SBS Technologies, Inc.

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SBS Technologies, Inc.

2400 Louisiana Boulevard Northeast
Albuquerque, New Mexico 87110
U.S.A.
(505) 875-0600
Fax: (505) 875-0400
Web site: http://www.sbs.com

Public Company
Incorporated: 1986 as SBS Engineering, Inc.
Employees: 280
Sales: $52.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: SBSE
SICs: 3571 Electronic Computers; 3663 Radio and TV Communications Equipment; 3812 Search and Navigation Equipment

SBS Technologies, Inc. is a leading designer and manufacturer of embedded computer components. The company’s original focus, upon its founding in 1986, was on products and services for the aerospace and defense industries, such as flight simulators. However, SBS quickly expanded into the embedded computer market, first offering an avionics interface board used in aircraft and missiles. In this highly competitive market, SBS became extremely successful, largely through a rapid series of acquisitions of other companies in the market. By the mid-1990s, the embedded computer market was growing so enormously that SBS decided to discontinue its engineering and flight simulation operations, allowing it to focus completely on embedded computers. The market for these computers in the late 1990s was estimated by SBS to be $3.2 billion. The company’s 1997 sales reached $52.8 million, a 68.7 percent increase over those of the previous year; the number of SBS employees also doubled. In the same year, Andrew C. Cruce, SBS’s founder and former chairman, announced his retirement.

SBS Finds Early Niche in Embedded Computers

In November 1986 Andrew C. Cruce founded SBS Engineering, Inc. in Albuquerque, New Mexico. His company won its first contract the following year, when the U.S. Navy selected it to support development of the V-22 Tilt-Rotor (“Osprey”) flight simulator. Aided by this contract, SBS developed products and services in three areas: flight simulators, avionics computer products, and engineering services. In 1988, the young company made what turned out to be an excellent business decision; it developed its first embedded computer product, an avionics interface board. According to company literature, embedded computers are “small, highly specialized computing modules that perform specific tasks … the ‘invisible’ components of larger systems that do everything from testing car brake systems to communicating with satellites.”

SBS was already experiencing steady growth. Between 1991 and 1993 the company began to acquire other small companies, the first being Simaltech, Inc., which produced flight simulator visual display systems. In 1992 it acquired Berg Systems International, a manufacturer of telemetry-related computer products for the aerospace industry, giving SBS a second embedded computer product. The Sensor Systems Division of Merit Technology, Inc. (a developer of radar and flight simulation systems) and rights to a use-of-force trainer system were added in 1993.

Based on its obvious success at this point, SBS decided to offer its stock publicly in 1992. Along with becoming a publicly held corporation, SBS also announced that its name was changing from SBS Engineering, Inc. to SBS Technologies, Inc., to emphasize its new direction. Revenues were $19.1 million in 1993, and rose to $28.8 million in 1994.

A Change of Strategy in 1995

By 1995 it had become clear to SBS management that, while the embedded computer component market was booming, the flight simulation products and basic engineering services it offered were lagging. A decline in the defense industry was a significant contributor to the drop in this part of the business. SBS thus made the decision to discontinue these operations, selling the flight simulator business to Camber Corporation in April 1995 and focusing completely on the embedded computer market. As a result, SBS revenues dipped sharply that year, to about $16.2 million.

The company also made a key acquisition in April 1995: GreenSpring Computers, a California manufacturer of computer input/output (I/O) products used in commercial and industrial embedded computers. At the time GreenSpring was the owner of a pioneering product, IndustryPack, which it had developed in the late 1980s. IndustryPack was a modular I/O device that had been incorporated into almost 100 computer mezzanine boards. One of its greatest early successes was being selected for use by the Motorola Computer Group in the early 1990s. Within a year after SBS bought GreenSpring, this decision proved sound; IndustryPack was chosen as an industry standard, which carried a coveted “ANSI” accreditation.

In 1996, SBS continued its acquisition strategy with the purchase of two more embedded computer companies: Logical Design Group (LDG) of Raleigh, North Carolina, a manufacturer of Intel processor-based CPU boards (acquired in August 1996); and Bit 3 Computer Corporation, a Minneapolis manufacturer of hardware and software used in computer networking and interconnection (acquired in November 1996). The LDG acquisition was carried out so that SBS could share in the growing use of Microsoft software in embedded computers. With the addition of Bit 3, SBS also could become involved in new embedded computer standards, such as “PCI” and “CompactPCI” and enter the networking and interconnection market. The acquisitions had an immediate positive impact on SBS’ revenues and income. Revenues almost doubled in 1996, from $16.2 million to $31.3 million; income rose about 78 percent, from $7.4 million to $9.5 million.

No single customer, domestic or foreign, accounted for more than ten percent of the company’s sales during this time. Although SBS conducted all of its manufacturing in the United States, it maintained foreign sales offices in Reading, England, and Glasgow, Scotland. Its international sales in 1995, 1996, and 1997 were $1.6 million, $5.1 million, and $8.6 million respectively. In 1995 three-quarters of the foreign sales were made in Canada and France. The opening of the Glasgow office in 1996 boosted foreign sales significantly. In 1997 Canada was the largest foreign market ($1.4 million), followed by Japan ($1.3 million), the United Kingdom ($1.1 million), Korea ($1 million), Germany ($800,000), and France ($700,000). The remaining SBS foreign sales were divided among other countries.

Reorganization for New Markets in 1997

Largely due to these shrewd acquisitions, SBS had a stellar year in 1997. Revenues increased another 68.7 percent, from $31.3 million to $52.8 million, and income almost doubled, rising from $3.6 million to $7.1 million. SBS once again decided to discontinue one of its existing operations. In June 1997 it sold its “ICAT” judgmental use-of-force training program to Firearms Training Systems, Inc. of Georgia. The “ICAT” program was used to teach military and police personnel what force would be appropriate in a given situation. In the 1997 SBS annual report, CEO and Chairman Christopher J. Amenson, and President and COO Steve Cooper, also announced that the founder and former chairman of SBS, Andrew C. Cruce, was retiring.

