnect
Real-time Control Systems Queue Systems, Inc./Digital Interconnect
Equipment Corp
Robot Control Adept Technology I/O
Semiconductor Trim Equipment Control Automation CPU
Surface Mount Board Assembly Seiko Instruments Interconnect
Page 8
MEDICAL DEVICES
Blood Analyzer IGEN I/O
CT Beam Scanner Imatron Interconnect
DNA Analyzer Organon Teknika I/O
PET Imaging Systems UGM Medical Systems, Inc. Interconnect
Positron Emissions Topography Positron Corporation Interconnect
Ventilators Display NellCor I/O
MILITARY AND SPACE APPLICATIONS
Ariane V System Test and Simulation Aerospatiale Avionics
Ariane V Test Support Lockheed Martin Telemetry
B-2 Flight Testing Northrop Grumman Telemetry
C-17 Aircraft Testing Boeing Telemetry/Avionics
Communications System Department of Defense CPU
Crusader UDLP/General Dynamics I/O
F-14 Northrop Grumman Avionics
F-15, F-16 U.S. Government Avionics
F-16 TRW Avionics
F-22 Lockheed Martin Avionics
Flight Test/Satellite Integration & Test Boeing Telemetry
Flight Test/Shuttle Command Launch Control NASA Telemetry
System
Helicopter Systems Fugitsu Avionics
Military Radios GEC Marconi CPU
Military Satellite Telemetry Tracking & Lockheed Martin Telemetry
Control/ Missile Test
Military Satellite Telemetry Tracking & Aerojet Telemetry
Control
Mini-DAMA Titan Linkabit I/O
Missile Systems/ F-18 Raytheon Avionics
Missile Test Raytheon Telemetry
Missile and Aircraft Test NAWC Telemetry
Missile and Aircraft Test McDonnell Douglas Telemetry
Mission Planning & Debriefing Lockheed-Sanders Interconnect
Rocket Launch Controller Orbital Sciences CPU
Satellite Imaging TRW Telemetry
Satellite Telemetry Tracking and & Control/ Real Time Logic Telemetry
Satellite Integration Test
Satellite Integration & Test TRW Space and Electronics Telemetry
Space Station Simulator Raytheon CPU
TAC-3 Hughes Data Systems Interconnect
TAC-4 Hewlett Packard Interconnect
TEST AND MEASUREMENT APPLICATIONS
Automotive Test/ Simulation Systems Integrated Systems I/O
Particle Collision and Detection System CERN I/O
Temperature Control Therm-O-Disk I/O
VLSI Tester LTX/Trillium Interconnect
TRANSPORTATION
Aircraft Flight Testing Cessna Telemetry
Aircraft Ground Control ARINC I/O
Commercial Avionics System Test Honeywell Avionics
Page 9
Commercial Avionics System Test Rockwell International Avionics
FAA Communication System Delta Information Systems I/O
Jet Engine Testing Pratt & Whitney Telemetry
Lane Controllers NYSTA I/O
Maritime Systems NEC Avionics
777 Aircraft Testing Boeing Telemetry
Train Track Alignment System Fairmont Tamper CPU
SALES AND MARKETING
The Company markets its products both domestically and internationally. As of
September 1, 1998, excluding the effect of the acquisitions of OR and V-I,
(see "Management's Discussion and Analysis: Subsequent Events"), the Company
had 70 employees, who typically hold engineering degrees, in sales, marketing
and customer relations. During fiscal 1998, the Company realigned its sales
force into two groups, the aerospace group sales force and the computer group
sales force and reduced its use of independent manufacturers' representatives
from 43 at the beginning of fiscal 1998 to 14 at the end of fiscal 1998. The
aerospace sales force is responsible for sales of the Company's avionics
interface and telemetry products and the computer group sales force is
responsible for sales of the Company's CPU, I/O, interconnect and industrial
computer systems and enclosures products. Employee sales personnel are
educated about each of the Company's product lines and refer opportunities to
appropriate product line managers. Primary sales methods vary among the
Company's product lines. The Company's avionics interface and telemetry
products generally have the most complex applications and, as a result, leads
are generally identified by field sales personnel or independent
manufacturers' representative and closed with the assistance of the
appropriate product line manager. In the case of the Company's CPU, I/O,
interconnect and industrial computer systems and enclosure products, sales
are either closed by the computer group sales force, or independent
manufacturers' representatives or are the result of catalog sales. In each of
the Company's product lines, sales employees generally pursue "design in"
applications where the Company's products are included as part of a system.
The Company sells approximately 16% of its products outside the United States
(see footnote 4 to the consolidated financial statements). These sales are
primarily generated by the 41 international distributors which represent the
Company's products. During the 1999 fiscal year, the Company will add sales
from its recently acquired German businesses. The Company maintains sales
offices in Albuquerque, New Mexico for its avionics interface products; in
Raleigh, North Carolina, for its Intel processor-based CPU boards; in Menlo
Park, California, for its I/O products; in Carlsbad, California, for its
telemetry products; in St. Paul, Minnesota for its interconnect products and
in Vista, California for its industrial computer systems and enclosure
products. The Company's domestic field sales employees are located throughout
the United States. The Company also maintains an international sales office
near London, England to support European sales of its avionics interface
products. Sales and sales leads are generated through a range of activities
performed by the Company including identification of participants in key
defense-related programs, participation in numerous trade shows, direct mail
catalogs, advertisements in leading trade publications and corporate and
subsidiary web sites on the Internet.
COMPANY RESEARCH AND DEVELOPMENT
The Company invests in research and development programs to develop new
products in related markets and to integrate state of the art technology into
existing products. As of September 1, 1998, excluding the effect of the
acquisition of OR and V-I (see "Management's Discussion and Analysis:
Subsequent Events"), the Company had approximately 86 employees engaged in
research and development activities. Of these employees, 48 have technical
degrees and 21 have advanced degrees. The Company seeks to combine
special-purpose hardware, firmware and software in its products to provide
its customers with the desired functionality. Approximately
Page 10
60% of the Company's research and development efforts in fiscal 1998 were
software related. The Company's research and development expense was $8.0
million, $4.4 million and $2.8 million in fiscal 1998, 1997 and 1996,
respectively, corresponding to 10.8%, 8.4% and 9.1% of sales, respectively.
SBS Embedded's current research and development activity is focused on
evolutionary improvement of its existing product lines. GreenSpring's efforts
are directed towards broadening the scope of its market by developing new IPs
and upgrading existing products to state of the art technology. Examples
include the recent introduction of 16 ruggedized conduction cooled mezzanine
I/O boards primarily used in military environments. The development of Bit
3's new products is driven by the emergence of significant new bus
specifications and applications. For example, Bit 3 recently introduced a
fiber optic adapter to connect PCI and VME systems. Berg is continuing to
upgrade its products' performance by increasing the operating bit rates, a
key performance measure in the telemetry industry. Berg is also continuing to
expand its offerings of high performance, CCSDS packet switching products for
the satellite ground station market. The Company is also extending its
avionics interface product line. For example, the Company is continuing to
expand development of additional ruggedized avionics product for the
operational system market. In October 1997, the Company announced its first
software product development effort with the introduction of DataXpress-TM-,
a data acquisition software product designed for the Microsoft Windows NT
operating environment. This product is designed to meet the needs of
telemetry ground and flight test applications, commercial and military
avionics test and integration, and industrial automation applications. There
can be no assurance that the Company will be successful in developing and
bringing to market any products as a result of its research and development
efforts.
SUPPLIERS
The Company uses contract manufacturing to produce substantially all of its
board-level products. The Company obtains parts from large electronics parts
suppliers and printed circuit boards from printed circuit board manufacturers
and provides these parts and boards as kits to contract manufacturing
companies that fabricate the Company's products. Following manufacturing of
these products, the Company performs test, packaging and support functions
for the Company's products. The Company reduces dependence on a particular
contract manufacturer by using multiple contract manufacturers for each of
the Company's product lines. However, the Company may choose in the future to
consolidate its contract manufacturing to gain economies of scale and to
shift its inventory control to the contract manufacturer. If the Company did
this it would become increasingly dependent on a smaller number of
manufacturers for the continued timely and efficient production of all of its
inventory. The Company's industrial computer systems and enclosure business
purchases all needed components from third party vendors. The Company
performs all assembly, test, packaging and support functions for these
products.
Many of the Company's products consist in part of state-of-the-art digital
electronic components. The Company is dependent upon third parties for the
continuing supply of many of these components, some of which are obtained
from a sole supplier such as Xylinx, Inc. or a limited number of suppliers,
alternative sources for which would be difficult to locate. Moreover,
suppliers may discontinue or upgrade some of the products incorporated into
the Company's products, which could require the Company to redesign a product
to incorporate newer or alternative technology. Although the Company believes
that it has arranged for an adequate supply of components to meet short-term
requirements, the Company does not have contracts for the components which
assure availability and price, however the Company has negotiated cash
discount terms for prompt payment. Lack of timely availability of components
could cause delays in shipment of product and affect the Company's revenues
during certain periods as well as lead to customer dissatisfaction. Limited
availability of components could also require the Company to pay premiums for
parts to make shipment deadlines and thus affect the Company's profit margin,
or cause the Company to increase its inventory of scarce parts and thus
affect the Company's cash flow. There is no assurance that the Company will
continue to be able to obtain all of the components it requires or that the
price of certain components in short supply will not materially and adversely
affect its business, financial condition or results of operations.
Page 11
COMPETITION
The standard bus embedded computer industry is highly competitive and
fragmented, and the Company's competitors differ depending on product type,
company size, geographic market and application type. The Company faces
competition in each of its product lines. The Company believes that because
of the diverse nature of the Company's products and the fragmented nature of
the embedded computer market, there is little overlap of competitors for each
product line. Competitive factors across the Company's product lines include
performance, customer support, product longevity, supplier stability, breadth
of product offerings and reliability. Many of the Company's existing and
potential competitors have financial, technological and marketing resources
significantly greater than those of the Company and may have established
relationships with customers or potential customers that afford them a
competitive advantage. There can be no assurance that the Company will be
able to compete effectively in its current or future markets or that
competitive pressures will not adversely affect its business, financial
condition or results of operations.
In the Company's CPU product line, the Company competes with a number of
other suppliers of CPU boards. The Company's direct competitors include other
companies that build CPU boards based on Intel microprocessor technology such
as Force Computers, Inc. (a wholly owned subsidiary of Solectron
Corporation), Performance Technologies, Inc., RadiSys Corporation, VME
Microsystems, Inc. and XYCOM, Inc. In addition, with the acquisition of OR
and VI, the Company also competes with suppliers of CPU boards based on
Motorola 680x0 and PowerPC architectures.
In the generalized computer I/O product area served by GreenSpring and its IP
product line, the Company has two classes of competition. The first class
includes companies that compete directly by selling IP products. The second
class includes companies that compete with I/O products using a different
implementation to provide functionally equivalent products. The Company's
competitors in each of these classes include Acromag, Inc. , Systran, Inc.
and VME Microsystems, Inc.
In the telemetry market, the Company competes with other suppliers of open
architecture telemetry solutions. It also indirectly competes with suppliers
of traditional, closed architecture telemetry systems. The Company's
competitors include Aydin Vector Division, AVTECH Systems, Inc., L3
Communications, Inc., Terametrix, Inc. and Veda, Inc.
In the avionics interface market, the Company competes with a number of other
companies that produce similar avionics interface products. The Company's
competitors include Ballard Technologies, Inc., Data Devices Corporation,
Systran, Inc., Excalibur Technologies Corporation, Condor Engineering and
Gesellschaft Fur Angewandte Informatik und Mikroelekernik, GmbH.
In the Company's interconnect and expansion unit product line, the Company
competes with personal computer (PC) manufacturers that offer computer
motherboards with multiple PCI slots and with companies that have similar
product lines. There is no significant direct competitor in this market.
In the Company's industrial computer systems and enclosure business, the
Company competes with other suppliers of ISA/PCI systems and enclosures such
as I-Bus, a subsidiary of Maxwell Technologies, Texas Micro, Inc and
Industrial Computer Source.
