<PAGE>
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
[Fee Required]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
Commission File No. 0-8419
SBE, INC.
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(Exact name of Registrant as specified in its charter)
California 94-1517641
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4550 Norris Canyon Road, San Ramon, California 94583
----------------------------------------------------
(Address of principal executive offices and Zip Code)
(510) 355-2000
--------------
(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:
Common Stock
(Title of Class)
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 approximate aggregate market value of the Common Stock of the
Registrant held by non-affiliates of the Registrant, based on the closing price
for the Registrant's Common Stock on December 29, 1995 as reported on the Nasdaq
National Market, was approximately $17,830,100. Shares of Common Stock held by
each executive officer, director and shareholder whose ownership exceeds five
percent of Common Stock outstanding have been excluded in that such persons may
be deemed to be affiliates of the Registrant. This determination of affiliate
status for purposes of the foregoing calculation is not necessarily a conclusive
determination of affiliate status for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
December 29, 1995, was 2,087,576.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
(1) Proxy statement for Annual Meeting of Shareholders scheduled for April 16,
1996 -- Part III
Exhibit Index on page 23
Total Pages 63
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SBE, INC.
FORM 10-K
---------
TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for The Registrant's Common Equity
and Related Shareholder Matters 12
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10 Directors and Executive Officers of the Registrant 19
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners
and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement
Schedule, and Reports on Form 8-K. 22
SIGNATURES 25
SCHEDULE 42
EXHIBITS 43
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PART I
ITEM 1. BUSINESS
SBE, Inc. develops, markets, sells and supports remote access internetworking
products and high speed intelligent computer communications controllers that
enable users to exchange data between computer systems. The Company's products
are distributed worldwide through a direct sales force, distributors,
independent manufacturers' representatives, and value-added resellers.
Founded in 1961 as Linear Systems, Inc., the Company evolved from a high-quality
supplier of radio communications equipment to a provider of comprehensive
network communications solutions for original equipment manufacturers and end
users. In September 1995, the Company began shipping a suite of new products
known as netXpand to meet the growing need for remote access data communications
products.
The Company markets, sells and supports a broad range of high-speed intelligent
communications controller products sold primarily to original equipment
manufacturers. These products support applications in a broad spectrum of
industrial and commercial markets. Markets and application areas include data
networking, process control, medical imaging, CAE/automated test equipment,
military defense systems and telecommunications networks.
The initial products for the Company's new suite of netXpand remote access
products are netXpand SoHo and Central; both of these products allow a remote PC
or network to access an existing network as a fully functional network node,
thereby enabling users to access network resources from their remote locations
as if they were directly connected to the enterprise network. These products
include server hardware and software, client software and network management
software. SBE's remote access products allow for single user dial-in to local
area networks (LANs) over analog or digital phone lines, individual dial-out
from LANs to other locations and routed or bridged LAN to LAN dial-up or direct
connections. These products support all major desktop computing platforms,
including IBM-compatible PCs and UNIX workstations.
INDUSTRY BACKGROUND:
Significant changes in computer-based information systems have occurred over the
last decade. Historically, information stored in computer databases could only
be accessed by terminals or personal computers emulating terminals directly
connected to a central or host computer. Remote users wishing to access
information over the public switched telephone network used a modem to dial from
their terminal or computer into another modem which was usually connected
directly to the central or host computer.
Beginning in the late 1980s the following factors changed the nature of, and
increased the demand for, remote network access.
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GROWTH OF THE INTERNET AND ON-LINE SERVICES. The number of users of the
Internet and on-line services such as America Online, CompuServe and Prodigy has
grown rapidly in recent years. It is estimated that the number of users linked
to the Internet has grown from less than 2 million in 1992 to approximately 30
million today. This growth is due to increased use of electronic mail and the
proliferation of databases and other information platforms such as the World
Wide Web.
DEVELOPMENT OF DISTRIBUTED, CLIENT /SERVER COMPUTING. With the development
of LANs it became possible for information to be stored on a number of computers
which were connected to each other and located within a building or campus.
Simultaneously, the advent of new communications products such as hubs, bridges,
and routers allowed multiple LANs to be integrated into distributed, enterprise-
wide computer networks. To take advantage of these distributed computer
networks, products utilizing client/server architecture, including relational
databases, e-mail and file and printer sharing were introduced to collect,
retrieve and distribute information. Distributed computing and client/server-
based software are now being used on a corporate enterprise-wide and
departmental basis to run critical processes and to provide the primary means
for corporate communications.
GROWTH IN MOBILE, REMOTE AND HOME OFFICES. Corporations, government
agencies, universities and other organizations are increasingly looking to
control costs while providing their employees with access to essential
information and resources to perform their jobs efficiently and effectively from
any location. The proliferation of notebooks and home computers is allowing a
newly created remote workforce to work from home or on the road. To remain
productive, these users must be able to access their cooperative distributed
networks from remote locations.
TECHNOLOGICAL ADVANCES. Advances in modem technology such as the V.34
communications standard and switched digital service technology, such as ISDN
and Frame Relay are helping to increase the speed of network communication,
which is a key user requirement for remote network access.
The above factors have created an enormous growth in the number of remote users
seeking to access information on the corporate network or to connect to the
Internet and on-line services through network access providers. As a result,
the need for hardware and software products to support, expand and enhance
remote network access has created a number of rapidly growing markets.
Early remote connectivity solutions have typically followed three principal
computing oriented approaches: host-oriented terminal emulation; PC remote
control software, and application-specific solutions.
Terminal emulation products allow remote workstations to simulate a local "dumb"
terminal session with a mainframe. These products are better suited to a
character-based centralized system and not the graphical client server systems
that are predominant today.
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Remote control software products allow a dial-in user to take control of a PC on
the network and remotely view the networked PC's screen. Like terminal
emulation, remote control software works best with character-based computing.
In addition, remote control solutions present both network security and
management problems as the controlled PC typically has complete access to all
the resources of the network and the network manager is typically unable to
identify an unauthorized remote user.
Application-specific solutions overcome the limitations of terminal emulation by
enabling users to access a single network application as a specialized remote
client. Examples of this type of solution would include electronic mail
programs that offer remote versions. However these application-specific
products provide an incomplete remote access solution for users who require
access to other resources or applications on the enterprise network.
Today's solutions use a communications-oriented approach where the network is
extended to users through the combination of hardware and software that lets
users expand their network using analog, digital or leased circuits. These
solutions have typically used expensive router products to connect branch
offices to networks using leased lines. But more recently introduced products
allow users to establish lower-cost dial-up connections that provide
multiprotocol, multiplatform routing and routing-related communications
technologies and hardware that address performance and security requirements of
remote network access. However, these products are typically designed to
principally provide routing or remote access functions.
PRODUCTS
The Company manufactures data communications products designed to allow the
connection of LANs to external Wide Area Networks (WANs). The Company began
shipping a suite of new products known as netXpand to meet the growing demand
for remote access data communications products in September 1995.
REMOTE ACCESS PRODUCTS. The initial products for the Company's family of
netXpand remote access products are netXpand SoHo and Central. SoHo (Small
office, Home office) is a remote access product which can serve either as an
access server or a branch office router. Central is a larger version of SoHo
with more WAN interfaces. The products have been designed to provide cost-
effective internetworking capabilities to the broadest range of end-users, the
users of UNIX and Novell networking products. Both products allow users to
access remote networks resources as full network clients or as nodes.
Applications appear the same to users as they do when directly connected to the
enterprise network, except that the speed of computing through the remote access
connection may be reduced as a result of the speed limitations of telephone
connections.
The Company's remote access products support up to 10 wide area network
interfaces at speeds up to T1/E1(1.5mbs). The products feature full routing for
Novell IPX and TCP/IP (Transmission Control Protocol, Internet Protocol); other
protocols are transparently bridged with filtering. The products use Windows-
based configuration tools, are SNMP manageable, and support PAP, CHAP and direct
callback security. The
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remote access products list from $899 to $2,499 with various software
configurations available.
INTELLIGENT CONTROLLER PRODUCTS. Intelligent controller products are used to
provide connectivity between a system, such as a mini-computer or bridge/router,
and a local or wide area network. Communication controller products enable
computers to exchange data in much the same way as the telephone system allows
people to converse with one another. As computers become more pervasive in all
areas of society, computer users are demanding greater productivity, efficiency,
and lower costs in their computer systems, which has led to the sharing of
databases, software applications, and computer peripheral equipment.
Communications controllers have become a central component to connecting
networks and computers to deliver information more efficiently.
The Company's communications products target all four major protocol
communications technologies for each of the bus architectures: Fiber Distributed
Data Interface (FDDI), Token Ring, Ethernet and high speed serial
communications. The latter is a growing wide-area networking technology that
enables computers to talk to one another using telephone lines. FDDI, Token
Ring and Ethernet are local area networking technologies that offer a wide range
of speed and reliability options.
The Company's strategy for its intelligent controller products is to expand its
offerings to more segments of the market by adding software interfaces, improved
performance and new technologies that will provide lower-cost solutions for high
speed, high volume communications.
SINGLE-BOARD COMPUTER PRODUCTS. The Company supplies high performance single-
board computers (SBC) for Multibus* and VMEbus architectures. An SBC manages
and processes the data that passes between the boards within a computer system.
The Company's SBC products provide a high-speed interface for linking to
peripherals and intelligent I/O controllers that accommodate plug-on modules for
many industrial applications.
CUSTOM PRODUCTS. The Company has developed several products specifically for
single customer applications. These products typically have proprietary
functions that meet specific application needs of the customer. Recently the
Company has not sought new custom relationships unless the products have
significant sales potential.
INTEGRATED CIRCUITS. The Company has designed a number of proprietary
integrated circuits that are used on many SBE products. The Company has a small
group of customers that purchase some of these proprietary chips for their
applications. This line of business is not being actively pursued by the
Company.
SOFTWARE PRODUCTS. The Company supplies software products that operate various
communications protocols for certain communications controller products
including X.25 for serial communications, SMT (Station Management) for FDDI, and
TCP/IP for Ethernet applications. Real-time operating systems for Motorola's
68000 family are also
- - ---------------------------
*Multibus is a Trademark of Intel Corporation
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supported. The Company's software products are principally bundled with the
hardware platform based upon the customer's application requirement.
The following table shows sales by major product type as a percentage of total
sales for fiscal 1995, 1994, and 1993.