SBS next set its sights on a California-based supplier of embedded computer modules and, in December 1997, announced that it had a new operating unit, renamed SBS Micro Alliance. This five-year-old company manufactured a variety of rack mount computers, work stations, and similar products to customers throughout the United States, Europe, and Asia.

The year 1997 marked the beginning of another refocusing within the company. The rapid series of acquisitions had led to five separate subsidiaries with individual sales forces within the company. To achieve a more cohesive operation and public image, SBS regrouped its subsidiaries and units into two new operating groups, the SBS Computer Group and the SBS Aerospace Group. The SBS Computer Group would comprise SBS GreenSpring Modular I/O, Inc., SBS Bit 3 Operations, Inc., SBS Embedded Computers, Inc., and SBS Micro Alliance, Inc. The SBS Aerospace Group would encompass SBS Berg Telemetry Systems, Inc., SBS Avionics Technologies, Inc., and Data-Express (TM) software operations.

This consolidation was an outgrowth of the “One SBS” program that began in mid-1997 and resulted in the renaming of all subsidiaries to include “SBS” at the head of their names. As explained by CEO and Chairman Amenson in a February 1998 PR Newswire release, “The step we are now taking is targeted at developing the technical, marketing, and sales synergies that are inherent in our company…. This alignment provides a structure within which we can readily integrate our future business acquisitions, and will position SBS to continue to meet our goal of continued growth in profitability and shareholder value.”

Along with this realignment of operations, SBS reorganized its strategy to address important market trends. It planned to develop open, standard systems rather than proprietary systems. Military system developers, for example, were increasingly turning to open systems as a way of allowing easier, faster, and more economical adaptation to technology changes, and SBS saw others in the industry following this trend. Additional market trends that SBS hoped to address were the growing markets for standard board-level products and for “WINTEL” embedded computer platforms. SBS saw four rapidly growing market segments for itself in the coming years: (1) military and commercial aviation (claiming military technology was “several generations” behind industry standards); (2) the communications industry, including telecommunications, data communications, networking, and cellular phone service; (3) factory automation and process control; and, (4) medical equipment, encompassing applications from complex CAT scanners to portable diagnostic equipment.

Company Perspectives:

At SBS, our goal is to lead the constantly changing embedded computer industry into the 21st Century. By keeping abreast of the latest advances in chip-level technology, we will continue to provide the benefits of cutting edge technology to our customers.

Outlook in the Late 1990s

Given its rapid growth and financial success during its short history, it was likely that SBS would continue to flourish through the late 1990s. The year 1998 brought several promising new projects and, along with them, expert recognition for SBS’ performance.

First, SBS formed a partnership with Micro Elektronic Nuremburg GmbH, of Nuremburg, Germany. Together they developed a compact mezzanine card (known as PC-MIP) that would be used to add capabilities or interfaces onto a computer’s motherboard. A standard for add-on cards had been sought after by the computer board industry for years, and SBS hoped that the development of a compact card would “become the worldwide standard mezzanine for industrial, embedded and OEM applications,” as Kim Rubin, SBS Computer Group’s chief technical officer, told EE Times. In March 1998 SBS formed another partnership, this one with Massachusetts based Digital Equipment Corporation (DEC), to develop an aircraft simulation product using the DEC platform. Shortly afterward, however, DEC was acquired by Compaq Computers and numerous staff cutbacks and reorganizations were in the works, and so the future of this project was unclear.

SBS launched another pair of acquisitions in July 1998. It announced that it had purchased a controlling interest (50.1 percent) of the shares of or Industrial Computers GmbH, a German designer and manufacturer of CPU boards used in embedded computers. Most of or’s customers were located in Europe. However, the acquisition also included purchase of all of the shares of Computers, Inc., a Virginia-based marketing arm of or. Simultaneously SBS announced that it planned to purchase V-l Computer in its entirety. This California company designed, manufactured, and marketed CPU boards using Motorola processors in telecommunications, industrial automation, and defense applications. With these two purchases, SBS now could target products at customers using almost all types of embedded computers.

SBS also cleverly began to utilize the World Wide Web as a way of providing very up-to-date product information to engineers making purchases, as well as to customers seeking technical assistance. Knowing that its product catalog included several hundred items, scattered among its subsidiaries, SBS set up a Web site with a database of product information. When a user went to the site, he or she could pull a current product description from the database, so that the Web pages did not need to be constantly updated. SBS’s main site also served as a portal to individual Web sites for each of its subsidiaries.

It also appeared that fiscal 1998 would be another recordsetting year for SBS, based on its performance through the first three quarters. Its sales of $18.9 million for the third quarter set an all-time quarterly record for the company. For the entire three quarters, sales of $53.6 million represented an increase of 42 percent over the same quarters in the previous year, and income of $7.2 million represented an increase of 47 percent. Recognizing SBS as a top performer in its segment of the embedded computer industry, The Red Chip Review (which analyzes top-performing publicly traded companies for investors) selected SBS as one of 20 companies to be invited to its June 1998 investor conference. It noted that SBS stood out for its “history of earning reliability, and for making accretive, complementary acquisitions,” as well as for its 46 percent compound annual growth and history of meeting customer expectations.

Principal Subsidiaries

SBS Avionics Technologies, Inc.; SBS Berg Telemetry Systems, Inc.; SBS Bit 3 Operations, Inc.; SBS Embedded Computers, Inc.; SBS GreenSpring Modular I/O, Inc.