EMPLOYEES
As of September 1, 1998, the Company had, exclusive of recent acquisitions,
approximately 327 employees at its six locations: Albuquerque, New Mexico;
Carlsbad, California; Vista, California; Menlo Park, California; Raleigh,
North Carolina; and St. Paul, Minnesota. Of these employees, 35 were in
executive and administrative positions; 70 were in sales, marketing and
customer relations; 86 were in research and development; 29 were clerical,
and 107 were employed in support of ongoing production.
Page 12
In July and August 1998 the Company added 98 employees resulting from the
50.1% acquisition of OR, the 50.2% acquisition of ORTEC, the 100% acquisition
of OR Computers, Inc. and the acquisition of VI (see "Management's
Discussion and Analysis: Subsequent Events"). Of these employees, 5 were in
executive and administrative positions; 22 were in sales, marketing and
customer relations; 34 were in research and development; 2 were clerical, and
35 were employed in support of ongoing production.
RISK FACTORS
Statements in this Report about SBS' outlook for its business and markets,
such as projections of future performance, statements of management's plans
and objectives, forecasts of market trends and other matters, are
forward-looking statements that involve risks and uncertainties. SBS' actual
results may differ materially from the results discussed in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed below:
GROWTH THROUGH ACQUISITIONS AND INTEGRATION OF ACQUIRED COMPANIES. SBS has
increased the scope of its operations through the acquisition of seven
businesses and product lines acquired since 1992. SBS acquired Berg in fiscal
1993, GreenSpring in fiscal 1995, SBS Embedded in fiscal 1997, Bit 3 in
fiscal 1997, Micro Alliance in fiscal 1998, and, in fiscal 1999, OR, ORTEC
and OR Computer Inc. and VI. SBS' management and financial controls,
personnel, and other corporate support systems might not be adequate to
manage the increase in the size and the diversity of scope of SBS' operations
as a result of the recent acquisitions or any future acquisitions. In
addition, SBS' acquisitions might not increase earnings and the companies
acquired might not continue to perform at their historical levels.
A major element of SBS' business strategy is to continue to pursue
acquisitions that either expand or complement its business. In the future,
SBS might not be able to identify and acquire acceptable acquisition
candidates on terms favorable to SBS, and in a timely manner. SBS could use a
substantial portion of its capital resources for these acquisitions.
Consequently, SBS may require additional debt or equity financing for future
acquisitions. This financing may not be available on terms favorable to SBS,
if at all. Also, even if SBS does acquire other businesses, it will continue
to encounter the risks associated with the integration of the acquisitions
described above.
SBS anticipates that one or more potential acquisition opportunities,
including some that could be material, may become available in the near
future. If and when appropriate acquisition opportunities become available,
SBS intends to pursue them actively. An acquisition by SBS might or might
not, however, occur. An acquisition which does occur could potentially
materially and adversely affect SBS and might not be successful in enhancing
SBS' business.
ACQUISITION CHARGES. As part of its strategy for growth, SBS acquires
compatible businesses. Not infrequently, in accounting for a newly acquired
business, SBS is required to amortize, over a period of years, intangible
assets, including goodwill. Although usually the acquired business' current
operating profit offsets the amortization expense, no one can assure that an
acquired business' operations will remain at their current levels. A decrease
in the acquired business' operating profit could reduce SBS' overall net
income and earnings per share. In addition, no one can assure that changes in
future markets or technologies will not require faster amortization of
goodwill in such a way that overall Company financial condition or results of
operations would be adversely affected. SBS may also be required, under
generally accepted accounting principles, to charge against earnings the
value of an acquired business' technology which does not meet the accounting
definition of "completed technology." When SBS acquired Bit 3 in fiscal 1997,
it recorded approximately $10.0 million in intangible assets, including
goodwill. These are being amortized on a straight-line basis over the
estimated benefit period of ten years. Also, in connection with the Bit 3
acquisition, SBS recorded an $11.0 million charge against earnings in the
second fiscal quarter of 1997. The amount of the charge against earnings was
based on an assessment by SBS, in conjunction with an independent valuation
firm, of purchased technology of Bit 3. SBS incurred a net loss of $5 million
(or $1.24 per share) for the second fiscal quarter of 1997 as a result of the
earnings charge. In connection
Page 13
with SBS' acquisition of Micro Alliance in fiscal 1998, SBS recorded $4.5
million of goodwill, which is being amortized over a ten-year period. As a
result of its recent acquisitions of OR, ORTEC, OR Computers, Inc. and VI,
SBS expects to amortize goodwill and take a charge against earnings for
technology which is not completed technology. (see "Fluctuations in Operating
Results").
FLUCTUATIONS IN OPERATING RESULTS. SBS has experienced fluctuations in its
operating results in the past and may experience those fluctuations in the
future. Sales, on both an annual and a quarterly basis, can fluctuate as a
result of a variety of factors, many of which are beyond SBS' control. These
factors include the timing of customer orders, manufacturing delays, delays
in shipment due to component shortages, cancellations of orders, the mix of
products sold, cyclicality or downturns in the markets served by SBS'
customers, including significant reductions in defense spending affecting
certain of SBS' customers, and regulatory changes. Because those fluctuations
can happen, SBS believes that comparisons of the results of its operations
for preceding quarters are not necessarily meaningful and that investors
should not rely on the results for any one quarter as an indication of how
SBS will perform in the future. Investors should also understand that, if
SBS' sales or earnings for any quarter are less than the level expected by
securities analysts or the market in general, the market price for SBS'
Common Stock could immediately and significantly decline.
RELIANCE ON DEFENSE SPENDING. In each of fiscal 1995, 1996, 1997 and 1998 SBS
derived a significant portion of its sales directly or indirectly from the
U.S. Department of Defense. SBS expects that the Department of Defense will
continue to be a significant source of sales. Changes in the geopolitical
environment or in national policy might result in significantly reduced
defense spending. Reduced spending could significantly reduce SBS' marketing
opportunities and revenues, and, therefore, materially adversely affect its
financial condition, results of operations, or liquidity. Also, SBS believes
that many of its potential customers will rely on U.S. government funding for
the purchase of SBS' products. Sales to these customers may be reduced if
those funds are unavailable or delayed because of budget constraints or
bureaucratic processes.
RELIANCE ON INDUSTRY STANDARDS; FUNDAMENTAL TECHNOLOGY CHANGE. Most of SBS'
products are developed to meet certain industry standards, which define the
basis of compatibility in operation and communication of a system supported
by different vendors. Among such standards which SBS' products meet are
MIL-STD-1553, Telemetry IRIG Standards and various ANSI standards. These
standards are continuing to develop and can change. If these standards are
eliminated or changed, the design, manufacture or sale of SBS' products could
be inappropriate or obsolete and could require costly redesign to meet new or
emerging standards. SBS also believes that its success will depend in part on
its ability to develop products that evolve with changing industry standards
and customer preferences. SBS may or may not be successful in developing
those products in a timely manner, or in selling the products it develops.
SBS' delay or failure to adapt to changing industry standards could
significantly adversely affect its marketing and sales, revenues and
financial condition.
Many of SBS' product designs rely on state of the art digital
technology. Future advances in technology might make obsolete SBS' existing
product lines, which would require SBS to compete more and to undertake
costly redesign of its products to maintain its competitive position. SBS
might not be able to incorporate the new technology into its existing
products or to redesign its existing products in order to compete effectively.
SBS' competitors are continually introducing new and enhanced products
and solutions for business needs. These products and solutions probably will
affect the competitive environment in the markets in which they are
introduced. The development of new products and technologies, or the
adaptation or development of products and technologies in response to them,
requires commitments of financial resources, personnel and time well in
advance of sales. Decisions with respect to those commitments must accurately
anticipate both future demand and the technology that will be available to
meet that demand. SBS might not be able to adapt to future technological
changes. If it does not, SBS' business might be materially adversely affected.
PRODUCT MARKET MIGHT NOT DEVELOP. Many of SBS' potential customers design and
manufacture standard bus embedded computers internally. Increased market
acceptance of SBS' products and services depends in part on these customers
relying on SBS instead of themselves to provide embedded computer components.
SBS believes
Page 14
that increased market acceptance of its products will also depend on a number
of factors. These factors include the quality of SBS' design and production
expertise, the increasing use and complexity of embedded computer systems in
new and traditional products, the expansion of markets that are served by
standard bus embedded computers, time-to-market requirements of the Company's
actual and potential products, the assessment of direct and indirect cost
savings, and customers' willingness to rely on SBS for mission-critical
applications. SBS believes that in many customer applications, the cost of
its products may exceed or be perceived to exceed the cost of internal
development. SBS will not be able to achieve its business growth objectives
if market acceptance of its products does not increase.
POTENTIAL YEAR 2000 PROBLEMS. The Year 2000 ("Y2K") issue refers to the
inability of certain date-sensitive computer chips, software, and systems to
recognize a two-digit date field as belonging to the 21st century. Mistaking
"00" for 1900 or any other incorrect year could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing, a
temporary inability to process transactions, or send invoices, or engage in
other normal business activities. This is a significant issue for most, if
not all companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty. The Y2K issue may
create unforeseen risks to the Company from its internal computer systems as
well as from computer systems of third parties with which it deals. Failures
of the Company's and/or third parties' computer systems could have a material
adverse impact on the Company's ability to conduct its business (see
"Management's Discussion and Analysis: Year 2000 Issue").
COMPETITION. The standard bus embedded computer industry is
highly-competitive and fragmented, and SBS' competitors differ depending on
product type, company size, geographic market and application type. SBS faces
competition in each of its product lines. SBS believes that because of the
diverse nature of SBS' products and the fragmented nature of the embedded
computer market, there is little overlap of competitors for each product
line. Competition in all of SBS' product lines is based on: performance,
customer support, product longevity, supplier stability, breadth of product
offerings and reliability. At the end of the 1998 fiscal year, SBS had
revenues of $74.2 and net income of $10.1 million. Many of SBS' existing and
potential competitors are bigger companies which have financial,
technological and marketing resources significantly greater than those of
SBS, which may give them a competitive advantage. They and other competitors
may have established relationships with customers or potential customers
which can make it harder for SBS to sell its products to those customers. SBS
cannot promise that it will be able to compete effectively in its current or
future markets. Also, competitive pressures might significantly adversely
affect SBS' marketing and sales, revenues and financial condition.
In the CPU market in which SBS Embedded's products are marketed, SBS
competes with a number of other suppliers of CPU boards. SBS' direct
competitors include other companies that build CPU boards based on Intel
microprocessor technology, such as Force Computers, Inc. (a wholly-owned
subsidiary of Solectron Corporation), RadiSys Corporation, VME Microsystems,
Inc. and XYCOM, Inc. In addition, with the acquisition of OR and VI, SBS also
competes with suppliers of CPU boards based on Motorola 68OxO, and PowerPC
architectures.
In the generalized computer I/0 product area served by GreenSpring and
its IP product line, SBS has two classes of competition. The first class
includes companies that compete directly by selling IP products. The second
class includes companies that compete with I/0 products using a different
implementation to provide functionally equivalent products. SBS' competitors
in each of these classes include Acromag, Inc., Systran, Inc. and VME
Microsystems, Inc.
In the telemetry market, SBS competes with suppliers such as Aydin
Vector Division, AVTECH Systems, Inc., L3 Communications, Inc., Terametrix,
Inc. and Veda, Inc.
In the avionics interface market in which SBS' MIL-STD 1553 products are
marketed, SBS competes with a number of other companies that produce similar
avionics interface products. SBS' competitors include Ballard Technologies,
Inc., Data Devices Corporation, Excalibur Technologies Corporation, Condor
Engineering and
Page 15
Gesellschaft Fur Angewandte Informatik und Mikroelekemik, GmbH.
In SBS' interconnect and expansion unit product line, SBS competes with
personal computer (PC) manufacturers that offer computer motherboards with
multiple PCI slots and with companies that have similar product lines. There
is no significant direct competitor in this market.
In SBS' industrial computer systems and enclosure business, SBS competes
with other suppliers of ISA/PCI systems and enclosures such as I-Bus, a
subsidiary of Maxwell Technologies, Texas Micro, Inc. and Industrial Computer
Source.