Year Ended October 31,
(percent of annual sales)
1995 1994 1993
----------------------------
Communication Controllers 72% 62% 59%
Single Board Computer 9 9 14
netXpand Remote Access 3 -- --
Integrated Circuits 3 10 2
Custom 1 11 15
Other 12 8 10
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100% 100% 100%
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DISTRIBUTION, SALES AND MARKETING
The Company markets its netXpand remote access products through multiple
indirect distribution channels worldwide, including distributors, manufacturers'
representatives, value-added resellers, and certain OEM partners. The Company
had relationships with over 40 distributors and value-added resellers as of
October 31, 1995. Approximately half of the Company's distributors and
resellers operate outside the United States.
The Company actively supports its indirect channel marketing partners with its
own sales and marketing organization. SBE's sales staff solicits prospective
customers, provides technical advice with respect to SBE products and works
closely with marketing partners to train and educate their staffs on how to
sell, install and support the netXpand product line.
The Company has focused its sales and marketing efforts principally in the
United States and Asia, including Japan. International sales for the netXpand
product line represented 92 percent of total netXpand sales in fiscal 1995. The
Company expects that, in the future, domestic sales will represent a greater
percentage of total netXpand sales. All of the Company's international sales
are negotiated in U.S. dollars.
The Company provides most of its distributors and resellers with product return
rights for stock balancing or product evaluation. Stock balancing permits
distributors to return products for credit, within specified limits and subject
to purchasing additional products. The Company believes that it has adequate
reserves to cover product returns although there can be no assurance that the
Company will not experience significant returns in the future.
The Company primarily markets its computer controller products to OEMs and
systems integrators. The Company sells its products both domestically and
internationally using a direct sales force as well as through independent
manufactures' representatives. The
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Company also sells certain products directly to end-users. During 1993 the
Company established a channel partnership arrangement with Hewlett Packard (HP).
This arrangement provides the Company's direct sales force access to HP
customers that require VME and EISA communications controllers. The Company
believes that it has successfully positioned itself as a leading supplier of VME
high speed serial and EISA communications controllers to HP workstations. The
Company believes that a direct sales force is well suited to differentiate the
Company's communications controller products from those of its competitors.
The Company conducts its sales and marketing activities from its principal
offices in San Ramon, California. The Company's direct sales force is based in
five locations in the United States and one location in Germany. The Company's
sales offices are located in Greensboro, North Carolina; Damon, Texas; Malden,
Massachusetts; Mountain View, California; Lake Oswego, Oregon; and Munich,
Germany.
The Company's computer controller sales are concentrated among a small number of
customers and consequently, the timing of significant orders from major
customers cause the Company's operating results to fluctuate.
RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused principally on its
strategic businesses, remote internetworking and intelligent communications
controllers. The Company's experience in high-speed data communication creates
opportunities to leverage its engineering investments and develop more
integrated products for simpler, more innovative communications solutions for
customers. The development of new remote internetworking products, high
performance communications controllers, and communications-related software is
critical to attracting new and retaining existing customers
During the past year, the Company has developed communication products based on
PCIbus, VMEbus and EISA architecture. The Company has also redesigned and
upgraded certain communications products to improve the products' performance
and lower the products' manufacturing costs. The Company also acquired or
licensed certain hardware products that have been integrated principally through
the addition of software into the Company's product line.
During fiscal 1995 the Company focused the majority of its development efforts
on the netXpand remote access product line, and it expects to continue this
focus in 1996. These products leverage existing product designs and incorporate
routing software.
The Company has purchased extensive design and testing tools (CAD/CAE) that will
simulate new product designs prior to building prototype boards. These tools
have decreased the time required to develop new designs, thereby allowing the
Company to take advantage of new market demands and meet its customers' product
development schedules. The Company expects to continue to invest in product
design tools to enhance its product development activities.
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Information relating to accounting for research and development costs is
included in Note 1 of the Notes to the Consolidated Financial Statements on Page
32 of this document. Also see the section labeled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing on Pages 13
through 17 of this document.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company does not use raw materials in any of its products or production
activity. Products are constructed from components which are generally
available as needed from a variety of suppliers. The Company believes that it
currently possesses adequate supply channels. An interruption in its existing
supplier relationships or delays by some suppliers could result in production
delays and may have a material adverse effect on the Company's operations.
Certain parts used in the Company's products are purchased from a single
supplier. New state-of-the-art high technology parts are normally available
only from a single supplier when first introduced into the market. These
components generally become available from alternative suppliers over time.
Although the Company has rarely experienced any significant problems in
obtaining sole-source components, the Company has sought to establish a close
relationship with sole-source suppliers and if necessary build up an inventory
of such components.
COMPETITION
The market for remote access products is highly competitive. The Company
competes directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific remote
access solutions, such as Shiva, Ascend Communications, Xylogics, Inc.,
Livingston Enterprises, Inc., Telebit Corporation, and Microcom, Inc.. The
Company also competes with suppliers of routers, hubs, and other data
communications products, such as Cisco and 3Com. In addition the Company may
encounter increased competition from operating system and network operating
system vendors, such as Microsoft and Novell, to the extent that such vendors
include full remote access or routing capabilities in their products. The
Company believes that it can compete successfully in the remote access market by
(1) focusing on the low end of the remote LAN access and internetworking
markets; (2) providing low-cost, fully functional remote access product
solutions; (3) expanding significantly into the Asia-Pacific region; (4)
providing easy-to-use software and hardware; and (v) providing accessible and
local support.
By focusing on the above factors the company believes that it can compete within
the remote access market.
Competition within the intelligent communications controller market is
fragmented principally by application segment. The Company's VMEbus
communications controllers compete primarily with products from Motorola,
Interphase Corp., CMC, a Rockwell Company, Themis Computers, Network
Peripherals, Performance Technologies, and various other companies on a product-
by-product basis. To compete
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in this market the Company emphasizes the functionality, support, quality and
price of its product in relation to its competitors as well as the Company's
ability to customize the product or software to exactly meet the customer needs.
Competition within the EISAbus communications controller market is also
fragmented among various companies providing different applications. The
Company's EISAbus-based products are targeted to potential customers using
Hewlett Packard (HP) 9000 and HP Apollo workstations. Currently, the Company's
EISAbus products face nominal competition in this market.
Additionally, the Company competes with the internal engineering resources of
its customers. As its customers become successful with their products they
examine methods to reduce costs and integrate functions. To compete with the
internal engineering resources of its customers, the Company works jointly with
their engineering staff to understand its customers system requirements and
anticipate product needs.
INTELLECTUAL PROPERTY
The Company believes that its future success will depend principally on its
continuing product innovation, sales, marketing, technical expertise, product
support and customer relations. The Company also believes that it needs to
protect the proprietary technology contained in its products. The Company does
not currently hold any patents and relies on a combination of copyright,
trademark, trade secret laws and contractual provisions to establish and protect
proprietary rights in its products. The Company typically enters into
confidentiality agreements with its employees, strategic partners, indirect
channel marketing partners and suppliers and limits access to the distribution
of its proprietary information.
BACKLOG
On January 2, 1996, the Company had a backlog of orders of approximately
$2,429,000 for shipment within the next twelve months. At December 31, 1994,
the Company had a backlog of orders of approximately $3,026,000. Since recorded
sales orders are subject to changes in customer delivery schedules,
cancellation, or price changes, the Company's backlog as of any particular date
may not be representative of actual sales for any succeeding fiscal period and
is not considered firm.
EMPLOYEES
On January 2, 1996, the Company had 162 employees. None of the Company's
employees is represented by a labor union and the Company has experienced no
work stoppages. The Company's management believes its employee relations are
good.
The Company's management believes that the Company's future success will depend,
in part, on its ability to attract and retain qualified technical, marketing,
and management personnel. Such experienced personnel are in great demand, and
the Company must compete for their services with other firms, many of which have
greater financial resources than the Company.
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ITEM 2. PROPERTIES
In April 1993 the Company relocated its engineering, manufacturing, and
administrative headquarters to 63,000 square feet of leased space in a building
located in San Ramon, California. The lease was amended in June 1995 to extend
its term from seven years to thirteen years. The lease contains an option to
increase the leased space by 10,000 square feet. The Company expects that the
facility will satisfy its anticipated needs through the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY &
RELATED SHAREHOLDER MATTERS.
<TABLE>
<CAPTION>
Fiscal quarter ended
-------------------------------------------------------------
1995 January 31 April 30 July 31 October 31
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High $10.50 $15.75 $14.25 $16.00
Low 7.00 8.75 10.75 10.75
1994
High $11.25 $11.25 $8.75 $7.75
Low 8.00 7.75 6.75 5.50
</TABLE>
SBE, Inc. common stock is quoted on the Nasdaq National Market under the symbol
SBEI. The above table sets forth the high and low closing sales prices for 1995
and 1994 for the quarters indicated. The Company has not paid cash dividends on
its common stock and is prohibited from doing so by its credit line agreement.
As of December 29, 1995, SBE, Inc. had approximately 808 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except for per share
amounts and number of employees)
For years ended October 31 1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $19,368 $22,337 $26,732 $28,057 $20,279
Net (loss) income (4,568) 1,336 2,461 2,565 1,333
Net (loss) income per share ($2.22) $0.63 $1.18 $1.24 $0.73
Product research and development 6,900 4,769 4,739 4,455 3,628
Working capital 7,644 7,436 6,608 4,563 6,647
Total assets 14,978 17,665 16,563 14,325 10,939
Long-term obligations 1,218 410 44 39 211
Shareholders' equity 12,108 15,864 14,889 12,001 9,088
Shares outstanding 2,074 2,035 2,005 1,922 1,817
Number of employees 173 165 148 147 145
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the last decade, the Company has specialized in the development of
computer board data communications products and industrial computer equipment.
In the early 1990s, the Company determined that a large opportunity existed in
the emerging remote LAN market for affordable remote access router products. To
seize that opportunity, the Company has invested significant resources in
developing netXpand, its new line of standalone remote LAN access server/router
products. In addition, the Company began and is continuing to restructure its
existing sales and marketing channels and adding new sales channels to access
customers for its netXpand products. The Company also has added certain key
management personnel to better serve this emerging market. Primarily as a
result of this investment and of decreased sales of computer board
communications products attributable to the decline in business with Cisco
Systems, the Company incurred substantial operating losses in fiscal 1995.
Prior to fiscal 1995, the Company reported profitable quarterly operations for
over ten years.