AVAILABILITY OF COMPONENT MATERIALS. Many of SBS' products contain state of
the art digital electronic components. SBS is dependent upon third parties
for the continuing supply of many of these components. Some of the components
are obtained from a sole supplier, such as Xilinx, Inc., or a limited number
of suppliers, for which alternate sources may be difficult to locate.
Moreover, suppliers may discontinue or upgrade some of the products
incorporated into SBS' products, which could require SBS to redesign a
product to incorporate newer or alternative technology. Although SBS believes
that it has arranged for an adequate supply of components to meet its
short-term requirements, SBS does not have contracts which would assure
availability and price. If sufficient components are not available when SBS
needs them, SBS' product shipments could be delayed, which could affect SBS'
revenues during certain periods as well as lead to customer dissatisfaction.
If enough components are not available, SBS might have to pay premiums for
parts in order to make shipment deadlines. Paying premiums for parts would
lower or eliminate SBS' profit margin and hurt its business and financial
condition, or cause SBS to increase its inventory of scarce parts, which
would adversely affect SBS' cash flow.
RETENTION AND RECRUITMENT OF KEY EMPLOYEES. SBS' ability to maintain its
competitive position and to develop and market new products depends, in part,
upon its ability to retain key employees and to recruit and retain additional
qualified personnel, particularly engineers. If SBS is unable to retain and
recruit key employees, its product development, marketing and sales,
revenues, and business condition could suffer material adverse effects.
NO PATENT PROTECTION. Although SBS believes that some of its processes and
equipment may be proprietary, SBS has not sought patent protection for its
technology. SBS has relied upon trade secret laws, industrial know-how and
employee confidentiality agreements. SBS' processes and equipment might not
provide it with a sufficient competitive advantage to overcome its lack of
patent protection. Others could independently develop equivalent or superior
products or technology. Also, SBS might not be able to establish trade secret
protection, and secrecy obligations might not be honored. If consultants,
employees and other parties apply technological information developed
independently, by them or others, to Company projects, disputes may arise as
to the proprietary rights to that information. Those disputes may not be
resolved in favor of SBS.
SBS could have to litigate to enforce its proprietary rights, protect its
trade secrets, determine the validity and scope of the intellectual property
rights of others or defend against claims of infringement. That litigation
could be very expensive and could divert resources which SBS could otherwise
use in its business, which could hurt SBS and its business.
Patent applications in the United States are not publicly disclosed until the
patents issue, so patent applications may have been filed by someone else
that relate to SBS' products and technology. SBS does not believe that it
infringes any patents of which it is aware, but someone could make a patent
infringement claim against SBS. Such a claim might significantly hurt SBS and
its business. If someone asserts infringement or invalidity claims against
SBS, SBS might have to litigate to defend itself against those claims. In
certain circumstances, SBS might try to obtain a license under the claimant's
intellectual property rights. The claimant might not be willing to give SBS a
license at all or on terms acceptable to SBS.
PRODUCT LIABILITY. SBS' products and services could be subject to product
liability or government or commercial warranty claims. SBS maintains primary
product liability insurance with a general aggregate limit of $2.0
Page 16
million, $1.0 million per occurrence, and an $9.0 million excess policy.
While SBS has never been the subject of any significant claims of this kind,
its products are widely used in a variety of applications and claimants have
a propensity initially to pursue all possible contributors in a legal action.
If a claim is made against SBS, SBS' insurance coverage might not be adequate
to pay for its defense or to pay for any award, in which case SBS would have
to pay for it. Also, SBS might not be able to continue that insurance in
effect for premiums acceptable to SBS. If a litigant were successful against
SBS, a lack or insufficiency of insurance coverage could have a material
adverse effect upon SBS.
INTERNATIONAL SALES IN GENERAL. SBS sells its products in countries
throughout the world from its United States and European based offices. These
sales subject SBS to various governmental regulations, export controls, and
the normal risks involved in international sales. Sales of products
internationally are subject to political, economic and other uncertainties,
including, among others, risk of war, revolution, expropriation,
renegotiation or modification of existing contracts, standards and tariffs,
and taxation policies. They are also subject to international monetary
fluctuations which may make payment in United States dollars more expensive
for foreign customers (who may, as a result, limit or reduce purchases).
CHANGES IN EXCHANGE RATES. Substantially all of SBS' revenues to date have
been received in United States dollars. However, some sales in the future may
be in other currencies. Any decline in the value of other currencies in which
SBS makes sales against the United States dollar will have the effect of
decreasing SBS' earnings when stated in United States dollars. SBS does not
engage in any hedging transactions that might have the effect of minimizing
the consequences of currency fluctuations, and SBS does not intend to do so
in the immediate future.
TRADE POLICIES AND DISPUTES. The political and economic policies and concerns
of countries in which SBS makes or could make sales could result in the
adoption of new trade policies in those countries or the United States or
lead to trade disputes between those countries and the United States. These
could limit, reduce, eliminate or disrupt SBS' sales outside the United
States, which might adversely affect SBS' total revenues and business
prospects outside the United States.
POTENTIAL DILUTIVE EFFECT OF OUTSTANDING WARRANTS AND OPTIONS AND
REGISTRATION RIGHTS. SBS, in connection with its acquisition of GreenSpring
in August 1995, issued warrants to purchase 400,000 shares of Common Stock at
an exercise price of $4.50 per share (the "GreenSpring Warrants"). SBS also
registered the Common Stock underlying the GreenSpring Warrants for sale
under the Securities Act of 1933 (the "Securities Act"). In April 1996, SBS
registered under the Securities Act options for 133,333 shares held by SBS'
Chairman of the Board and Chief Executive Officer, Mr. Amenson. As of June
30, 1998, 140,236 of the GreenSpring Warrants remained, all of which were
exercisable. The holders of the GreenSpring Warrants also possess until
August 2000 the right to sell shares of Common Stock underlying the
GreenSpring Warrants alongside SBS should SBS file a registration statement
during this period.
As of June 30, 1998, SBS had 463,933 options and warrants outstanding which
could be exercised and 944,267 options which were not yet eligible for
exercise.
LIMITED PUBLIC FLOAT; TRADING; VOLATILITY OF STOCK PRICE. SBS' Common Stock
is traded on the Nasdaq National Market. While a public market currently
exists for SBS' Common Stock and the number of shares in the public float as
of June 30, 1998 was 5,328,512, trading volume in the four weeks ended June
30, 1998 averaged 25,587 shares traded per day. Thus, trading of relatively
small blocks of stock can have a significant impact on the price at which the
stock is traded. In addition, the Nasdaq National Market has experienced, and
is likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of SBS. SBS believes
factors such as quarterly fluctuations in financial results, announcements of
new technologies impacting SBS' products, announcements by competitors or
changes in securities analysts' recommendations may cause the market price to
fluctuate, perhaps substantially. These fluctuations, as well as general
economic conditions, such as recessions or high interest rates, may adversely
affect the market price of the Common Stock.
Page 17
ABSENCE OF DIVIDENDS. Since its inception, SBS has not paid cash dividends on
its Common Stock. SBS intends to retain future earnings, if any, to provide
funds for business operations and, accordingly, does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future.
ITEM 2. FACILITIES
The Company leases office and manufacturing space in Albuquerque, New Mexico,
Carlsbad, California, Menlo Park, California, Vista, California, Encinitas,
California, Raleigh, North Carolina, St. Paul, Minnesota and Angsburg and
Mindelheim, Germany. The Company's standard practice is to obtain all of its
facilities through operating leases. The Company maintains an insurance plan
covering all its facilities and contents.
The Albuquerque, New Mexico leased facility consists of 31,482 square feet
located in a multi-floor office building which includes adequate assembly and
test space for the Company's avionics interface product line, as well as
serving as the Company's corporate headquarters. Management believes that
this facility is capable of handling projected increases in production for
the foreseeable future, as the current capacity utilization of the available
productive floor space is approximately 50%. The lease term for the
Albuquerque, New Mexico facility runs through June 30, 2000, with an option
to extend the term for an additional five years.
The Company's general purpose I/O business is located in Menlo Park,
California. The 16,394 square foot facility, which is leased for a four year
term expiring May 31, 2000, is a one story multi-tenanted building in a
business park which consists of 6,000 square feet of office space and 10,394
square feet of assembly and test areas. Management believes that the facility
will be sufficient to serve the general purpose I/O business needs through
the term of the lease.
The Company's CPU products business, located in Raleigh, North Carolina,
leases a one story multi-tenanted facility consisting of approximately 4,000
square feet of office space and approximately 7,000 square feet of assembly
and test areas. The lease expires on November 30, 2002. Management believes
that the facility is adequate at the Company's current level of business and
that expansion space is available if required.
The Company's interconnect business relocated during fiscal 1998 from
Minneapolis, Minnesota to a 39,597 square foot leased facility, located in a
business park, in St. Paul, Minnesota. This facility, consisting of 14,813
square feet of office space and 24,784 square feet of production and
warehouse space, has been leased for a term of five years expiring on
November 30, 2002. In addition, the Company has an option to extend the term
of the lease for one consecutive period of twenty-four to thirty-six months.
Management believes that this facility will be sufficient to serve needs of
the interconnect business through the term of the lease.
The Company leases, in Carlsbad, California, a one story 12,000 square foot
building, located in a business park, consisting of approximately 6,000
square feet of office space and 6,000 square feet of assembly and test areas
for the Company's telemetry products and development of the Company's data
acquisition software. The lease term for the Carlsbad, California location
runs through July 2000. In addition, the Company's industrial computer and
enclosure business is located in a leased facility in Vista, California
consisting of approximately 10,661 square feet as part of a multi-tenant
industrial building. This lease expires on December 31, 1998. Management is
currently finalizing a seven year lease for a 75,160 square foot one story
facility located in a business park in Carlsbad, California and will relocate
the Company's telemetry, data acquisition software development, and
industrial computer and enclosure operations, as well as the Company's recent
acquisition, VI, currently located in Encinitas, California (see "Management
Discussion and Analysis: Subsequent Events"), to this facility. Management
estimates that the relocation of these activities will be completed by
January 1999 and will not be disruptive to their operations. Management
believes that this facility will sufficiently serve the needs of these
operations through the term of the lease.
The Company leases, in Angsburg, Germany (see "Management's Discussion and
Analysis: Subsequent Events"), four floors, of a six floor building,
consisting of approximately 20,000 square feet of office and assembly and
test areas for its or operations. The lease has a term of ten years expiring
December 31, 2005 with an option to expand to the additional two floors,
consisting of 5,000 square feet each, five years from the commencement of the
lease. Management believes that the facility is sufficient to serve the needs
of the or operations through the term of the lease. In addition, the Company
leases approximately 5,000 square feet of manufacturing space in a multi-use
facility, in Mindelheim, Germany, for its other operations. The lease had a
five-year term that commenced May 1, 1992 with an option to extend in
one-year increments open three months written notice. Management believes
that the facility is sufficient to serve the needs of others for the
foreseeable future.
Page 18
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in Virtual Systems Group, Inc. (VSG) v.
SBS Technologies, Inc., filed on June 19, 1996 in the Second Judicial
District Court, County of Bernalillo, State of New Mexico. The plaintiff, a
company engaged by SBS to market its Judgmental Use of Force Trainers (the
Company sold this business in June 1997), claimed that the Company failed to
fulfill all its obligations under an Agreement between the Company and VSG
whereby VSG would market the Company's Judgmental Use of Force Trainers. The
Company settled this lawsuit in March 1998 for $40,000.
The Company is subject to various claims which arise in the ordinary course
of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the
financial position, results of operations, or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of closing price of the Company's
common stock as reported on the NASDAQ National Market System for each full
fiscal quarter within the last two fiscal years:
High Low
---- ---
First Quarter 1997 $ 19.750 $ 10.625
Second Quarter 1997 39.000 19.000
Third Quarter 1997 35.000 15.250
Fourth Quarter 1997 24.875 10.875
First Quarter 1998 26.250 20.125
Second Quarter 1998 31.375 22.125
Third Quarter 1998 29.250 23.000
Fourth Quarter 1998 33.375 26.500
The Company's common stock is traded over the counter on the NASDAQ National
Market System using the symbol SBSE.
Based on the Company's survey of brokerage houses, management believes that
as of September 1, 1998, the number of common stockholders of record was
approximately 250, at which date the closing market value of the Company's
common stock was $22.50 per share.
The Company has not paid any cash dividends on its common stock. Management's
current policy is to retain earnings for use in the Company's operations and
for expansion of the Company's business. No dividend payments are expected to
be paid in the future.
Page 20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended June 30, 1994
through June 30, 1998 have been derived from the Company's audited
consolidated financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated financial statements
and related notes thereto included elsewhere herein.
Year ended June 30
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Sales - continuing operations $ 74,213,901 52,814,568 31,331,793 16,217,648 10,196,568
Net income - continuing operations $ 10,090,188 461,685 3,580,907 1,844,876 870,750
Net income per common share $ 1.81 0.10 1.19 0.66 0.30
Net income per common share - assuming dilution $ 1.64 0.09 0.97 0.65 0.30
Total assets $ 74,315,187 61,165,014 20,443,672 19,904,922 13,476,737
Long-term debt, excluding current installments $ -- 2,816,251 5,188,320 5,341,649 273,573
Total liabilities $ 10,051,200 10,838,326 10,392,752 14,855,674 7,611,400
Total stockholders' equity $ 64,263,987 50,326,688 10,050,920 5,049,248 5,865,337
- ----------------------------------------------------------------------------------------------------------------------------------
Note: The Company has not declared any dividends during the periods presented.
No future dividend payments are expected.
On November 24, 1997, the Company completed the purchase of Micro
Alliance.
On November 18, 1996, the Company completed the purchase of Bit 3. In
connection with the acquisition of Bit 3, the Company recorded an $11.0
million in-process R&D charge in the second quarter of fiscal 1997.
For fiscal 1997, net income excluding the $11.0 million in-process R&D
charge would have been $7,061,685 (net of income taxes). Net income per
common share excluding the $11.0 million in-process R&D charge would
have been $1.56 and net income per common share - assuming dilution
would have been $1.34.
On August 19, 1996, the Company completed a pooling of interests
transaction with SBS Embedded, the results of which are included in
fiscal 1997 on a prospective basis.
On April 28, 1995 the Company completed the purchase of GreenSpring.
On April 26, 1995 the Company sold its flight simulation business to
Camber Corporation, which was reported as discontinued operations in
the consolidated financial statements.
The Selected Financial Data for the statements of operations data are
for continuing operations only.
Page 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING
STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND ARE SUBJECT TO A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL BUSINESS AND
ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE COMPANY'S
PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW
PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS AND OTHER RISK FACTORS (SEE "ITEM 1. RISK FACTORS").
OVERVIEW
The Company is a leading designer and manufacturer of open-architecture,
standard bus embedded computer components that system designers can easily
utilize to create a custom solution specific to the user's unique
application. The Company's product lines include CPU boards ("CPU"), general
purpose input/output ("I/O") modules, avionics interface modules and
analyzers, interconnection and expansion units, telemetry boards, data
acquisition software and industrial computer systems and enclosures. In 1992,
the Company added a second embedded computer product line with the
acquisition of Berg, a developer of telemetry interface circuit boards. In
1995, the Company added a third embedded computer product line with the
acquisition of GreenSpring. GreenSpring is engaged in the design, development
and manufacture of general purpose I/O products. In recent years, the Company
has discontinued certain of its operations. From its inception in 1986 until
1995, the Company provided flight simulators for a variety of military
aircraft to U.S. and foreign entities. In April 1995, following a decline in
the defense industry, the Company divested this business and recorded a
related charge of $2.3 million. Additionally, from 1987 through the first
half of fiscal 1996, the Company provided engineering services that generated
minimal revenue and profit. The Company subsequently exited this business.
The Company marketed a Judgmental Use of Force Training System, used to train
police and military personnel in the appropriate situational use of force,
from 1993 through fiscal year 1997, when the Company sold this business as
discussed in "Sale of Judgmental Use of Force Business" below. Since 1995,
the Company has focused its efforts and investments in the embedded computer
marketplace, expanding its product offerings and marketing with the
acquisition of five embedded computer companies as discussed in "Recent
Acquisitions," "Public Stock Offering," and "Subsequent Events" below.
RECENT ACQUISITIONS
On November 24, 1997, the Company completed the purchase of Micro Alliance, a
privately held San Diego county-based manufacturer of industrial computer
systems and enclosures. Micro Alliance specializes in the design and
manufacture of special-purpose PC-compatible computer systems offering a
variety of CPU boards and system enclosures, including rack mount, desktop
and mobile systems. Most systems contain passive backplanes that allow the
addition of up to 20 ISA and PCI cards. These systems are often customized to
meet the needs of particular OEM applications. Under the terms of the
purchase agreement dated November 24, 1997 (the "Agreement") among the
Company, Micro Alliance, a California corporation, and Jeffrey Huston, Edward
Larson, and Sherrin W. Larson (together "Shareholders"), the Company acquired
all of the outstanding capital stock of Micro Alliance for a total purchase
price of $5.8 million. Of this total purchase price, $250,000 in cash was
placed in a joint escrow account until the earlier of resolution of certain
tax issues or the end of any applicable statute of limitations. The financial
results of Micro Alliance have been included in the Company's Consolidated
Financial Statements from November 24, 1997. As a result of the acquisition,
the Company recorded $4.5 million of goodwill, which is being amortized over
a ten-year period.
Page 22
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
On November 18, 1996, the Company completed the purchase of Bit 3. Bit 3 is a
St. Paul-based manufacturer of computer networking and interconnection
hardware for many of the most widely used computer architecture standards in
the standard bus embedded computer market. Under the terms of the purchase
agreement dated October 8, 1996 (the "Acquisition Agreement") among the
Company and the two shareholders of Bit 3 (the "Sellers"), the Company
acquired all of the outstanding capital stock of Bit 3 for a total purchase
price of $24.0 million paid or to be paid from the proceeds from the public
stock offering (see "Public Stock Offering") and cash flow from the Company's
operations. Of this total purchase price, $20.0 million was paid to the
Sellers in cash upon closing of the offering. Of the balance of $4.0 million,
$1.0 million was paid to the Sellers on July 1, 1997 and $3.0 million was
paid to the Sellers on July 1, 1998, pursuant to secured promissory notes
according to the terms of the Acquisition Agreement. The financial results of
Bit 3 have been included in the Company's Consolidated Financial Statements
from November 18, 1996. In connection with the acquisition of Bit 3, the
Company recorded an $11.0 million earnings charge based on an assessment by
the Company, in conjunction with an independent valuation firm, of purchased
technology of Bit 3. The assessment determined that $11.0 million of Bit 3's
purchase price represented technology that does not meet the accounting
definition of "completed technology," and thus should be charged to earnings
under generally accepted accounting principles. In addition, as a result of
the acquisition, the Company recorded $10.0 million of goodwill which is
being amortized over a ten year period.
The following pro forma consolidated results of operations have been prepared
as if the acquisitions of Bit 3 and Micro Alliance had occurred at July 1,
1996.
June 30 June 30
(in thousands except per share amounts) 1998 1997
---- ----
Sales $ 76,437 64,476
Net income 10,014 1,862
Net income per common share 1.79 0.41
---- ----
---- ----
Net income per common share - assuming dilution 1.62 0.35
---- ----
---- ----
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would
have been achieved had the acquisitions been consummated as of that time, nor
is it intended to be a projection of future results.
On August 19, 1996, the Company completed a pooling of interests transaction
with SBS Embedded based in Raleigh, North Carolina. SBS Embedded manufactures
Intel processor-based CPU boards for the standard bus embedded computer
market. The financial results of SBS Embedded are not included in the
Company's Consolidated Financial Statements for the periods prior to July 1,
1996, as historical results did not have a material effect on combined
consolidated results of operations. For its fiscal year ended March 31, 1996,
SBS Embedded recorded sales of approximately $4.0 million and income from
continuing operations of approximately $103,000.
PUBLIC STOCK OFFERING
On November 18, 1996, the Company consummated a fully underwritten public
offering of 1,500,000 shares of the Company's common stock at a price of
$25.625 per share. In addition, certain selling shareholders sold an
additional 300,000 shares in the offering. The proceeds of the sale of the
300,000 additional shares did not benefit the Company; however, the Company
did receive the exercise price of $4.80 per share from the exercise of
warrants covering 100,000 of the shares. The offering was managed by an
underwriting group led by Cowen & Co. and SoundView Financial Group, Inc. The
net proceeds to the Company from the public
Page 23
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
stock offering were used to fund the acquisition of Bit 3 (see "Recent
Acquisitions" above), to repay long-term debt, and the balance has been used
for general working capital requirements and acquisitions.
SALE OF JUDGMENTAL USE OF FORCE BUSINESS
On June 26, 1997, the Company sold substantially all of the assets of the
Company's Judgmental Use of Force Business to FATS, Inc. for $2.0 million.
This Business marketed a Judgmental Use of Force Training System used to
train police and military personnel in appropriate situational use of force.
The results of operations of this business were immaterial to the total
operating results of the Company.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data as a percentage of sales:
Year ended June 30
----------------------------------------------
1998 1997 1996
------------ ----------- ----------
Sales 100.0% 100.0% 100.0%
Cost of Sales 42.8 47.2 46.3
------------ ----------- ----------
Gross Profit 57.2 52.8 53.7
Selling, general and administrative expense 22.8 19.4 20.1
Research and development expense 10.8 8.4 9.1
Acquired in-process research and development charge -- 20.8 --
Amortization of intangible assets 2.6 2.8 2.8
------------ ----------- ----------
Operating income 21.0 1.4 21.7
Interest income (expense) (net) 1.3 0.1 (2.7)
------------ ----------- ----------
Income before income taxes 22.3 1.5 19.0
Income taxes 8.7 0.6 7.6
------------ ----------- ----------
Net income 13.6% 0.9% 11.4%
------------ ----------- ----------
------------ ----------- ----------
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. In fiscal 1998, sales increased 40.5%, or $21.4 million, from $52.8
million in fiscal 1997 to $74.2 million. Of this 40.5% increase, sales
contributed by Micro Alliance, which was acquired on November 24, 1997,
comprised 9.1%; sales contributed by Bit 3, which was acquired on November
18, 1996, comprised 14.7%; and 19.8% of this increase was attributable to the
Company's other product lines, offset by 3.1% due to the sale of the
Company's Judgmental Use of Force business on June 26, 1997. Throughout
fiscal 1998, prices for the Company's products remained firm, and unit
shipments increased across all product lines. Historically, less than 5% of
the Company's sales were direct sales to Asian-based customers. The Company
experienced minimal direct effect (less than 2% of sales) on its operations
due to the current Asian currency and economic crisis. Management believes
that any future direct effect on the Company from the Asian currency and
economic crisis will remain minimal; however, it is difficult for the Company
to predict any indirect effect derived from sales to U.S. based customers
whose products are sold into Asia. Sales of the Company's products are
recorded at the time of shipment.
Page 24
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
GROSS PROFIT. In fiscal 1998, gross profit increased 52.0%, or $14.5 million,
from $27.9 million in fiscal 1997, to $42.4 million. In fiscal 1998, gross
margin increased to 57.2% of sales from 52.8% in fiscal 1997. This increase
was primarily due to the acquisition of Micro Alliance and Bit 3, increased
sales volume over fixed costs, material cost improvements, and a reduction in
commissionable sales due to the movement from an independent representative
sales force to a direct sales force, and the sale of the Company's low margin
Judgmental Use of Force business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1998, selling, general
and administrative expense increased 65.7%, or $6.7 million from $10.2
million in fiscal 1997, to $16.9 million resulting from the added
expenditures due to the acquisitions of Bit 3 and Micro Alliance, and
additional salaried sales personnel as the Company transitioned from an
independent sales force to a direct sales force, as well as additional
administrative staffing and promotional costs commensurate with the growth of
the Company. For the same reasons, selling, general and administrative
expense increased as a percentage of sales from 19.4% in fiscal 1997 to 22.8%
in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1998, research and development
expense increased by 81.8%, or $3.6 million, from $4.4 million in fiscal
1997, to $8.0 million. The increase resulted primarily from the added
expenditures due to the acquisition of Bit 3 as well as increased investment
in new products in the Company's other product areas. For the same reasons,
research and development expense increased as a percentage of sales from 8.4%
in fiscal 1997, to 10.8% in fiscal 1998.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1998, amortization of intangible
assets increased 26.7%, or $400,000 from $1.5 million in fiscal 1997, to $1.9
million as a result of goodwill amortization associated with the acquisitions
of Bit 3 and Micro Alliance.