The Company began shipping its netXpand products in September 1995. Sales
of these products constituted over 11 percent of net sales for the fourth
quarter of fiscal 1995, and the Company expects them to constitute an increasing
percentage of net sales in future periods. netXpand is targeted at the high-
growth, price-sensitive sectors of the internetworking market. The Company
expects these segments to grow at a compounded annual rate of over 50 percent in
the United States and at a greater rate in international markets. However,
there can be no assurance that the market will grow at this rate, if at all, or
that the Company will be successful in achieving widespread market acceptance of
its netXpand products.
The Company intends to continue to support its existing computer board
controller business by developing new products for strategic customer accounts
and by focusing on emerging technologies that can be leveraged into the sales
channels the Company is developing for its netXpand remote LAN access products.
The Company introduced a line of PCI-bus based products in late 1995 that it
expects to help to expand its computer board controller business. The computer
board portion of the Company's business is characterized by a concentration of
sales to a small number of customers, and consequently the timing of significant
orders from major customers and their product cycles may cause fluctuations in
the Company's operating results.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the fiscal years ended October
31, 1995, 1994 and 1993. These operating results are not necessarily indicative
of Company's operating results for any future period.
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<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1995 1994 1993
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 49 44 45
--- --- ---
Gross profit 51 56 55
Operating expenses:
Product research and development 36 21 18
Sales and marketing 26 12 11
General and administrative 20 16 14
--- --- ---
Total operating expenses 82 50 43
--- --- ---
Operating (loss) income (31) 6 12
Interest and other (expense) income, net (1) 2 1
---- --- ---
Income (loss) before taxes (32) 8 13
(Benefit) provision for income taxes (8) 2 5
---- --- ---
Net (loss) income (24)% 6% 8%
---- --- ---
---- --- ---
</TABLE>
NET SALES
Net sales for fiscal 1995 were $19.4 million, a 13 percent decrease from
fiscal 1994. Net sales for fiscal 1994 were $22.3 million, a 16 percent
decrease from fiscal 1993. These decreases were primarily attributable to lower
sales of the Company's board-level products to certain large customers. Sales
to Cisco represented 21 percent and 36 percent of net sales in fiscal 1994 and
fiscal 1993, respectively. There were no sales to Cisco in fiscal 1995. Sales
to America Online and Tandem Computers represented 16 percent and 14 percent of
net sales, respectively, in fiscal 1995, and sales to G.E. Capital Spacenet
Services represented 11 percent and 16 percent of net sales in fiscal 1994 and
1993, respectively. The Company expects to experience fluctuation in computer
board product sales as large customers needs change. Partially offsetting the
lower sales to these large customers, sales of VMEbus-based communications
products and interface chips increased by $5.1 million, or 60 percent, from
fiscal 1994 to fiscal 1995, and by $3.1 million, or 34 percent, from fiscal 1993
to fiscal 1994. In addition, approximately $575,000 of net sales in fiscal 1995
were attributable to sales of the new netXpand products.
International sales constituted 11 percent, 4 percent and 9 percent of net
sales in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. The increase
in international sales is primarily attributable to increased sales of VME
computer board products to a large customer in Germany and sales of netXpand
products in Japan and Korea. Sales of VMEbus-based communications products
through the Company's Channel Partner relationship with Hewlett Packard
constituted 27, 13 and 4 percent of net sales in fiscal 1995, fiscal 1994 and
fiscal 1993, respectively. No customer within this channel, other than America
Online, represented more than 5% of total sales. The Company expects that
future sales through the HP channel will continue, however sales to this channel
will be subject to significant variability from quarter to quarter.
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GROSS PROFIT
Gross profit as a percentage of sales was 51 percent, 56 percent and 55
percent in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. The decrease
from fiscal 1994 to fiscal 1995 was primarily attributable to higher
manufacturing overhead costs incurred in connection with expanding manufacturing
capacity for the new netXpand products. These costs included the cost of
leasing additional high speed placement and testing equipment. The Company
believes this equipment will significantly increase manufacturing capacity and
reduce production cycle time, leading to lower cost of sales as a percentage of
net sales, as production volumes increase for the netXpand product line.
However, there can be no assurance that the Company will be successful in
increasing volume sufficiently to offset the increased overhead costs. The
increase in gross profit from fiscal 1993 to fiscal 1994 was primarily
attributable to a change in the Company's mix of products.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses net of capitalized software costs
were $6.9 million in fiscal 1995, $4.8 million in fiscal 1994, and $4.7 million
in fiscal 1993, representing 36, 21, and 18 percent of sales respectively. The
Company capitalized software development costs of $1.5 million, $230,000 and
$108,000 in fiscal 1995, fiscal 1994 and fiscal 1993 respectively, in accordance
with Statement of Financial Accounting Standards No. 86. The amounts
capitalized represented 22, 5 and 2 percent, respectively, in fiscal 1995,
fiscal 1994 and fiscal 1993 of gross product research and development
expenditures. The increase in software costs capitalized in fiscal 1995 was due
to software development related to the new netXpand product line. Those costs
will be amortized over a three year period. The increases in net research and
development expenses as a percent of sales were primarily attributable to
additional staff, consulting costs and contract professional expenses relating
to development of the netXpand product line. Contractual reimbursements under
joint development contracts are accounted for as a reduction of product research
and development expenses. The Company received $221,000, $439,000 and $80,000
of such reimbursements in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. The Company does not expect any significant reimbursements in the
future. The Company expects that product research and development expenses will
continue to increase in absolute dollars as it continues to expand and improve
its remote LAN access product line and enhance its traditional board-level
product lines.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1995 were $5.0 million, an 87
percent increase from fiscal 1994. Sales and marketing expenses for fiscal 1994
were $2.7 million, a 7 percent decrease from fiscal 1993 in absolute dollars,
but representing a greater percentage of net sales in fiscal 1994 as a result of
decreased sales in fiscal 1994. These increases were primarily attributable to
expansion of the Company's worldwide sales operations to support the netXpand
product line. The expansion included hiring additional sales and marketing and
technical support personnel and implementing new advertising programs. The
Company expects sales and marketing expenses to increase in absolute dollars as
sales of the netXpand products increase.
-15-
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1995 were $3.9 million, a 7
percent increase from fiscal 1994. General and administrative expenses for
fiscal 1994 were $3.7 million, a 3 percent decrease from fiscal 1993 in absolute
dollars, but representing a greater percentage of net sales in fiscal 1994 as a
result of decreased sales in fiscal 1994. The increase from fiscal 1994 to
fiscal 1995 was primarily attributable to recruiting costs and consulting
expenses related to the transition of the Company into the emerging remote
access markets. The decrease in absolute dollars from fiscal 1993 to fiscal
1994 was primarily attributable to non-recurring charges incurred in fiscal 1993
related to the Company's relocation to its San Ramon, California facility, as
well as decreased incentive payments to employees in fiscal 1994 due to reduced
profitability.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income, net, decreased in fiscal 1995 from fiscal 1994 and 1993
due to lower investment balances. Additionally, non recurring charges were
taken in fiscal 1995 to write off an equity investment in a strategic software
partner and to report realized losses on the liquidation of investments.
INCOME TAXES
The Company's effective tax rate was (27), 26 and 34 percent in fiscal
1995, fiscal 1994 and fiscal 1993, respectively. The Company's operating losses
in fiscal 1995 enabled it to realize a $1.7 million tax benefit, all of which
the Company expects to realize as a carryback against prior taxes paid. The
Company has recorded a valuation allowance in fiscal 1995 and 1994 for certain
deferred tax assets due to the uncertainty of realization. This valuation
allowance increased from approximately $179,000 in fiscal 1994 to $948,000 in
fiscal 1995. In the event of future taxable income, the Company's effective
income tax rate in future periods could be lower as such tax assets could be
realized. The decrease in the effective tax rate from fiscal 1993 to fiscal
1994 was primarily attributable to the utilization of research and development
tax credits, which resulted in the amendment of prior years' tax returns to
adjust research and development tax credits claimed. As a result, the Company's
fiscal 1994 fourth quarter results reflected a $153,000 tax benefit. The
Company's adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in fiscal 1994 did not have a material impact on
the Company's financial statements.
NET (LOSS) INCOME
As a result of the factors discussed above, the Company recorded a net loss
of $4.6 million in fiscal 1995, and net income of $1.3 million and $2.5 million
in fiscal 1994 and fiscal 1993, respectively.
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1995, the Company had cash and cash equivalents of $900,000,
as compared to $2.6 million at October 31, 1994. During fiscal 1995, $4.4
million of cash was used in operating activities, primarily to fund operating
losses. Working capital at October 31, 1995 was $7.6 million, as compared to
$7.4 million at October 31, 1994.
In fiscal 1995 the Company purchased $1.8 million of fixed assets,
consisting primarily of computer and manufacturing equipment. In addition, the
Company entered into operating leases for approximately $900,000 of
manufacturing equipment for its new netXpand product line. The Company expects
capital expenditures during fiscal 1996 to decrease from fiscal 1995 levels
because the Company's current facilities have been expanded to meet production
levels anticipated through fiscal 1996. Additionally, the Company capitalized
$1.5 million of software costs related to the netXpand product line. These
costs will be amortized over three years.
In fiscal 1995 the Company liquidated all of its long term investments and
as a result recorded a realized loss of $294,000. Additionally, the Company
recorded a writeoff of an equity investment in a software technology partner of
$330,000 due to management's evaluation that the carrying value of this
investment will not be recoverable.
The Company received $287,000 of proceeds from employee stock option and
stock purchase plans, an increase of 76 percent from 1994 amounts.
On May 23, 1995, the Company signed a loan agreement for a $4.0 million
revolving line of credit for working capital purposes that expires on April 30,
1996. The agreement was modified on January 17, 1996. Borrowings under the
credit line agreement bear interest at the bank's prime rate plus one percent
and are collateralized by accounts receivable and other assets. Borrowings are
limited to 70 percent of adjusted accounts receivable balances, and the Company
is subject to certain financial covenants, including the maintenance of minimum
tangible net worth of $7.0 million and minimum debt ratio of 0.7:1.0. On
October 31, 1995, the Company had no balance outstanding under its revolving
line of credit.