INTEREST INCOME, NET OF INTEREST EXPENSE. In fiscal 1998, interest income,
net of interest expense, was $933,000 compared to $14,000 in fiscal 1997.
This change is attributable to the elimination of all bank debt effective
November 22, 1996, by application of some of the proceeds of the public stock
offering, and earnings on surplus cash from operations as well as earnings on
cash received above the Company's immediate requirements from the public
offering, offset by imputed interest of $184,000 on notes payable to the
former owners of Bit 3.
INCOME TAXES. For fiscal 1998 and fiscal 1997 income taxes represent
effective income tax rates of 39.0% and 40.0%, respectively. The decrease in
the effective rate is due to tax planning strategies implemented by the
Company in fiscal 1998, including a research and experimental tax credit.
EARNINGS PER SHARE. For fiscal 1998, net income per common share was $1.81
compared to $0.10 for fiscal 1997. Net income per common share - assuming
dilution was $1.64 for fiscal 1998 compared to $0.09 for fiscal 1997. This
change is primarily due to the $11.0 million charge to earnings associated
with the acquisition of Bit 3 in November 1996, offset by additional shares
outstanding. For fiscal 1997, net income per common share-assuming dilution,
excluding the charge to earnings, net of income taxes, would have been $1.34.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES. In fiscal 1997, sales increased 68.7%, or $21.5 million, from $31.3
million in fiscal 1996 to $52.8 million. Sales contributed by SBS Embedded,
which was acquired effective August 9, 1996 and pooled effective July 1,
1996, and sales contributed by Bit 3, which was acquired on November 18,
1996, comprised 48.2% of this increase and 20.5% of this increase was
attributable to the Company's other product lines. The increases in sales for
1997 resulted from increased sales of existing products, introduction of new
products, and sales of new and existing products to new customers in all of
the Company's product lines. Throughout fiscal 1997, prices for the Company's
products remained firm.
Page 25
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
GROSS PROFIT. In fiscal 1997, gross profit increased 66.1%, or $11.1 million,
from $16.8 million in fiscal 1996, to $27.9 million, as a result of increased
sales volume. In fiscal 1997, gross margin decreased to 52.8% of sales from
53.7% in fiscal 1996, as a result of sales mix. In fiscal 1997, although
gross margins of each of the Company's product lines remained relatively
constant with fiscal 1996, total sales were comprised of a higher percentage
of commercial products (i.e., general purpose I/O, CPU, and interconnect
products), which generally yield lower gross margins than the Company's
avionics and telemetry products. Reductions in component material costs in
each of the Company's product lines partially offset the effect on gross
margin of this shift in sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. In fiscal 1997, selling, general
and administrative expense increased 61.9%, or $3.9 million from $6.3 million
in fiscal 1996, to $10.2 million, largely because of the increased staffing
resulting from the SBS Embedded and Bit 3 acquisitions and subsequent
augmentation of those staffs in an effort to increase productivity and
efficiency, as well as additional staffing and promotional costs related to
the Company's avionics, telemetry, and I/O product lines. However, selling,
general and administrative expense decreased as a percentage of sales from
20.1% in fiscal 1996 to 19.4% in fiscal 1997 as the increase in sales more
than offset the increase in expense.
RESEARCH AND DEVELOPMENT EXPENSE. In fiscal 1997, research and development
expense increased by 57.1%, or $1.6 million, from $2.8 million in fiscal
1996, to $4.4 million. The increase resulted primarily from the added
expenditures resulting from the SBS Embedded and Bit 3 acquisitions, as well
as additional staffing required for new product development in the avionics,
telemetry, and I/O product lines. However, research and development expense
decreased as a percentage of sales from 9.1% in fiscal 1996, to 8.4% in
fiscal 1997, as a result of sales increasing at a faster rate than the
expense.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. In conjunction with the
acquisition of Bit 3 completed on November 18, 1996, the Company recorded an
$11.0 million earnings charge based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
Bit 3. The assessment determined that $11.0 million of Bit 3's purchase price
represented technology that did not meet the accounting definition of
completed technology, and thus should be charged to earnings under generally
accepted accounting principles.
AMORTIZATION OF INTANGIBLE ASSETS. In fiscal 1997, amortization of intangible
assets increased 70.1%, or $620,000, from $884,000 in fiscal 1996, to $1.5
million as a result of goodwill amortization associated with the acquisition
of Bit 3.
INTEREST INCOME, NET OF INTEREST EXPENSE. In fiscal 1997, interest income,
net of interest expense, was $14,000 compared to interest expense, net of
interest income, of $830,000 in fiscal 1996. This change is attributable to
the reduction of debt incurred primarily to finance the acquisition of
GreenSpring in April 1995, the elimination of all bank debt effective
November 22, 1996, by application of some of the proceeds of the public stock
offering, and earnings on surplus cash from operations as well as earnings on
cash received above the Company's immediate requirements from the public
offering, offset by imputed interest of $144,000 on notes payable to the
former owners of Bit 3.
INCOME TAXES. For fiscal 1997 and fiscal 1996 income taxes represent an
effective income tax rate of 40.0%.
EARNINGS PER SHARE. For fiscal 1997, net income per common share was $0.10
compared to $1.19 for fiscal 1996. Net income per common share - assuming
dilution was $0.09 for fiscal 1997 compared to $0.97 for fiscal 1996. This
reduction is due to the $11.0 million charge to earnings associated with the
acquisition of Bit 3 in November 1996 and due to more shares outstanding. For
fiscal 1997, net income per common share - assuming dilution excluding the
charge to earnings, net of income taxes, would have been $1.34.
Page 26
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company uses a combination of the sale of equity securities, internally
generated funds and bank borrowings to finance its acquisitions, working
capital requirements, capital expenditures and operations.
Cash totaled $22.9 million at June 30, 1998, an increase of $1.2 million from
June 30, 1997. This increase is a result of cash flow provided by operations
of $8.7 million and $2.0 million received from the exercise of stock options
and warrants, reduced by $5.6 million for the purchase of Micro Alliance, net
of cash received, $3.0 million for the purchase of property and equipment,
and $1.0 million for the payments to the former owners of Bit 3, in
conjunction with the acquisition. The Company's growth during the fiscal year
caused the Company to increase accounts receivable and inventory. Liabilities
were in line with the current level of business. The exercise of stock
options related to the Company's stock option plans reduced the Company's tax
liability.
In fiscal years ended June 30, 1997 and June 30, 1996, the Company generated
$10.2 million and $3.4 million, respectively, of positive cash flow from
operating activities. In fiscal 1997, the positive cash flow from operating
activities combined with the net proceeds from the sale of common stock (see
"Public Stock Offering") provided the Company sufficient funds to acquire Bit
3 in November 1996 and to pay down all existing debt. In fiscal 1996, the
positive cash flow from operating activities was partially used to pay down
bank debt, to purchase equipment and to acquire the IndustryPack-Registered
Trademark- compatible product line from Wavetron Microsystems, Inc. in January
1996.
On April 26, 1996 and November 15, 1996, the Company amended its bank
financing agreement with NationsBank, N.A. originally entered into in April
1995, to provide the Company with a $6.8 million term loan and a $2.5 million
revolving line of credit. The term loan was completely paid down from the
proceeds of the public stock offering. The revolving line of credit matured
on October 30, 1997, and was not renewed. For the entire year ended June 30,
1998, there were no borrowings drawn on the revolving line of credit. The
Company is currently negotiating a $15.0 million credit facility with
NationsBank, N.A. Management believes that financial resources, including its
internally generated funds, debt capacity, and the remaining net proceeds
from the public offering, will be sufficient to finance the Company's current
operations and capital expenditures, excluding acquisitions, for the next
twelve months.
For the three most recent fiscal years, there has been no significant impact
from inflation or changing prices on the Company's sales or income from
continuing operations.
YEAR 2000 ISSUE
DESCRIPTION OF THE ISSUE. The Y2K issue refers to the inability of certain
date-sensitive computer chips, software, and systems to recognize a two-digit
date field as belonging to the 21st century. Mistaking "00" for 1900 or any
other incorrect year could result in a system failure or miscalculations
causing disruptions to operations, including manufacturing, a temporary
inability to process transactions, or send invoices, or engage in other
normal business activities. This is a significant issue for most, if not all
companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty. The Y2K issue may
create unforeseen risks to the Company from its internal computer systems as
well as from computer systems of third parties with which it deals. Failures
of the Company's and/or third parties' computer systems could have a material
adverse impact on the Company's ability to conduct its business.
Page 27
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
YEAR 2000 TASK FORCE. The Company assembled, in April 1998, an internal task
force, chaired by the CEO and comprised of senior managers throughout the
Company, to review its products, business and engineering applications and
suppliers and develop contingency plans for Y2K readiness to be completed by
the end of calendar 1999. The goal of the task force is to minimize the
effect that Y2K issues will have on the Company and its customers. The CEO of
the Company updates the Board of Directors on its Y2K readiness at each
scheduled Board Meeting.
INTERNAL BUSINESS AND ENGINEERING SYSTEMS. The task force is currently
reviewing all internal business and engineering computer systems to ensure
that such systems either will be Y2K ready, or will be modified or replaced
by Y2K ready systems. The Company has already been assured that its business
information system, installed in 1998 and utilized at most of its locations,
is Y2K ready as long as the Company adheres to the supplier's Y2K readiness
guidelines. The Company plans to simulate and test, in a Y2K environment, its
business information systems to verify its Y2K readiness by the middle of
calendar 1999. All other internal engineering development applications and
systems are planned to be modified if necessary, by the middle of calendar
1999.
SUPPLIERS. The major suppliers to the Company are component parts
distributors and contract manufacturers. Often the Company sources its
products and manufacturing services from multiple, competing vendors. The
Company is conducting reviews of its key suppliers to ensure Y2K readiness of
as many vendors as possible and has initiated communication with all of its
key suppliers to determine to what extent the Company may be vulnerable due
to their failure to be Y2K ready. This communication, including site visits
by Company personnel, will be ongoing throughout calendar 1999. There can be
no assurance that the systems of other companies on which the Company relies
will be Y2K ready on a timely basis and will not have an adverse effect on
the operations of the Company. In the instances where the Company is unable
to determine that its vendors have taken appropriate steps to minimize
disruption due to non-Y2K readiness, the Company will consider contingency
plans, including moving to currently identified alternate sources, or
developing new alternate sources.
PRODUCTS. The Company also has a program to assess the capability of its
existing and legacy products to handle the year 2000. In addition, all
products under development are also being reviewed to ensure Y2K readiness
prior to release. Certain of the Company's computer processor board level
products and integrated computer systems utilize computer chips that include
built in operating systems ("BIOS") allowing the computer to initialize and
load software. For many users, software is provided by sources other than the
Company. As with the typical PC computer, the assessment of whether a
complete system will operate correctly may depend on the BIOS capability and
software. To the extent that older BIOS or software are not Y2K ready, they
may need to be upgraded or replaced.
COSTS. The Company expects the cost of its Y2K assessment, including both
incremental spending and redeployed resources, will not be material. The
current assessment does not include potential costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business. This assessment is subject to change. Since there
is no uniform definition of "Y2K readiness" and since all customer situations
cannot be anticipated, particularly those involving third party products, the
Company may see claims as a result of the Y2K transition. Such claims, if
successful, could have a material adverse impact on future results.
CUSTOMERS. Since the Company has no customer which comprises more than 5% of
its sales, the Company believes that the effect of a failure of any single
customer to continue to purchase goods and services from the Company due to
non-Y2K readiness will not be material to the operations of the Company. As
the Company sells its products and services to many hundreds of customers,
there can be no assurance that some of
Page 28
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
the Company's customers will not become Y2K ready, and in the aggregate, have
a material effect on the Company's operations.