Based on the current operating plan, the Company anticipates that
existing cash balances, credit facilities, income tax refunds and lease lines
will be sufficient to meet short-term operating requirements. In late 1995,
in connection with the review of its 1996 operating plan, the Company decided
it must obtain additional working capital in 1996 to support its expansion of
the netXpand product lines. Additional working capital would be used to
support accounts receivable and inventory growth, research and development
activities, geographic sales expansion and licensing of technology. The
Company expects to seek additional capital in 1996 through the sale of equity
securities. If the Company is unsuccessful in the sale of equity securities,
it will initially scale back its efforts to gain additional market
penetration for its netXpand product and reduce its development of new
netXpand and communications controller products. The Company also may need
to seek alternative sources of financing, including debt. There can be no
assurance that the Company will be successful in obtaining additional working
capital or in expanding its netXpand business.
-17-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under Item 8 are
provided under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-18-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
Information concerning the Company's directors is incorporated by reference to
the information in the section captioned "Nominees" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 16, 1996.
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are set forth in the following table. Executive officers serve
at the discretion of the Board of Directors. There are no family relationships
between a director or executive officer and any other director or executive
officer of the Company.
Name Age Position
- - --------------------------------------------------------------------------------
William R. Gage 53 Chairman of the Board
William B. Heye, Jr. 57 President and Chief Executive Officer
Timothy J. Repp 36 Vice President, Finance, and Chief
Financial Officer
Belton E. Allen 48 Vice President, Sales
Anthony Spielman 47 Vice President, Network Systems Marketing
Gene Buechele 49 Vice President, Engineering
and Secretary
Norman E. O'Shea 47 Vice President, Manufacturing
Mr. Gage has been Chairman of the Board since January of 1990. From 1986 until
March 1989 he was President of the Company, from March 1989 until January 1990
he served as Senior Vice President of the Company and from January 1990 until
November 1991 he was Chief Executive Officer of the Company. From 1982 to 1986,
Mr. Gage also served at various times as Chief Operating Officer, Senior Vice
President, Vice president of Programming and Treasurer of the Company.
-19-
<PAGE>
Mr. Heye has been President and Chief Executive Officer of the Company since
November, 1991. From 1989 to November 1991, he served as Executive Vice
President of Ampex Corporation, a manufacturer of high-performance scanning
recording systems, and President of Ampex Video Systems Corporation, a wholly-
owned subsidiary of Ampex Corporation and a manufacturer of professional video
recorders and editing systems for the television industry. From 1986 to 1989,
Mr. Heye served as Executive Vice President of Airborn, Inc., a manufacturer of
connectors for the aerospace and military markets.
Mr. Repp has served as Vice President of Finance and Chief Financial Officer
since January of 1992. He joined the Company in January 1991 as Controller.
From 1987 until 1990 he was assistant controller at Grubb and Ellis, a national
real estate firm, and prior to 1987 he was an audit manager at Coopers and
Lybrand, an international accounting firm.
Mr. Allen has been Vice President, Sales since March 1990. He joined the
Company in December of 1987 as Vice President, Software Products after the
acquisition of Alcyon by the Company. From February of 1980 until the
acquisition he was Vice President, Software Products for Alcyon.
Mr. Spielman has served as Vice President, Network Systems Marketing since May
1994. Prior to joining the Company Mr. Spielman was Director of Product
Marketing at Asante Technologies, Inc., a networking equipment company,
responsible for various product lines. He was at Asante Technologies, Inc. from
1993 to 1994. From 1992 to 1993 Mr. Spielman was Director of Product Marketing
for the Internetworking division of Network Systems Corp., a networking
equipment company. From 1990 to 1992, Mr. Spielman was Manager of Business
Strategy at 3Com Corporation, an internetworking equipment company, and from
1989 to 1990 Mr. Spielman was a Product Manager at Ungermann-Bass, a wholly
owned subsidiary of Tandem Computers, Inc. and a computer equipment company,
responsible for developing the strategic plan for Ungermann-Bass's Access/One
Token Ring product line.
Mr. Buechele has been Vice President of Engineering since December 1993. From
October 1992 until joining the Company, Mr. Buechele was Managing Partner of the
Prosper Group, located in San Francisco, California. The Prosper Group is a
consulting organization focused on strategic and management projects combining
networking with multimedia. From July 1988 to September 1992, Mr. Buechele was
Vice President Engineering for the Network Systems Division of 3Com Corporation,
San Jose, California, a manufacturer and developer of networking systems.
Mr. O'Shea joined the Company in February 1995. From March 1993 until joining
the Company, Mr. O'Shea was Director of Operations for Berkeley Process Control,
a motion control systems company located in Point Richmond, California. From
January 1987 to February 1993 Mr. O'Shea served in various operational and
engineering management positions at NeXT Computer Inc., a manufacturer of
computer workstations and software.
-20-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" appearing in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-21-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) Financial Statements (see Item 8).
---------------------------------
Page
----
Report of Independent Accountants 27
Consolidated Balance Sheets at October 31, 1995 and 1994 28
Consolidated Statements of Operations for fiscal years 1995, 1994,
and 1993 29
Consolidated Statements of Shareholders' Equity for fiscal years 1995,
1994, and 1993 30
Consolidated Statements of Cash Flows for fiscal years 1995, 1994,
and 1993 31
Notes to Consolidated Financial Statements 32
(b) Financial Statement Schedule
----------------------------
Schedule II - Valuations and Qualifying Accounts 42
All other schedules are omitted as the required information is not
applicable or has been included in the consolidated financial
statements or the notes thereto.
-22-
<PAGE>
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------- ----------- --------
(a) 10.1 1984 Incentive Stock Option Plan, as amended.
(a) 10.2 1987 Supplemental Stock Option Plan.
(b) 10.3 1991 Non-Employee Directors' Stock Option Plan
(c) 10.4 Lease for 4550 Norris Canyon Road, San Ramon,
California dated November 2, 1992 between the
Company and PacTel Properties
10.5 Amendment dated June 6, 1996 to lease for 4550
Norris Canyon Road, San Ramon, California, between
the Company and CalProp L.P. (assignee of PacTel
Properties) 43
10.6 Letter of agreement to provide credit facilities
between the Company and Comerica Bank - California,
dated May 23, 1995 44
10.7 Modification of letter of agreement between the
Company and Comerica Bank - California, dated
January 17, 1996 59
11.1 Statement re computation of per share earnings 62
24.1 Consent of Coopers & Lybrand, Independent Public
Accountants 63
27.1 Financial Data Schedule 64
(d) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the quarter ended
October 31, 1995.
Explanations for letter footnotes are on the following page.
-23-
<PAGE>
Explanations for letter footnotes:
- - --------------------------------------------------------------------------------
(a) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1986, and incorporated herein by reference.
(b) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by reference.
(c) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1993, and incorporated herein by reference.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SBE, Inc.
(Registrant)
Dated: January 26, 1996 By: /s/ Timothy J. Repp
--------------------------
Timothy J. Repp
Chief Financial Officer
and Vice President of Finance
Pursuant to the requirements for the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated, as of January 26, 1996.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- - ------------------------
William B. Heye Jr. Chief Executive Officer, President, and
Director (Principal Executive Officer)
/s/ Timothy J. Repp
- - -------------------
Timothy J. Repp Chief Financial Officer, Vice President
of Finance (Principal Financial and
Accounting Officer)
-25-
<PAGE>
Signature
- - ---------
Title
/s/ William R. Gage
- - -------------------
Chairman of the Board
William R. Gage
/s/ Edward H. Laird
- - -------------------
Director
Edward H. Laird
/s/ Harold T. Hahn
- - ------------------
Director
Harold T. Hahn
/s/ Ramon L. Conlisk
- - --------------------
Director
Raimon L. Conlisk
/s/ George E. Grega
- - -------------------
Director
George E. Grega
-26-
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
SBE, Inc.
San Ramon, California
We have audited the consolidated financial statements of SBE, Inc. and
subsidiary as of October 31, 1995 and 1994, and for each of the three years in
the period ended October 31, 1995. We have also audited the financial statement
schedule listed in Item 14(b) of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SBE, Inc. and
subsidiary as of October 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended October 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Oakland, California
December 14, 1995
-27-
<PAGE>
SBE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 1995 1994
- - -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 857,206 2,566,067
Trade accounts receivable, net 3,387,732 3,444,197
Inventories 2,611,413 2,047,792
Income tax recoverable 1,836,315 59,830
Deferred income taxes 224,681 300,221
Other 377,733 408,238
------------ ------------
Total current assets 9,295,080 8,826,345
Property, plant and equipment, net 3,329,913 2,782,284
Investments --- 5,454,258
Deferred income taxes 654,319 ---
Capitalized software costs, net 1,656,419 230,000
Other 41,968 371,818
------------ ------------
Total assets $ 14,977,699 $ 17,664,705
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 940,888 $ 802,275
Accrued payroll and employee benefits 593,106 480,759
Other 117,410 107,583
------------ ------------
Total current liabilities 1,651,404 1,390,617
Deferred tax liabilities 879,000 290,043
Deferred rent 339,134 120,409
------------ ------------
Total liabilities 2,869,538 1,801,069
------------ ------------
Commitments (Note 8).
Shareholders' equity:
Preferred stock (no par value); authorized
50,000 shares; none issued
Common stock (no par value); authorized
6,000,000 shares; issued and outstanding
2,074,254 and 2,034,842 shares at October 31,
1995 and 1994, respectively 7,679,819 7,392,693
Unrealized loss on investments --- (525,370)
Retained earnings 4,428,342 8,996,313
------------ ------------
Total shareholders' equity 12,108,161 15,863,636
------------ ------------
Total liabilities and shareholders'
equity $ 14,977,699 $ 17,664,705
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended October 31
1995 1994 1993
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 19,367,776 $ 22,336,777 $ 26,731,821
Cost of sales 9,566,784 9,838,663 11,998,750
------------ ------------ ------------
Gross profit 9,800,992 12,498,114 14,733,071
Product research and development 6,900,420 4,769,306 4,739,348
Sales and marketing 4,961,438 2,656,240 2,862,860
General and administrative 3,929,544 3,683,237 3,790,220
------------ ------------ ------------
Total expenses 15,791,402 11,108,783 11,392,428
Operating (loss) income (5,990,410) 1,389,331 3,340,643
Interest income 342,463 407,937 402,334
Interest expense (14,783) (1,217) (13,809)
Writeoff of equity investment (330,000) --- ---
Loss on sale of investments (293,797) --- ---
------------ ------------ ------------
(Loss) income before income taxes (6,286,527) 1,796,051 3,729,168
(Benefit) provision for income taxes (1,718,556) 459,743 1,267,918
------------ ------------ ------------
Net (loss) income $ (4,567,971) $ 1,336,308 $ 2,461,250
------------ ------------ ------------
------------ ------------ ------------
Net (loss) income per common share $ (2.22) $ 0.63 $ 1.18
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares 2,054,570 2,107,582 2,089,904
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Unrealized Losses Retained
Shares Amount on Investments Earnings Total
--------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances, October 31, 1992 1,921,930 $ 6,802,722 --- $ 5,198,755 $ 12,001,477
Stock issued in connection
with stock option plan 70,456 306,387 --- --- 306,387
Stock issued in connection
with stock purchase plan 12,745 120,300 --- --- 120,300
Net income --- --- --- 2,461,250 2,461,250
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1993 2,005,131 7,229,409 --- 7,660,005 14,889,414
Stock issued in connection
with stock option plan 18,209 86,221 --- --- 86,221
Stock issued in connection
with stock purchase plan 11,502 77,063 --- --- 77,063
Unrealized losses on investments --- --- (525,370) --- (525,370)
Net income --- --- --- 1,336,308 1,336,308
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1994 2,034,842 7,392,693 (525,370) 8,996,313 15,863,636
Stock issued in connection
with stock option plan 21,543 166,454 --- --- 166,454
Stock issued in connection
with stock purchase plan 17,869 120,672 --- --- 120,672
Unrealized losses on investments --- --- 525,370 --- 525,370
Net loss --- --- --- (4,567,971) (4,567,971)
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1995 2,074,254 $ 7,679,819 --- $ 4,428,342 $ 12,108,161
--------- ----------- -------------- ----------- ------------
--------- ----------- -------------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended October 31 1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,567,971) $ 1,336,308 $ 2,461,250
Adjustments to reconcile net (loss) income to net cash (used)
provided by operating activities:
Depreciation and amortization 1,312,061 1,115,173 1,099,578
Writeoff of equity investment 330,000 --- ---
Loss on sale of investments 293,797 7,730 ---
Deferred taxes 10,178 199,822 57,005
Other 955 9,010 33,695
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable 56,465 (8,392) (137,502)
(Increase) decrease in inventories (563,621) 92,316 721,132
(Increase) in income tax recoverable (1,776,485) --- ---
Decrease (increase) in other assets 30,355 (160,880) (110,035)
Increase (decrease) in trade accounts payable 138,613 256,782 (71,438)
Decrease in income taxes payable --- (26,201) (271,297)
Increase (decrease) in other current liabilities 122,174 (502,289) (188,168)
Increase in noncurrent liabilities 218,725 76,048 44,361
------------ ----------- -----------
Net cash (used) provided by operating activities (4,394,754) 2,395,427 3,638,581
------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,802,826) (772,899) (1,573,515)
Proceeds from sale of fixed assets 2,729 2,000 30,880
Capitalized software costs (1,486,967) (230,000) (108,250)
Proceeds from sale of investments 5,936,416 974,522 1,500,000
Purchase of investments (250,585) (2,163,595) (1,838,227)
------------ ----------- -----------
Net cash provided (used) by investing activities 2,398,767 (2,189,972) (1,989,112)
------------ ----------- -----------
Cash flows from financing activities:
Repayments on bank facilities --- --- (88,750)
Principal payments on capital lease obligations --- (26,466) (75,310)
Proceeds from stock plans 287,126 163,284 426,687
------------ ----------- -----------
Net cash provided by financing activities 287,126 136,818 262,627
------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,708,861) 342,273 1,912,096
Cash and cash equivalents at beginning of year 2,566,067 2,223,794 311,698
------------ ----------- -----------
Cash and cash equivalents at end of year $ 857,206 $ 2,566,067 $ 2,223,794
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 14,783 $ 1,217 $ 13,809
------------ ----------- -----------
------------ ----------- -----------
Income taxes $ 33,824 $ 447,590 $ 1,482,210
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SEGMENT:
SBE, Inc. and subsidiary (the Company) designs and manufactures high-performance
network systems and products for world-wide distribution. During 1995 the
Company invested significant resources in developing netXpand, its new line of
standalone remote LAN access server/router products. As a result of this
investment and decreased sales attributable to the shift in product focus, the
Company incurred substantial operating losses in fiscal 1995. The Company's
business falls exclusively within one industry segment.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary.
CASH EQUIVALENTS:
The Company considers all highly liquid investments readily convertible into
cash with an original maturity of three months or less upon acquisition by the
Company to be cash equivalents. Substantially all of its cash and cash
equivalents are held in two large financial institutions.
INVESTMENTS:
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." This statement requires that securities be classified
as "held to maturity," "available for sale," or "trading," and the securities in
each classification be accounted for at either amortized cost or fair market
value, depending upon their classification. The Company classifies its
investments as "available for sale," and therefore records the investment at
fair market value with any unrealized losses or gains reflected as a separate
component of shareholders' equity. The Company had no investments as of October
31, 1995. During fiscal 1995, the Company sold all of its investments for
proceeds of $5,936,416 and realized losses of $293,797. For purposes of
determining realized losses, the cost of investments is based upon the specific
identification method.
INVENTORIES:
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value.
-32-
<PAGE>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost. The Company provides for
depreciation by charges to expense, which are sufficient to write off the costs
of the assets over their estimated useful lives of three to eight years, on a
straight-line basis. Leasehold improvements are amortized over the lesser of
their useful lives or the remaining term of the related leases.
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the asset and allowance for depreciation accounts,
and any gain or loss on such sale or disposal is credited or charged to income.
Maintenance, repairs, and minor renewals are charged to expense as
incurred. Expenditures which substantially increase an asset's useful life are
capitalized.
CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of costs to purchase software and to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized over related sales on a per-unit basis with a minimum amortization
based on a straight-line method over a three-year useful life. The Company
evaluates the estimated net realizable value of each software product and
records provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
REVENUE RECOGNITION AND WARRANTY COSTS:
The Company records product sales at the time of product shipment. Warranty
costs are not significant; however, the Company provides a reserve for estimated
warranty costs at the time of sale and periodically adjusts such amounts to
reflect actual expenses. The Company's sales transactions are negotiated
principally in U.S. dollars.
PRODUCT RESEARCH AND DEVELOPMENT EXPENDITURES:
Product research and development (R&D) expenditures, except certain software
development costs, are charged to expense as incurred. Contractual
reimbursements for R&D expenditures under joint R&D contracts with customers are
accounted for as a reduction of related expenses as incurred. For the years
ended October 31, 1995, 1994, and 1993, direct costs incurred under R&D
contracts were $112,868, $382,397, and $102,183, respectively, and
reimbursements earned were $221,120, $439,000, and $80,000, respectively.
INCOME TAXES:
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Previously,
the Company used SFAS No. 96 in accounting for income taxes. SFAS No. 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the consolidated
financial statements or tax returns. Under SFAS No. 109 the Company provides a
deferred tax expense or benefit equal to the change in
-33-
<PAGE>
the deferred tax asset or liability during the year. Deferred income taxes
represent future net tax effects resulting from temporary differences between
the financial statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are recorded against net deferred tax assets,
where in the opinion of management realization is uncertain. SFAS No. 109 was
applied on a prospective basis, and the amounts presented for prior years have
not been restated. The adoption of SFAS No. 109 did not have a material impact
on net income, and did not require the recording of a cumulative effect of
change in accounting principle.
NET INCOME (NET LOSS) PER COMMON SHARE:
Net income per common share for the years ended October 31, 1994 and 1993 was
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
relate to stock options. Common stock equivalents are excluded from the net
loss per common share (LPS) calculation for the year ended October 31, 1995, as
they have the effect of decreasing LPS. The difference between primary and
fully diluted net income per share was not significant in any year.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued and is
effective for the Company's 1997 fiscal year. The Company intends to continue
to account for employee stock options in accordance with APB Opinion No. 25 and,
accordingly, will comply with the pro forma disclosure required by SFAS 123.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation with no effect on net income as
previously reported.
2. INVENTORIES
Inventories at October 31, 1995 and 1994 are comprised of the following :
<TABLE>
<CAPTION>
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 841,453 $ 558,840
Subassemblies 299,315 217,382
Parts and materials 1,470,645 1,271,570
--------------------------------
$ 2,611,413 $ 2,047,792
------------- ------------
------------- ------------
</TABLE>
-34-
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 7,462,268 $ 5,913,380
Furniture and fixtures 1,091,935 953,188
Leasehold improvements 519,309 447,238
------------ ------------
9,073,512 7,313,806
Less accumulated depreciation
and amortization 5,743,599 4,531,522
------------ ------------
$ 3,329,913 $ 2,782,284
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense totaled $1,251,513, $979,430 and $929,455
for the years ending October 31, 1995, 1994 and 1993, respectively.
4. LINE OF CREDIT
The Company had a line of credit for $1,000,000 which expired on February 28,
1995. On May 23, 1995, the Company entered into a $4,000,000 revolving working
capital line of credit agreement which expires on April 30, 1996. The agreement
was modified on January 17, 1996. Borrowings under the new line of credit, as
modified, bear interest at the bank's prime rate plus one percent and are
collateralized by accounts receivable and other assets. Borrowings are limited
to 70 percent of adjusted accounts receivable balances, and the Company is
required to maintain minimum tangible net worth of $7.0 million, a minimum debt
ratio of 0.7:1.0, a quick ratio of cash, investments, and receivables to current
liabilities of not less than 1.0:1.0, and minimum profitability levels. The
line of credit agreement also prohibits the payment of cash dividends without
the consent of the bank.
As of October 31, 1995 and 1994, there were no borrowings under either
credit line.