SUBSEQUENT EVENTS
On July 1, 1998, the Company acquired through its newly formed subsidiary,
SBS Holdings GmbH, a 50.1% interest in or. Based in Augsburg, Germany, OR
designs, manufactures, and markets CPU boards utilized in a wide range of
embedded computer applications. As part of the acquisition, the Company
acquired, through its newly formed subsidiary, SBS Holdings GmbH, a 50.2%
interest in ORTEC, a Mindelheim, Germany based related company which
manufactures OR's commercial products and electronic products for other
customers. The Company also acquired, through its wholly-owned subsidiary SBS
Embedded Computers, Inc. based in Raleigh, NC, 100% of the shares of OR
Computers, Inc, based in Fairfax, Virginia, which is the U.S. marketing
support organization for the OR product line. In addition, the Company and
the shareholders of both OR and ORTEC entered into exclusive option
agreements which means that the Company may acquire the remaining shares of
both companies on February 28, 1999. The purchase price, excluding
transaction costs, for the majority interest in the two companies based in
Germany and 100% of OR Computers Inc. was DM 17.5 million, approximately $9.7
million, paid in cash and common stock at closing. The purchase price for the
remaining interest in the two companies based in Germany is DM 17.2 million,
approximately $9.5 million based on the exchange rate at June 26, 1998. The
acquisition will be accounted for under the purchase method, whereby the
purchase price will be allocated to the underlying assets and liabilities
based upon their estimated fair values. It is expected that a portion of the
purchase price will be allocated to in-process research and development
which, under generally accepted accounting principles, will be expensed by
the Company in the quarter ending September 30, 1998. Goodwill will be
amortized over 10 years. For the year ended December 31, 1997, combined sales
and net income of OR, ORTEC, and OR Computers, Inc. were approximately $12.1
million and $1.8 million, respectively. In fiscal 1999, the Company plans to
change the name of OR to SBS OR Industrial Computers GmbH; OR Computers, Inc.
will operate as a wholly-owned subsidiary of SBS Embedded Computers, Inc. for
the foreseeable future.
On August 12, 1998, the Company completed the acquisition of VI for $5.0
million, subject to adjustment upon finalizing the closing balance sheet.
Based in Encinitas, California, VI designs, manufactures and markets CPU
boards based on the Motorola PowerPC processor for computer applications that
utilize VME and CompactPCI bus standards. The acquisition will be accounted
for under the purchase method, which means that the purchase price will be
allocated to the underlying assets and liabilities based upon their estimated
fair values. Goodwill will be amortized over 10 years. For the year ended
December 31, 1997, VoI had sales of approximately $5.6 million and net income
of approximately $480,000.
NEW ACCOUNTING STANDARDS
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.
Page 29
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures About Segments Of An Enterprise And Related Information." 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. The Company
will adopt SFAS 131 in fiscal 1999, having identified its reportable segments
as the Computer Group and the Aerospace Group.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, Software Revenue Recognition, to
supersede SOP 91-1, the previously released SOP on this topic. SOP 97-2
provides additional guidance on when revenue should be recognized, and in
what amounts, for licensing, selling, leasing, or otherwise marketing
computer software. The provisions of SOP 97-2 are effective for transactions
entered into in fiscal years beginning after December 15, 1997. Adoption of
SOP 97-2 is not expected to have a material adverse impact on the Company's
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's liquid investment is cash invested either in money market
accounts or in overnight repurchase agreements. The Company's long-term debt
as of June 30, 1998 and 1997 was at a fixed interest rate maturing within one
year. As a result, the Company believes that the market risk arising from its
holdings of financial instruments is minimal.
In conjunction with the acquisitions of OR and ORTEC in July 1998, the
Company entered into an option agreement to acquire the remaining interests
in OR and ORTEC for DM 17.2 million (see "Management's Discussion and
Analysis: Subsequent Events"). Accordingly, the Company is subject to
potentially adverse movements in the foreign currency exchange rates. As of
September 1998, the Company has not entered into any foreign exchange forward
contracts to reduce its exposure to changes in the foreign currency exchange
rate on the purchase option.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SBS Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SBS
Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998 in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
Albuquerque, New Mexico
August 4, 1998
Page 31
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ASSETS June 30, 1998 June 30, 1997
------------------- -------------------
Current assets:
Cash and cash equivalents $ 22,874,754 21,661,671
Receivables, net (note 5) 13,118,717 9,244,269
Inventories 10,661,211 7,705,470
Deferred income taxes (note 8) 1,600,000 1,327,000
Prepaid expenses 288,350 232,283
Other current assets 335,694 128,560
--------------- ---------------
Total current assets 48,878,726 40,299,253
--------------- ---------------
Property and equipment, at cost 6,776,965 4,729,259
Less accumulated depreciation 2,316,689 2,247,408
--------------- ---------------
Net property and equipment 4,460,276 2,481,851
--------------- ---------------
Intangible assets, net 16,694,154 14,099,254
Deferred income taxes (note 8) 4,230,000 4,253,000
Other assets 52,031 31,656
--------------- ---------------
Total assets $ 74,315,187 61,165,014
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,000,000 1,013,316
Accounts payable 2,062,373 1,541,846
Accrued representative commissions 236,228 449,699
Accrued salaries 1,996,431 1,868,623
Accrued compensated absences 743,944 560,061
Income taxes (note 8) 901,909 1,095,162
Other current liabilities (note 3) 1,110,315 1,493,368
--------------- ---------------
Total current liabilities 10,051,200 8,022,075
Long-term liabilities:
Long-term debt, excluding current installments - 2,816,251
--------------- ---------------
Total long-term liabilities - 2,816,251
--------------- ---------------
Total liabilities 10,051,200 10,838,326
--------------- ---------------
Stockholders' equity:
Common stock, no par value; 100,000,000 shares authorized,
5,678,200 issued and outstanding at June 30, 1998
5,405,378 issued and outstanding at June 30, 1997 47,778,033 43,889,754
Common stock warrants (note 10) 70,118 111,286
Retained earnings 16,415,836 6,325,648
--------------- ----------------
Total stockholders' equity 64,263,987 50,326,688
--------------- ----------------
Total liabilities and stockholders' equity $ 74,315,187 61,165,014
--------------- ----------------
--------------- ----------------
See accompanying notes to consolidated financial statements
Page 32
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Year Ended June 30
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Sales $ 74,213,901 52,814,568 31,331,793
Cost of sales 31,793,078 24,910,271 14,510,106
---------------- ---------------- ----------------
Gross Profit 42,420,823 27,904,297 16,821,687
Selling, general and administrative expense 16,891,907 10,223,374 6,292,954
Research and development expense 7,983,570 4,422,152 2,846,300
Acquired in-process research and
development charge - 11,000,000 -
Amortization of intangible assets 1,937,353 1,504,524 884,438
---------------- ---------------- ----------------
Operating income 15,607,993 754,247 6,797,995
---------------- ---------------- ----------------
Interest income 1,120,871 523,115 9,210
Interest expense (187,676) (508,677) (839,028)
---------------- ---------------- ----------------
933,195 14,438 (829,818)
---------------- ---------------- ----------------
Income before income taxes 16,541,188 768,685 5,968,177
Income taxes (note 8) 6,451,000 307,000 2,387,270
---------------- ---------------- ----------------
Net income $ 10,090,188 461,685 3,580,907
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net income per common share $ 1.81 0.10 1.19
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net income per common share -
assuming dilution $ 1.64 0.09 0.97
---------------- ---------------- ----------------
---------------- ---------------- ----------------
See accompanying notes to consolidated financial statements
Page 33
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
Common Total
stock Common stock-
-------------------------- stock Retained holders'
Shares Amount warrants earnings equity
---------- ------------ ---------- ------------- -------------
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 10) - - 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
SBS Embedded (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
Exercise of stock options
and warrants 272,822 2,032,675 (41,168) - 1,991,507
Income tax benefit from stock
options exercised - 1,855,604 - - 1,855,604
Net income - - - 10,090,188 10,090,188
---------- ------------ ---------- ------------- -------------
Balance at June 30, 1998 5,678,200 $ 47,778,033 $ 70,118 $ 16,415,836 $ 64,263,987
---------- ------------ ---------- ------------- -------------
---------- ------------ ---------- ------------- -------------
See accompanying notes to consolidated financial statements
Page 34
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 10,090,188 461,685 3,580,907
------------ ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 960,943 705,160 316,494
Amortization of intangible assets 1,937,353 1,504,524 884,438
Bad debt expense 136,078 223,004 56,933
Deferred income taxes (250,000) (5,141,037) (13,000)
(Gain) loss on disposition of assets 7,802 (189,579) 44,218
Imputed interest 183,749 144,072 -
Acquired in-process research and development charge - 11,000,000 -
Changes in assets and liabilities:
Receivables (3,066,609) (888,824) 673,406
Inventories (2,480,430) (541,340) (1,192,938)
Prepaids and other assets (262,465) 260,367 144,862
Accounts payable 343,790 (143,036) (635,049)
Accrued representative commissions (253,711) 79,181 27,810
Accrued salaries 53,870 683,403 562,603
Accrued compensated absences 173,912 65,584 58,270
Income taxes (247,290) 873,333 (127,532)
Other current liabilities (460,937) (555,158) (943,359)
------------ ----------- -----------
Net adjustments (3,223,945) 8,079,654 (142,844)
------------ ----------- -----------
Net cash provided by operating activities 6,866,243 8,541,339 3,438,063
------------ ----------- -----------
Cash flows from investing activities:
Cash received from sale of assets 54,200 - -
Business acquisitions, net of cash acquired (note 2) (5,565,603) (20,511,319) (317,746)
Acquisition of property and equipment (2,975,552) (1,451,643) (764,191)
Proceeds from businesses divested and asset sales (note 3) - 2,000,000 -
------------ ----------- -----------
Net cash used by investing activities (8,486,955) (19,962,962) (1,081,937)
------------ ----------- -----------
(Continued)
Page 35
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -----------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from financing activities:
Proceeds from notes payable to bank - - 4,095,000
Payments on notes payable to bank - - (4,717,383)
Payments on long-term borrowings and capital leases (1,013,316) (7,108,990) (3,332,390)
Net proceeds from refinancing long-term borrowings - - 549,108
Proceeds from exercise of stock options and warrants 1,991,507 1,892,066 1,295,765
Income tax benefit of stock options exercised 1,855,604 1,645,740 -
Net proceeds from sale of common stock - 35,524,448 -
------------ ----------- -----------
Net cash provided (used) by financing
activities 2,833,795 31,953,264 (2,109,900)
------------ ----------- -----------
Net increase in cash and cash equivalents 1,213,083 20,531,641 246,226
Cash and cash equivalents at beginning of period 21,661,671 1,130,030 883,804
------------ ----------- -----------
Cash and cash equivalents at end of period $ 22,874,754 21,661,671 1,130,030
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid $ 3,916 275,415 875,736
Income taxes paid 5,092,687 2,922,519 2,431,749
Noncash financing and investing activities:
Assets acquired through capital leases $ - 70,733 -
Debt issued for acquisition - 3,672,179 -
Summary of assets, liabilities, and equity
acquired through acquisition:
Cash and cash equivalents $ 239,021 23,489 -
Receivables 943,917 2,157,225 -
Inventories 475,311 2,412,589 -
Deferred income tax - 65,963 -
Prepaid expenses 21,111 213,115 -
Goodwill 4,532,254 10,032,643 -
Property and equipment 25,817 1,065,180 -
Accumulated depreciation - (609,322) -
Accounts payable (176,737) (441,134) -
Accrued representative commissions (40,240) (17,240) -
Accrued salaries (73,938) (108,099) -
Accrued compensated absences (9,971) (154,135) -
Debt - (404,277) -
Income taxes (54,037) 1,552 -
Other current liabilities (77,884) (278,733) -
Common stock - (68,000) -
Retained earnings $ - (683,829) -
------------ ----------- -----------
------------ ----------- -----------
See accompanying notes to consolidated financial statements
Page 36
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.
The Company is a leading designer and manufacturer of open-
architecture, standard bus embedded computer components that
system designers can easily utilize to create a custom solution
specific to the user's unique application. The Company's product lines
include CPU boards, general purpose input/output modules, avionics
interface modules and analyzers, interconnection and expansion units,
telemetry boards, data acquisition software and industrial computer
systems and enclosures. 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. Substantially all cash is
held at one financial institution.