5. OTHER CURRENT LIABILITIES
Other current liabilities at October 31, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Accrued product warranties $ 78,302 $ 96,016
Other 39,108 11,567
------------ -----------
$ 117,410 $ 107,583
------------ -----------
------------ -----------
</TABLE>
-35-
<PAGE>
6. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
1995, 1994, and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ (1,731,734) $ 196,270 $ 912,579
Deferred 10,178 199,822 57,005
State:
Current 3,000 63,651 298,334
Deferred --- --- ---
------------- ---------- ------------
Total (benefit) provision for income taxes $ (1,718,556) $ 459,743 $ 1,267,918
------------- ---------- ------------
------------- ---------- ------------
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% 34.0% 34.0%
State taxes, net of federal income tax
benefit --- 4.3 6.1
Change in valuation allowance 12.2 --- ---
Tax credits (5.0) (8.9) (2.8)
Nontaxable interest income (0.7) (3.5) (1.4)
Other, net 0.2 (0.3) (1.9)
------ ------ -----
(27.3)% 25.6% 34.0%
------ ------ -----
------ ------ -----
</TABLE>
Significant components of the Company's deferred tax balances as of
October 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Current
Accrued employee benefits $ 103,000 $ 99,620
Inventory allowances 278,000 85,000
Allowance for doubtful accounts 51,000 34,000
Warranty accruals 31,000 32,640
Other reserves not currently deductible 4,000 48,961
Noncurrent
Deferred rent 134,000 ---
R&D credit carryforward 695,000 ---
Alternative minimum tax carryforward 143,000 ---
Operating loss carryforward 184,000 ---
Investments 130,000 178,626
Capital loss carryforward 74,000 ---
---------- ----------
Total deferred tax assets 1,827,000 478,847
---------- ----------
Deferred tax liabilities:
Noncurrent
Depreciation (234,000) (220,003)
Capitalized software costs (645,000) (70,040)
---------- ----------
Total deferred tax liabilities (879,000) (290,043)
---------- ----------
Deferred tax asset valuation allowance (948,000) (178,626)
---------- ----------
Net deferred tax assets $ --- $ 10,178
---------- ----------
---------- ----------
</TABLE>
-36-
<PAGE>
A valuation allowance was established to offset certain deferred tax assets due
to management's uncertainty of realizing the benefit of these items. The net
increase in the valuation allowance was $769,374 and $178,626 for the years
ended October 31, 1995 and 1994, respectively.
The Company has research and experimentation tax credit carryforwards of
$536,000 and $158,000 for federal and state tax purposes respectively. These
carryforwards expire in the periods ending 2007 through 2010. The Company has a
net operating loss carryforward for state income tax purposes of approximately
$3,000,000 which expires in 1999.
7. CAPITALIZED SOFTWARE COSTS
Software costs at October 31, 1995 and 1994 comprise the following:
<TABLE>
<CAPTION>
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Purchased software $ 195,000 $ 165,409
Internally developed software 1,521,967 200,334
------------ -----------
1,716,967 365,743
Less accumulated amortization 60,548 135,743
------------ -----------
$ 1,656,419 $ 230,000
------------ -----------
------------ -----------
</TABLE>
The Company capitalized $120,000 and $75,000 of purchased software costs in 1995
and 1994, respectively. Additionally, $1,366,967 and $155,000 of internally
developed software costs were capitalized in 1995 and 1994, respectively.
Amortization of capitalized software costs totaled $60,548, $135,743 and $91,878
for the years ended October 31, 1995, 1994 and 1993, respectively.
8. COMMITMENTS
The Company leases all its buildings under noncancelable operating leases which
expire at various dates through the year 2006. Future minimum lease payments
under all operating leases with initial or remaining noncancelable lease terms
in excess of one year at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending October 31:
1996 $ 849,749
1997 776,870
1998 765,503
1999 756,092
2000 728,804
Thereafter 3,460,166
------------
Total minimum lease payments $ 7,337,184
------------
------------
</TABLE>
-37-
<PAGE>
Under the terms of the San Ramon, California building lease, rent includes the
lessor's operating costs. The building lease also includes two five-year
renewal options at market rates as defined by the lease.
Rent expense under all operating leases for the years ended October 31, 1995,
1994 and 1993 was $794,700, $786,513 and $840,676, respectively.
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has two employee stock option plans: a 1987 nonqualified plan and a
1984 incentive plan. Shares of common stock reserved under the plans are pooled
and aggregated to 930,000 shares (830,000 shares as of October 31, 1994). Stock
options granted under employee plans are exercisable over a maximum term of ten
years from the date of grant, vest in various installments over this period and
have exercise prices reflecting market value at the date of grant.
Additionally, in 1991, shareholders approved a "Non-Employee Director Stock
Option Plan" (the Plan). Common stock reserved for issuance under the Plan, as
amended in fiscal 1994, allows for the issuance of 140,000 shares of stock to
nonemployee directors. Options granted under the plan vest over a four-year
period and expire five years after the date of grant and have exercise prices
reflecting market value at the date of grant.
At October 31, 1995 and 1994, 94,928 and 233,333 shares, respectively, were
available for stock option grants under the employee plans, and 74,000 and
94,000 shares, respectively, were available for grant under the Non-Employee
Director Plan.
-38-
<PAGE>
A summary of the activity under the stock option plans is set forth below:
<TABLE>
<CAPTION>
1992 Non-Employee
1987 Nonqualified 1984 Incentive Directors
Stock Option Plan Stock Option Plan Stock Option Plan
---------------------------------------------------------------------------------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
October 31, 1992 203,864 $2.97 - 13.75 60,258 $2.50 - 5.00 20,000 $5.25 - 11.88
Granted 75,382 9.25 - 17.25 --- --- 4,000 13.00
Terminated (2,501) 3.75 - 10.50 --- --- --- ---
Exercised (20,756) 2.97 - 6.50 (49,700) 2.50 - 5.00 --- ---
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1993 255,989 3.75 - 17.25 10,558 2.50 - 5.00 24,000 5.25 - 13.00
Granted 78,931 5.50 - 12.50 --- --- 20,000 8.50
Terminated (15,093) 7.13 - 10.50 --- --- --- ---
Exercised (3,901) 4.53 - 5.50 (10,558) 3.75 - 5.00 (3,750) 5.25
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1994 315,926 3.75 - 17.25 --- --- 40,250 5.25 - 13.00
Granted 275,907 7.50 - 14.50 --- --- 20,000 9.50
Terminated (37,502) 7.00 - 14.50 --- --- --- ---
Exercised (21,543) 3.75 - 13.25 --- --- --- ---
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1995 532,788 $4.13 - 17.25 --- --- 60,250 $5.25 - 13.00
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Exercisable at
October 31, 1995 147,339 $4.13 - 17.25 --- --- 22,250 $5.25 - 13.00
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under
which 100,000 shares of common stock have been reserved for issuance. The
Purchase Plan allows participating employees to purchase, through payroll
deductions, shares of the Company's common stock at 85 percent of the stock's
fair market value at specified dates. At October 31, 1995, 156 employees were
eligible to participate in the Purchase Plan and 51,851 common shares were
available for issuance. In fiscal year 1995, 1994 and 1993, 17,869, 11,502 and
12,745 shares were issued under the Purchase Plan, respectively.
10. EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company contributes a percentage of income before income taxes into an
employee savings and investment plan. The percentage is determined annually by
the board of directors. The Company makes matching payments of 50 percent of
each employee's contribution up to three percent of employees' earnings.
Additional contributions to the savings and investment plan are payable
annually, vest over five years and cover substantially all employees who have
been with the Company at least one year.
For the years ended October 31, 1995, 1994 and 1993, total expense under
the above program and plan was $202,228, $169,116 and $442,796, respectively.
-39-
<PAGE>
11. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's trade accounts receivable are concentrated among a small number of
customers, principally located in the United States. Ongoing credit evaluations
of customers' financial condition are performed and, generally, no collateral is
required. The Company maintains an allowance for doubtful accounts for
potential credit losses, and actual bad debt losses have not been material and
have not exceeded management's expectations. Trade accounts receivable are
recorded net of allowance for doubtful accounts of $130,000 and $100,000, at
October 31, 1995 and 1994, respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to America Online and Tandem Computers of $3,062,000 and
$2,785,000, respectively, in fiscal 1995. Sales to Cisco Systems and G.E.
Capital Spacenet Services, respectively, accounted for $4,635,000 and $2,526,000
of revenues in fiscal 1994 and $9,586,000 and $4,083,000 in fiscal 1993.
International sales accounted for 11% of total revenues during fiscal 1995.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company has amended its financial statements for the three months ended
April 30, 1995 to reflect a $650,000 writedown of capitalized software costs.
This adjustment resulted from the capitalization of products that either did not
achieve technological feasibility or were subsequently discontinued. The effect
of this adjustment was to increase the second quarter net loss by $474,000, or
$.23 per share.
The Company's fiscal 1994 fourth quarter reflects a $153,000 tax benefit as
a result of the Company's amendment of its prior years' tax filings to adjust
its research and development tax credits claimed.
<TABLE>
<CAPTION>
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------
1995:
<S> <C> <C> <C> <C>
Net sales $5,115 $4,768 $4,584 $4,901
Gross profit 2,910 2,418 2,174 2,299
Net loss (250) (1,583) (1,245) (1,490)
Net loss per share $(.12) $(.77) $(.60) $(.72)
1994:
Net sales $5,067 $5,627 $6,086 $5,556
Gross profit 2,784 3,222 3,468 3,024
Net income 288 544 411 93
Net income per share $.14 $.26 $.20 $.04
</TABLE>
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<PAGE>
13. SUBSEQUENT EVENT
In November 1995, the Company's Board of Directors approved an amendment to
the Company's Articles of Incorporation to increase the Company's authorized
shares of common and preferred stock to 10,000,000 and 2,000,000 shares,
respectively.
-41-
<PAGE>
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
--------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to costs End of
Description of Period and expenses Deductions (a) Period
- - ---------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1995
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts 100,000 32,590 (2,590) 130,000
Allowance for Obsolete Inventory 272,677 486,991 (228,654) 531,014
Allowance for Warranty Claims 96,016 52,608 (43,730) 104,894
Allowance for the deferred tax asset 178,626 769,374 0 948,000
YEAR ENDED OCTOBER 31, 1994
Allowance for Doubtful Accounts 150,986 0 (50,986) 100,000
Allowance for Obsolete Inventory 277,735 311,816 (316,874) 272,677
Allowance for Warranty Claims 123,042 65,392 (92,418) 96,016
Allowance for the deferred tax asset 0 178,626 0 178,626
YEAR ENDED OCTOBER 31, 1993
Allowance for Doubtful Accounts 124,030 30,000 (3,044) 150,986
Allowance for Obsolete Inventory 296,183 598,838 (617,286) 277,735
Allowance for Warranty Claims 95,404 149,053 (121,415) 123,042
</TABLE>
(a) Deductions represent activity charged to related asset or liability account.
-42-
<PAGE>
Exhibit 10.5
FIRST AMENDMENT TO LEASE
This First Amendment to Lease dated June 6, 1995, for reference purposes
only, by and between CalProp, L.P., a California Limited Partnership
("Landlord") and SBE, Inc., a California Corporation ("Tenant") is made in view
of the following facts and circumstances:
A. PacTel Properties - California, a California Corporation, and SBE, Inc., a
California Corporation, entered into a Lease dated November 2, 1992 for
sixty three thousand three hundred seventy three (63,373) rentable square
feet ("Premises") located on the ground floor, 4550 Norris Canyon Road, San
Ramon, California (the "Lease").
B. PacTel Properties - California, a California Corporation, has assigned the
Lease to CalProp, L.P., a California Limited Partnership, hereinafter
referred to as "Landlord".
The parties hereto desire to modify the terms of the Lease as stated below:
1. The Term of this Lease is hereby extended so that the Expiration Date shall
be April 3, 2006.
2. Base Monthly Rent is hereby amended as follows:
July 1, 1995 - December 31, 1995 Rent is abated
January 1, 1996 - March 31, 1996 $0.70 psf of Net Rentable Area
April 1, 1996 - March 31, 2000 $0.75 psf of Net Rentable Area
April 1, 2000 - March 31, 2006 $0.84 psf of Net Rentable Area
Except as modified by this First Amendment to Lease, all of the terms and
conditions of the Lease shall be applicable to the Premises and shall also
remain in full force and effect. In the event of any conflict between the terms
of this First Amendment and the terms of the Lease, the terms of this First
Amendment shall control.
LANDLORD TENANT
CALPROP, L.P., SBE, INC.,
a California Limited Partnership a California Corporation
By: LAMCO CalFront Management, Inc.,
as authorized agent
By: /s/ David J. Gaulton By: /s/ Timothy J. Repp
-------------------- -------------------
Its: President Its: Chief Financial Officer, V.P.
--------- Finance
-----------------------------
Date: July 26, 1995 Date: July 20, 1995
------------- -------------
-43-
<PAGE>
Exhibit 10.6
[COMERICA LOGO] REVOLVING CREDIT LOAN & SECURITY
AGREEMENT
(ACCOUNTS AND INVENTORY)
- - -------------------------------------------------------------------------------
OBLIGOR # NOTE # AGREEMENT DATE
MAY 23, 1995
- - -------------------------------------------------------------------------------
CREDIT LIMIT INTEREST RATE B+0.50% OFFICER NO./INITIALS
$4,000,000.00 9.50% 48703 MARY BETH SUHR
- - -------------------------------------------------------------------------------
THIS AGREEMENT is entered into on MAY 23, 1995, between COMERICA BANK-
CALIFORNIA ("Bank") as secured party, whose Headquarter Office is 333 WEST SANTA
CLARA ST., SAN JOSE, CA and SBE, INC. ("Borrower"), a CALIFORNIA CORPORATION
whose sole place of business (if it has only one), chief executive office (if it
has more than one place of business) or residence (if an individual) is located
at 4550 NORRIS CANYON ROAD, SAN RAMON, CA. The parties agree as follows:
1. DEFINITIONS
1.1 "Agreement" as used in this Agreement means and includes this
Revolving Credit Loan & Security Agreement (Accounts and Inventory), any
concurrent or subsequent rider to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and any extensions, supplements,
amendments or modifications to this Revolving Credit Loan & Security
Agreement (Accounts and Inventory) and to any such rider.
1.2 "Bank Expenses" as used in this Agreement means and includes: all
costs or expenses required to be paid by Borrower under this Agreement which
are paid or advanced by Bank; taxes and insurance premiums of every nature
and kind of Borrower paid by Bank; filing, recording, publication and search
fees, appraiser fees, auditor fees and costs, and title insurance premiums
paid or incurred by Bank in connection with Bank's transactions with
Borrower; costs and expenses incurred by Bank in collecting the Receivables
(with or without suit) to correct any default or enforce any provision of
this Agreement, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, disposing of, preparing for sale
and/or advertising to sell the Collateral, whether or not a sale is
consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof, including, but not limited
to, expenses incurred by Bank in attempting to obtain relief from any stay,
restraining order, injunction or similar process which prohibits Bank from
exercising any of its rights or remedies; and attorneys' fees and expenses
incurred by Bank in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is
brought. Bank Expenses shall include Bank's in-house legal charges at
reasonable rates.
1.3 "Base Rate" as used in this Agreement means that variable rate of
interest so announced by Bank at its headquarters office in San Jose,
California as its "Base Rate" from time to time and which serves as the basis
upon which effective rates of interest are calculated for those loans making
reference thereto.
1.4 "Borrower's Books" as used in this Agreement means and includes all
of the Borrower's books and records including but not limited to: minute
books; ledgers; records indicating, summarizing or evidencing Borrower's
assets, liabilities, Receivables, business operations or financial condition,
and all information relating thereto, computer programs; computer disk or
tape files; computer printouts; computer runs; and other computer prepared
information and equipment of any kind.
1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
SEVENTY-FIVE percent (75.00%) of the net amount of Eligible Accounts after
deducting therefrom all payments, adjustments and credits applicable thereto
("Accounts Receivable Borrowing Base"); and (2) the amount, if any, of the
advances against Inventory agreed to be made pursuant to any Inventory Rider
("Inventory Borrowing Base"), or other rider, amendment or modification to
this Agreement, that may now or hereafter be entered into by Bank and
Borrower.
1.6 "Cash Flow" as used in this Agreement means, for any applicable
period of determination, the Net Income (after deduction for income taxes and
other taxes of such person determined by reference to income or profits of
such person) for such period, plus, to the extent deducted in computation of
such Net Income, the amount of depreciation and amortization expense and the
amount of deferred tax liability during such period, all as determined in
accordance with GAAP. The applicable period of determination will be N/A,
beginning with the period from _______________ to _______________.
1.7 "Collateral" as used in this Agreement means and includes each and
all of the following: the Receivables; the Intangibles; the negotiable
collateral, the Inventory; all money, deposit accounts and all other assets
of Borrower in which Bank receives a security interest or which hereafter
come into the possession, custody or control of Bank; and the proceeds of any
of the foregoing, including, but not limited to, proceeds of insurance
covering the collateral and any and all Receivables, Intangibles, negotiable
collateral, Inventory, equipment, money, deposit accounts or other tangible
and intangible property of borrower resulting from the sale or other
disposition of the collateral, and the proceeds thereof. Notwithstanding
anything to the contrary contained herein, collateral shall not include any
waste or other materials which have been or may be designated as toxic or
hazardous by Bank.
1.8 "Credit" as used in this Agreement means all Obligations, except
those obligations arising pursuant to any other separate contract,
instrument, note, or other separate agreement which, by its terms, provides
for a specified interest rate and term.
-44-
<PAGE>
REVOLVING
LOAN & SECURITY AGREEMENT
(ACCOUNT & INVENTORY)
1.9 "Current Assets" as used in this Agreement means, as of any
applicable date of determination, all cash, non-affiliated customer
receivables, United States government securities, claims against the United
States government, and inventories.
1.10 "Current Liabilities" as used in this Agreement means, as of any
applicable date of determination, (i) all liabilities of a person that should
be classified as current in accordance with GAAP, including without
limitation any portion of the principal of the indebtedness classified as
current, plus (ii) to the extent not otherwise included, all liabilities of
the Borrower to any of its affiliates whether or not classified as current in
accordance with GAAP.
1.11 "Daily Balance" as used in this Agreement means the amount
determined by taking the amount of the Credit owed at the beginning of a
given day, adding any new Credit advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid and are
applied by Bank in reduction of the Credit on that date under the provisions
of this Agreement.
1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within THIRTY (30) days,
or less, from the date of invoice, have been validly assigned to Bank and
strictly comply with all of Borrower's warranties and representations to
Bank; but Eligible Accounts shall not include the following: (a) accounts
with respect to which the account debtor is an officer, employee, partner,
joint venturer or agent of Borrower; (b) accounts with respect to which goods
are placed on consignment, guaranteed sale or other terms by reason of which
the payment by the account debtor may be conditional; (c) accounts with
respect to which the account debtor is not a resident of the United States;
(d) accounts with respect to which the account debtor is the United States or
any department, agency or instrumentality of the United States; (e) accounts
with respect to which the account debtor is any State of the United States or
any city, county, town, municipality or division thereof; (f) accounts with
respect to which the account debtor is a subsidiary of, related to,
affiliated or has common shareholders, officers or directors with Borrower,
(g) accounts with respect to which Borrower is or may become liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower; (h) accounts not paid by an account debtor within ninety (90) days
from the date of the invoice; (l) accounts with respect to which account
debtors dispute liability or make any claim, or have any defense, crossclaim,
counterclaim, or offset; (j) accounts with respect to which any Insolvency
Proceeding is filed by or against the account debtor, of if an account debtor
becomes insolvent, fails or goes out of business; and (k) accounts owed by
any single account debtor which exceed twenty percent (20%) of all of the
Eligible Accounts; and (l) accounts with a particular account debtor on which
over twenty-five percent (25%) of the aggregate amount owing is greater than
ninety (90) days from the date of the invoice. CONCENTRATION ALLOWANCE OF
30% FOR SIEMENS, AOL, AND TANDEM COMPUTERS. ALLOW FOREIGN RECEIVABLES OF NTT
(JAPAN) AND SIEMENS (GERMANY) UP TO $1,000,000.00, WITH A $500,000.00 LIMIT
FOR EACH FOREIGN DEBTOR. CONCENTRATION LIMIT OF 25% FOR ALL ACCOUNTS.
1.13 "Event of Default" as used in this Agreement means those events
described in Section 7 contained herein below.
1.14 "Fixed Charges" as used in this Agreement means and includes, for
any applicable period of determination, the sum, without duplication, of (a)
all interest paid or payable during such period by a person on debt of such
person, plus (b) all payments of principal or other sums paid or payable
during such period by such person with respect to debt of such person having
a final maturity more than one year from the date of creation of such debt,
plus (c) all debt discount and expense amortized or required to be amortized
during such period by such person, plus (d) the maximum amount of all rents
and other payments paid or required to be paid by such person during such
period under any lease or other contract or arrangement providing for use of
real or personal property in respect of which such person is obligated as a
lessee, use or obligor, plus (e) all dividends and other distributions paid
or payable by such person or otherwise accumulating during such period on any
capital stock of such person, plus (f) all loans or other advances made by
such person during such person to any Affiliate of such person. The
applicable period of determination will be N/A, beginning with the period
from _______________ to _______________.
1.15 "GAAP" as used in this Agreement means as of any applicable period,
generally accepted accounting principles in effect during such period.