(d) INVENTORIES
Inventories are valued at standard cost, which approximates weighted
average cost, does not exceed market, and consists of the following:
June 30
-----------------------------
1998 1997
---- ----
Raw materials $ 4,970,267 3,211,502
Work in process 3,709,312 2,953,140
Finished goods 1,981,632 1,540,828
------------ ---------
$ 10,661,211 7,705,470
------------ ---------
------------ ---------
(e) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30
-----------------------------
1998 1997
---- ----
Computers $ 2,358,773 1,862,814
Software 1,526,558 946,608
Furniture and equipment 2,891,634 1,919,837
------------ ---------
$ 6,776,965 4,729,259
------------ ---------
------------ ---------
Page 37
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
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.
(f) INTANGIBLE ASSETS
Intangible assets are stated at cost and consist of the following:
June 30
-----------------------------
1998 1997
---- ----
Noncompete covenants $ - 1,290,001
Goodwill 20,868,107 16,584,314
----------- ----------
20,868,107 17,874,315
Less accumulated amortization (4,173,953) (3,775,061)
----------- ----------
$16,694,154 14,099,254
----------- ----------
----------- ----------
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 effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the change.
(h) EARNINGS PER SHARE
Effective with the quarter ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings Per Share." In accordance with SFAS
No. 128, all previously reported earnings per share amounts have been
restated to comply with SFAS No. 128. Net income per common share is
based on weighted average shares outstanding. Net income per common
share - assuming dilution includes the dilutive effects of potential
common shares outstanding during the period.
A reconciliation of the numerator and denominator of the per share and
per share - assuming dilution calculation follows:
Page 38
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
YEAR ENDED JUNE 30 ----------------------------------------
1998 Income Shares Per-Share
---- (Numerator) (Denominator) Amount
----------------------------------------
NET INCOME PER COMMON SHARE
Net Income $10,090,188 5,583,429 $ 1.81
------
------
EFFECT OF DILUTIVE SECURITIES
Dilutive options and warrants - 580,012
----------- ---------
NET INCOME PER COMMON SHARE
-ASSUMING DILUTION
Net Income $10,090,188 6,163,441 $ 1.64
----------- --------- ------
----------- --------- ------
----------------------------------------
1997 Income Shares Per-Share
---- (Numerator) (Denominator) Amount
----------------------------------------
NET INCOME PER COMMON SHARE
Net Income $ 461,685 4,535,746 $ 0.10
------
------
EFFECT OF DILUTIVE SECURITIES
Dilutive options and warrants - 494,916
----------- --------- ------
NET INCOME PER COMMON SHARE
-ASSUMING DILUTION
Net Income $ 461,685 5,030,662 $ 0.09
----------- --------- ------
----------- --------- ------
----------------------------------------
1996 Income Shares Per-Share
---- (Numerator) (Denominator) Amount
----------------------------------------
NET INCOME PER COMMON SHARE
Net Income $ 3,580,907 3,017,575 $ 1.19
------
------
EFFECT OF DILUTIVE SECURITIES
Dilutive options and warrants - 676,233
----------- ---------
NET INCOME PER COMMON SHARE
-ASSUMING DILUTION
Net Income $ 3,580,907 3,693,808 $ 0.97
----------- --------- ------
----------- --------- ------
For the years ended June 30, 1998, 1997 and 1996, options to purchase
388,267; 279,828 and 210,000 shares of common stock, respectively,
were outstanding but were not included in the computation of net
income per common share - assuming dilution because the options'
exercise price was greater than the average market price of the common
shares.
(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 cash and cash equivalents,
accounts receivable, accounts payable, and long-term debt. The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and long-term debt, because of their nature,
approximate fair value.
(j) RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
Page 39
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
(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 is recorded on
the date of grant only if the current market price of the underlying
stock exceeds 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 fiscal
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 (undiscounted and without interest
charges) 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 or results of operations.
(n) NEW ACCOUNTING STANDARDS
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.
Page 40
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Disclosures About Segments Of An Enterprise And Related
Information." 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. The Company will adopt SFAS
131 in fiscal 1999, having identified its reportable segments as the
Computer Group and the Aerospace Group.
In October 1997, the American Institute of Certified Public
Accountants issued SOP 97-2, Software Revenue Recognition, to
supersede SOP 91-1, the previously released SOP on this topic. SOP
97-2 provides additional guidance on when revenue should be
recognized, and in what amounts, for licensing, selling, leasing,
or otherwise marketing computer software. The provisions of SOP
97-2 are effective for transactions entered into in fiscal years
beginning after December 15, 1997. Adoption of SOP 97-2 is not
expected to have a material adverse impact on the Company's
financial statements.
(2) BUSINESS ACQUISITIONS
On November 24, 1997, the Company completed the purchase of Micro Alliance,
a privately held San Diego county-based manufacturer of industrial computer
systems and enclosures. Micro Alliance specializes in the design and
manufacture of special-purpose PC-compatible computer systems offering a
variety of CPU boards and system enclosures, including rack mount, desktop
and mobile systems. The Company acquired all of the outstanding capital
stock of Micro Alliance for a total purchase price of $5.8 million. The
acquisition was accounted for using the purchase method of accounting and
$4.5 million of goodwill is being amortized over 10 years. The financial
results of Micro Alliance have been included in the Company's Consolidated
Financial Statements from November 24, 1997.
The purchase price was paid as follows:
Cash $ 5,736,368
Acquisition costs 68,256
------------
$ 5,804,624
------------
------------
On November 18, 1996, the Company completed the purchase of Bit 3. Bit 3 is
a St. Paul-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 were 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 definition 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.
The purchase price was paid as follows:
Page 41
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
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 (unaudited) pro forma consolidated results of operations have
been prepared as if the acquisitions of Bit 3 and Micro Alliance had
occurred at July 1, 1996:
June 30 June 30
(in thousands except per share amounts) 1998 1997
---- ----
Sales $76,437 64,476
Net income 10,014 1,862
Net income per common share 1.79 0.41
------- ------
------- ------
Net income per common share - assuming dilution 1.62 0.35
------- ------
------- ------
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions been consummated as of that
time, nor is it intended to be a projection of future results.
On August 19, 1996, the Company acquired SBS Embedded, 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, SBS Embedded shareholders exchanged all outstanding
shares of SBS Embedded stock for 200,000 shares of the Company's stock. The
financial position and results of operations of the Company and SBS
Embedded are combined in fiscal 1997 on a prospective basis. SBS Embedded'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-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 share for fiscal 1996
would not have been materially different from that reported had the
acquisition taken place at the beginning of fiscal 1996.
(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 was
included in other current liabilities at June 30, 1997 and no liability
existed at June 30, 1998. The Company recognized a gain on the sale of
approximately $189,000 in fiscal 1997.
Page 42
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
(4) SIGNIFICANT CUSTOMERS AND FOREIGN SALES
In fiscal 1998, 1997 and 1996, no one customer exceeded 10% of the
Company's sales. All of the Company's operations were conducted in the
United States. International sales are denominated in U.S. dollars. During
the years ended June 30, 1998, 1997 and 1996, export sales with minimal
attendant risk, all of which were to unaffiliated customers, were
approximately $11.6 million, $8.6 million and $5.1 million, respectively.
Export sales were made primarily in the following foreign markets:
1998 1997 1996
---- ---- ----
Sales % Sales % Sales %
Foreign Market (000's) (000's) (000's)
-------------- -------- ----- ------- ----- ------- -----
United Kingdom $ 1,400 12.1 1,100 12.8 1,000 19.6
Germany 1,100 9.5 800 9.3 800 15.7
Korea 700 6.0 1,000 11.6 500 9.8
France 1,150 9.9 700 8.1 400 7.8
Japan 2,600 22.4 1,300 15.1 400 7.8
Canada 1,700 14.7 1,400 16.3 600 11.8
Belgium 200 1.7 50 0.6 300 5.9
All Others 2,750 23.7 2,250 26.2 1,100 21.6
-------- ----- ------- ----- ------- -----
Total $ 11,600 100.0 8,600 100.0 5,100 100.0
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
Sales $ 74,200 15.6 52,800 16.3 31,300 16.3
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
(5) RECEIVABLES
Receivables, net consisted of the following:
June 30
--------------------
1998 1997
---- ----
Accounts receivable $ 13,408,656 9,545,264
Less allowance for doubtful accounts (289,939) (300,995)
------------ ---------
$ 13,118,717 9,244,269
------------ ---------
------------ ---------
(6) FINANCING
The Company's $2,500,000 line of credit matured on October 30, 1997 and was
not renewed. No amounts were drawn on this line of credit during the years
ended June 30, 1998 and 1997.
Page 43
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
(7) LONG-TERM DEBT
Long-term debt consisted of the following:
June 30
-----------------------
1998 1997
---- ----
Notes payable to former shareholders of Bit 3, including
imputed interest at 6.46% through June 30, 1998, secured
by all Company assets, due July 1, 1998 $ 3,000,000 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
----------- ----------
3,000,000 3,829,567
Less current installments (3,000,000) (1,013,316)
----------- ----------
$ - 2,816,251
----------- ----------
----------- ----------
(8) INCOME TAXES
Income tax expense is comprised of the following:
Year ended June 30
----------------------------------
1998 1997 1996
---- ---- ----
Current:
U.S. Federal $ 5,447,200 4,432,000 1,916,770
State 1,253,800 1,082,000 483,500
Deferred:
U.S. Federal (202,500) (4,204,000) (11,000)
State (47,500) (1,003,000) (2,000)
------------ ---------- ----------
Total income tax expense $ 6,451,000 307,000 2,387,270
------------ ---------- ----------
------------ ---------- ----------
Income tax expense was provided for at an effective rate of 39.0, 40.0 and
40.0 percent in 1998, 1997 and 1996, respectively. The actual tax expense
differs from the "expected" tax expense (computed by applying the statutory
U.S. Federal tax rate to income before income taxes) as follows:
Page 44
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Year ended June 30
----------------------------------
1998 1997 1996
---- ---- ----
Computed "expected" tax expense $ 5,735,651 261,350 2,029,180
State income tax, net of federal income
tax benefit 933,631 51,050 319,112
Goodwill amortization - - 21,508
Nondeductible merger expenses - 62,800 -
Dividend from foreign sales corporation (102,000) (102,000) -
Research and experimental tax credit (250,000) - -
Other 133,718 33,800 17,470
----------- -------- ---------
$ 6,451,000 307,000 2,387,270
----------- -------- ---------
----------- -------- ---------
The significant components of deferred income tax assets are as follows:
Year ended June 30
---------------------
1998 1997
---- ----
Vacation and severance accruals $ 297,600 179,200
Inventory capitalization 685,200 519,100
Acquired in-process R&D charge 3,924,000 4,217,700
Accrued expenses 197,500 277,900
Amortization 497,500 234,900
Allowance for uncollectible accounts 100,000 120,400
Other 128,200 30,800
---------- ---------
$5,830,000 5,580,000
---------- ---------
---------- ---------
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,
1998. Accordingly, management has no allowance for deferred tax assets at
June 30, 1998 and 1997.
(9) LEASES
The Company leases its main facilities in Albuquerque, New Mexico,
Carlsbad, California, Menlo Park, California, Vista, California, St. Paul,
Minnesota, and Raleigh, North Carolina, under noncancelable operating
leases which expire at various dates through fiscal 2003. The Company also
leases various items of equipment under noncancelable operating leases
which expire at various dates through fiscal 2003.
Page 45
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
Buildings Equipment
Year ending minimum minimum
June 30 lease payments lease payments Total
------- -------------- -------------- -----
1999 $ 1,281,874 99,359 1,381,233
2000 1,244,284 87,356 1,331,640
2001 446,682 48,215 494,897
2002 386,497 12,444 398,941
2003 197,772 7,730 205,502
----------- ------- ---------
$ 3,557,109 255,104 3,812,213
----------- ------- ---------
----------- ------- ---------
Total rental expense for operating leases for the years ended June 30,
1998, 1997, and 1996 was $1,289,457, $886,965 and $521,885, respectively.
(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 Plans generally permit options to be granted (i) only to
employees or officers and not to directors as such; (ii) for a period
of up to ten years; and (iii) at prices not less than fair market
value of the underlying common stock at the date of grant. Under the
Code, holders of more than 10 percent of 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 of the
underlying common stock on the date of grant. Options granted under
the Plans may be exercised as provided by the administering committee
or Board of Directors of the Company. All of these options are
exercisable at the quoted market value of the Company's common 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 5% of the number of shares outstanding at the first day of
each fiscal year plus shares not awarded in prior years and underlying
expired or terminated options, 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 of Directors.
All options are granted at a price equal to fair market value of the
underlying common stock on the date of grant. The Directors' options
become exercisable one year from the date of grant and terminate
twelve months from the date the optionee ceases to be a member of the
Board of Directors or in five years, whichever occurs first.
Page 46
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
(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 common 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. On
September 15, 1997 the Board of Directors approved an extension of
this plan for an additional five years.
(d) 1998 LONG-TERM EQUITY INCENTIVE PLAN
The 1998 Long-Term Equity Incentive Plan ("Plan") was adopted by the
Board of Directors on September 15, 1997 and subsequently approved at
the December 1997 reconvened Annual Shareholder Meeting. All full-time
employees of the Company and its subsidiaries and all non-employee
Directors of the Company are eligible to be selected to participate in
the Plan, except that no person owning, directly or indirectly, more
than 15% of the total combined voting power of all classes of stock
shall be eligible to participate. The Plan provides for the grant of
any or all of the following types of awards: (i) Stock Options,
including Incentive Stock Options; (ii) Stock Appreciation Rights;
(iii) Restricted Stock; (iv) Performance shares and Units; and (v)
other stock-based awards. The maximum number of shares of common stock
that shall be available for grant of awards under the Plan shall not
exceed 1,500,000, subject to adjustment in accordance with the
provisions of the Plan. The exercise price of each option is
determined by the Board of Directors but cannot be less than 100% of
the fair market value of the underlying common stock on the date of
grant. The term of these options cannot exceed ten years from grant
date. The Plan expires in January, 2008.
(e) 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,
1998, 213,537 warrants had been exercised and 46,227 were forfeited
under the net issuance method.
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.
Page 47
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
Information regarding the Company's stock option plans and warrants is
summarized below:
1991 ALL 1993 1996 1998
NSOP ISOPS D&O ESPP LT WARRANTS TOTAL
------------------------------------------------------------------------------------------------------------
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
Granted -- 105,000 37,000 43,796 283,000 -- 468,796
Exercised -- 64,886 103,500 34,031 -- 70,405 272,822
Cancelled -- 38,750 117,500 5,354 -- 11,930 173,534
------------------------------------------------------------------------------------------------------------
OUTSTANDING AT 6/30/98 -- 798,698 123,000 63,266 283,000 140,236 1,408,200
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
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
EXERCISABLE AT 6/30/98 -- 246,197 77,500 -- -- 140,236 463,933
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
AVAILABLE FOR GRANT -- 7,609 227,240 202,709 1,217,000 -- 1,654,558
AT 6/30/98
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Weighted average option exercise price information for fiscal years
1998, 1997, and 1996 follows:
1998 1997 1996
---------------------------------------------------------------------------
Outstanding at July 1 $ 13.53 6.27 4.62
Granted during the year:
Price = Market Value 25.51 22.28 11.25
Price > Market Value -- -- 5.50
Exercised during the year 7.76 4.74 4.65
Cancelled during the year 17.81 9.37 4.53
Outstanding at June 30 18.11 13.53 6.27
Exercisable at June 30 9.89 6.71 4.83
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Page 48
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------------------------------------
Significant option groups outstanding and exercisable at June 30, 1998
and related weighted average price and life information follows:
---------------------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Exercise Number Contractual Exercise Number Weighted Average
Prices Outstanding Life Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------
$ 4.50 - $ 6.50 356,433 6.28 $ 4.94 326,433 $ 4.85
$ 7.88 - $18.25 353,500 7.84 $ 13.86 60,000 $ 16.04
$20.25 - $28.25 388,034 7.97 $ 24.29 67,500 $ 25.23
$28.56 - $34.00 310,233 8.18 $ 30.35 10,000 $ 34.00
--------------------------------------------------------------------------------------------
$ 4.50 - $34.00 1,408,200 7.56 $ 18.11 463,933 $ 9.89
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
The per share weighted-average fair value of stock options granted at
a price greater than market value during 1996 was $1.63 on the date of
grant. The per share weighted-average fair value of stock options
granted at a price equal to market value during 1998, 1997 and 1996
was $11.89, $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:
1998 1997 1996
---------------------------------------------------------------
Expected life (years) 3.14 2.26 2.58
Risk free interest rate 5.83% 6.05% 6.25%
Volatility 62.59% 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:
1998 1997 1996
------------------------------------------------------------------------------
Net income, as reported $ 10,090,188 461,685 3,580,907
Net income (loss), pro forma 6,333,362 (1,694,626) 3,110,685
EPS, as reported (basic) 1.81 0.10 1.19
EPS, pro forma (basic) 1.13 (0.37) 1.03
EPS, as reported (diluted) 1.64 0.09 0.97
EPS, pro forma (diluted) 1.09 (0.37) 0.96
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Pro forma net income (loss) reflects only options granted in fiscal 1998,
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.
Page 49
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 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, 1998, 1997 and 1996 were $582,488, $342,029 and
$185,387, respectively.
Bit 3 and SBS Embedded maintained retirement plans under Section 401(k) of
the Code for all of their employees. Subsequent to the Company's
acquisition of Bit 3 and SBS Embedded, these plans were terminated and
merged into the Company's plan.
In addition, SBS Embedded maintained a profit sharing plan qualified under
Section 401(a) of the Code for all of their employees. Subsequent to the
Company's acquisition of SBS Embedded, 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) CONTINGENCIES
The Company is subject to various claims which arise in the ordinary course
of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the
financial position, results of operations, or liquidity of the Company.
(13) SUBSEQUENT EVENTS
On July 1, 1998, the Company acquired through its newly formed subsidiary,
SBS Holdings GmbH, a 50.1% interest in OR. Based in Augsburg, Germany, OR
designs, manufactures, and markets CPU boards utilized in a wide range of
embedded computer applications. As part of the acquisition, the Company
acquired, through its newly formed subsidiary, SBS Holdings GmbH, a 50.2%
interest in ORTEC, a Mindelheim, Germany based related company which
manufactures OR's commercial products and electronic products for other
customers. The Company also acquired, through its wholly-owned subsidiary
SBS Embedded Computers, Inc. based in Raleigh, NC, 100% of the shares of OR
Computers, Inc, based in Fairfax, Virginia, which is the U.S. marketing
support organization for the OR product line. In addition, the Company and
the shareholders of both OR and ORTEC entered into exclusive option
agreements whereby the Company may acquire the remaining shares of both
companies on February 28, 1999. The purchase price, excluding transaction
costs, for the majority interest in the two companies based in Germany and
100% of OR Computers Inc. was DM 17.5 million, approximately $9.7 million,
paid in cash and common stock at closing. The purchase price for the
remaining interest in the two companies based in Germany is DM 17.2
million, approximately $9.5 million based on the exchange rate at June 26,
1998. The acquisition will be accounted for under the purchase method,
whereby the purchase price will be allocated to the underlying assets and
liabilities based upon their estimated fair values. It is expected that a
portion of the purchase price will be allocated to in-process research and
development which, under generally accepted accounting principles, will be
expensed by the Company in the quarter ending September 30, 1998. Goodwill
will be amortized over 10 years. For the year ended December 31, 1997,
combined sales and net income of OR, ORTEC, and OR Computers, Inc. were
approximately $12.1 million and $1.8 million, respectively. In fiscal 1999,
the Company plans to change the name of OR to SBS OR Industrial Computers
GmbH, and OR Computers, Inc. will operate as a wholly-owned subsidiary of
SBS Embedded Computers, Inc. for the foreseeable future.
Page 50
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On August 12, 1998, the Company completed the acquisition of VI for $5.0
million, subject to adjustment upon finalizing the closing balance sheet.
Based in Encinitas, California, VoI designs, manufactures and markets CPU
boards based on the Motorola PowerPC processor for computer applications
that utilize VME and CompactPCI bus standards. The acquisition will be
accounted for under the purchase method, whereby the purchase price will be
allocated to the underlying assets and liabilities based upon their
estimated fair values. Goodwill will be amortized over 10 years. For the
year ended December 31, 1997, VoI had sales of approximately $5.6 million
and net income of approximately $480,000 (unaudited).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 51
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 9, 1998.
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".
Page 52
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.
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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 25, 1998
Page 54
SBS Technologies, Inc.
Annual Report on Form 10-K
Fiscal Year Ended June 30, 1998
INDEX TO EXHIBITS
Exhibit
No. Description Page
- ------- ---------------------------------------------------------------- ----
3.i(4) Articles of Incorporation, as amended on February 11, 1998 - -
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 - -
4.1(10) Rights Agreement dates as of September 15, 1997 between SBS
Technologies, Inc. and First Security Bank, National Association,
as Rights Agent, which includes the form of Right Certificate
as Exhibit A and the Summary of Rights to Purchase Common Shares
as Exhibit B.2 - -
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(9) Employment Agreement between Registrant and Stephen D. Cooper
dated May 13, 1997 - -
10.k(9) First Amendment to Amended and Restated Credit Agreement
and Related Loan Documents between Registrant and NationsBank
of Texas, N.A. dated November 15, 1996 - -
10.l(8) Stock Purchase Agreement between Bit 3 Computer Corporation
and Registrant dated October 8, 1996 - -
10.m(9) Asset Purchase between Fats, Inc. and Registrant
dated June 26, 1997 - -
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. - -
Page 55
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
10.aa(11) Purchase Agreement among Micro Alliance, Jeffrey Huston,
Edward Larson, Sherrin W. Larson and the Registrant
dated November 24, 1997 - -
10.ab(12) Third Amendment to that Certain Lease Agreement dated
May 29, 1995 by and between Firouz D. Memarzedah and
Farah R. Memarzadeh, husband and wife dba PARS Asset
Management Company and SBS Technologies, Inc., dated
December, 1997 - -
10.ac(12) Office/Warehouse Lease Between Lutheran Brotherhood,
(a Minnesota Corporation), and Bit 3 Computer Corporation,
a wholly owned subsidiary of SBS Technologies, Inc.,
dated September 5, 1997. - -
10.ad(12) Amendment #1 to Lease between Lutheran Brotherhood, a Minnesota
Corporation, and Bit 3 Computer Corporation, a wholly
owned subsidiary of SBS Technologies, Inc., dated
December 23, 1997 - -
10.ae(13) Settlement Agreement and Release between SBS Technologies,
Inc. and Stephen D. Cooper - -
10.af Purchase Agreement dated July 1, 1998 between SBS
Technologies, Inc. and or Industrial Computers GmbH,
et al Filed herewith electronically
10.ag Purchase Agreement dated August 12, 1998 between SBS
Technologies, Inc. and Themis Computer and the minority
shareholders of VI Computer Filed herewith electronically
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
27.1(13) Financial Data Schedule, restated, Fiscal Years
End 1997 and 1998 - -
27.2(13) Financial Data Schedule, restated, Quarters 1 and
2 of Fiscal Year End 1997 - -
27.3(13) Financial Data Schedule, restated, Quarters 1, 2,
and 3 of Fiscal Year End 1997 - -
99.1a(13) Agreement to Serve as Rights Agent. On January 21,
1998, pursuant to Section 21 of the Shareholder Rights
Agreement dated September 15, 1997, SBS Technologies,
Inc. appointed Norwest bank Minnesota N.A. as Successor
Rights Agent - -
Page 56
(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 Exhibit 3.1 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1997.
(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.
(9) Incorporated by reference to Exhibits 10.j, 10.K, and 10.m of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
(10) Incorporated by reference to Exhibit 4.1 to the Registrant's Form
8-K filed September 23, 1997
(11) Incorporated by reference to Exhibit 10.aa to the Registrant's
Form 8-K filed December 9, 1997
(12) Incorporated by reference to Exhibits 10.ab, 10.ac, and 10.ad of
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(13) Incorporated by reference to Exhibits 10.ae, 27.1, 27.2, 27.3 and
99.1a of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998
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