1.16 "Insolvency Proceeding" as used in this Agreement means and includes
any proceeding or case commenced by or against the Borrower, or any guarantor
of Borrower's Obligations, or any of borrower's account debtors, under any
provisions of the Bankruptcy Code, as amended, or any other bankruptcy or
insolvency law, including but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition of extensions with
some or all creditors, any proceeding seeking a reorganization, arrangement
or any other relief under the Bankruptcy code, as amended, or any other
bankruptcy or insolvency law.
1.17 "Intangibles" as used in this Agreement means and includes all of
Borrower's present and future general intangibles and other personal property
(including, without limitation, any and all rights in any legal proceedings,
goodwill, patents, trade names, copyrights, trademarks, blueprints, drawings,
purchase orders, computer programs, computer disks, computer tapes,
literature, reports, catalogs and deposit accounts) other than goods and
Receivables, as well as Borrower's Books relating to any of the foregoing.
1.18 "Inventory" as used in this Agreement means and includes all present
and future inventory in which Borrower has any interest, including, but not
limited to, goods held by Borrower for sale or lease or to be furnished under
a contract of service and all of Borrower's present and future raw materials,
work in process, finished goods, advertising materials, and packing and
shipping materials, wherever located and any documents of title representing
any of the above, and any equipment, fixtures or other property used in the
storing, moving, preserving, identifying, accounting for and shipping or
preparing for the shipping of inventory, and any and all other items
hereafter acquired by Borrower by way of substitution,
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(ACCOUNTS AND INVENTORY)
replacement, return, repossession or otherwise, and all additions and
accessions thereto, and the resulting product or mass, and any documents of
title respecting any of the above.
1.19 "Net Income" as used in this Agreement means the net income (or
loss) of a person for any period determined in accordance with GAAP but
excluding in any event:
(a) any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets,
and any taxes on the excluded gains and any tax deductions or credits
on account on any excluded losses; and
(b) in the case of the Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall have
actually been received by Borrower in the form of cash distributions.
1.20 "Judicial Officer or Assignee" as used in this Agreement means and
includes any trustee, receiver, controller, custodian, assignee for the
benefit of creditors or any other person or entity having powers or duties
like or similar to the powers and duties of trustee, receiver, controller,
custodian or assignee for the benefit of creditors.
1.21 "Obligations" as used in this Agreement means and includes any and
all loans, advances, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower's account pursuant to any
agreement authorizing Bank to charge Borrower's account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any
kind and description whether advanced pursuant to or evidenced by this
Agreement; by any note or other instrument; or by any other agreement between
Bank and Borrower and whether or not for the payment of money, whether direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including, without limitation, any debt, liability or
obligation owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including,
without limitation, all interest not paid when due and all Bank Expenses
which Borrower is required to pay or reimburse by this Agreement, by law, or
otherwise.
1.22 "Person" or "person" as used in this Agreement means and includes
any individual, corporation, partnership, joint venture, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
1.23 "Receivables" as used in this Agreement means and includes all
presently existing and hereafter arising accounts, instruments, documents,
chattel paper, general intangibles, all other forms of obligations owing to
Borrower, all of Borrower's rights in, to and under all purchase orders
heretofore or hereafter received, all moneys due to Borrower under all
contracts or agreements (whether or not yet earned or due), all merchandise
returned to or reclaimed by Borrower and the Borrower's books (except minute
books) relating to any of the foregoing.
1.24 "Subordinated Debt" as used in this Agreement means indebtedness of
the Borrower to third parties which has been subordinated to the Obligations
pursuant to a subordination agreement in form and content satisfactory to the
Bank.
1.25 "Subordination Agreement" as used in this Agreement means a
subordination agreement in form satisfactory to Bank making all present and
future indebtedness of the Borrower to N/A subordinate to the Obligations.
1.26 "Tangible Effective Net Worth" as used in this Agreement means net
worth as determined in accordance with GAAP consistently applied, increased
by Subordinated Debt, if any, and decreased by the following: patents,
licenses, goodwill, subscription lists, organization expenses, trade
receivables converted to notes, money due from affiliates (including
officers, directors, subsidiaries and commonly held companies).
1.27 "Tangible Net Worth" as used in this Agreement means, as of any
applicable date of determination, the excess of
a. the net book value of all assets of a person (other than patents,
patent rights, trademarks, trade names, franchises, copyrights,
licenses, goodwill, and similar intangible assets) after all
appropriate deductions in accordance with GAAP (including, without
limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization), over
b. all Debt of such person.
1.28 "Total Liabilities" as used in this Agreement means the total of all
items of indebtedness, obligation or liability which, in accordance with GAAP
consistently applied, would be included in determining the total liabilities
of the Borrower as of the date Total Liabilities is to be determined,
including without limitation (a) all obligations secured by any mortgage,
pledge, security interest or other lien on property owned or acquired,
whether or not the obligations secured thereby shall have been assumed; (b)
all obligations which are capitalized lease obligations; and (c) all
guaranties, endorsements or other contingent or surety obligations with
respect to the indebtedness of others, whether or not reflected on the
balance sheets of the Borrower, including any obligation to furnish funds,
directly or indirectly through the purchase of goods, supplies, services, or
by way of stock purchase, capital contribution, advance or loan or any
obligation to enter into a contract for any of the foregoing.
1.29 "Working Capital" as used in this Agreement means, as of any
applicable date of determination, Current Assets less Current Liabilities.
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(ACCOUNTS & INVENTORY)
1.30 Any and all terms used in this Agreement shall be construed and
defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to
as the "Code") as amended.
2. LOAN AND TERMS OF PAYMENT
For value received, Borrower promises to pay to the order of Bank such
amount, as provided for below, together with interest, as provided for
below.
2.1 Upon the request of Borrower, made at any time and from time to time
during the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower an amount equal to the Borrowing Base; provided,
however, that in no event shall Bank be obligated to make advances to
Borrower under this Section 2.1 whenever the Daily Balance exceeds, at any
time, either the Borrowing Base or the sum of FOUR MILLION AND NO/100
($4,000,000.00), such amount being referred to herein as an "Overadvance".
Borrower shall be allowed to advance up to $2,000,000.00 in excess of the
eligible borrowing base, provided that such amounts over formula are cash
secured and are within the commitment amount.
2.2 Except as hereinbelow provided, the Credit shall bear interest, on
the Daily Balance owing, at a rate of 500/1000 (0.500) percentage points per
annum above the Base Rate (the "Rate"). The Credit shall bear interest, from
and after the occurrence of an Event of Default and without constituting a
waiver of any such Event of Default, on the Daily Balance owing, at a rate
three (3) percentage points per annum above the Rate. All interest
chargeable under this Agreement that is based upon a per annum calculation
shall be computed on the basis of a three hundred sixty (360) day year for
actual days elapsed.
The Base Rate as of the date of this Agreement is NINE AND NO/1000
(9.000%) per annum. In the event that the Base Rate announced is, from time
to time hereafter changed, adjustment in the Rate shall be made and based on
the Base Rate in effect on the date of such change. The Rate, as adjusted,
shall apply to the Credit until the Base Rate is adjusted again. The minimum
interest payable by the Borrower under this Agreement shall in no event be
less than N/A per month. All interest payable by Borrower under the Credit
shall be due and payable on the first day of each calendar month during the
term of this Agreement and Bank may, at its option, elect to treat such
interest and any and all Bank Expenses as advances under the Credit, which
amounts shall thereupon constitute Obligations and shall thereafter accrue
interest at the rate applicable to the Credit under the terms of the
Agreement.
2.3 Without affecting Borrower's obligation to repay immediately any
Overadvance in accordance with Section 2.1 hereof, all Overadvances shall
bear additional interest on the amount thereof at a rate equal to N/A (N/A%)
percentage points per month in excess of the interest rate set forth in
Section 2.2, from the date incurred and for each month thereafter, until
repaid in full.
3. TERM
3.1 This Agreement shall remain in full force and effect until APRIL 30,
1996, or until terminated by notice by Borrower. Notice of such termination
by Borrower shall be effectuated by mailing of a registered or certified
letter not less than thirty (30) days prior to the effective date of such
termination, addressed to the Bank at the address set forth herein and the
termination shall be effective as of the date so fixed in such notice.
Notwithstanding the foregoing, should Borrower be in default of one or more
of the provisions of this Agreement, Bank may terminate this Agreement at any
time without notice. Notwithstanding the foregoing, should either Bank or
Borrower become insolvent or unable to meet its debts as they mature, or
fail, suspend, or go out of business, the other party shall have the right to
terminate this Agreement at any time without notice. On the date of
termination all Obligations shall become immediately due and payable without
notice or demand; no notice of termination by Borrower shall be effective
until Borrower shall have paid all Obligations to Bank in full.
Notwithstanding termination, until all Obligations have been fully satisfied,
Bank shall retain its security interest in all existing Collateral and
Collateral arising thereafter, and Borrower shall continue to perform all of
its Obligations.
3.2 After termination and when Bank has received payment in full of
Borrower's Obligations to Bank, Bank shall reassign to Borrower all
Collateral held by Bank, and shall execute a termination of all security
agreements and security interests given by Borrower to Bank, upon the
execution and delivery of mutual general releases.
4. CREATION OF SECURITY INTEREST
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure prompt
repayment of any and all Obligations owed by Borrower to Bank and in order to
secure prompt performance by Borrower of each and all of its covenants and
Obligations under this Agreement and otherwise created. Bank's security
interest in the Collateral shall attach to all Collateral without further act
on the part of Bank or Borrower. In the event that any Collateral,
including proceeds, is evidenced by or consists of a letter of credit,
advice of credit, instrument, money, negotiable documents, chattel paper or
similar property (collectively, "Negotiable Collateral"), Borrower shall,
immediately upon receipt thereof, endorse and assign such Negotiable
Collateral over to Bank and deliver actual physical possession of the
Negotiable Collateral to Bank.
4.2 Bank's security interest in Receivables shall attach to all
Receivables without further act on the part of Bank or Borrower. Upon
request from Bank, Borrower shall provide Bank with schedules describing all
Receivables created or acquired by Borrower (including without limitation
agings listing the names and addresses of, and amounts owing by date by
account debtors), and shall execute and deliver written assignments of all
Receivables to Bank all in a form acceptable to Bank, provided, however,
Borrower's failure to execute and deliver such schedules and/or assignments
shall not affect or limit Bank's security interest and other rights in and to
the Receivables. Together with each schedule,
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(ACCOUNTS AND INVENTORY)
Borrower shall furnish Bank with copies of Borrower's customers' invoices or
the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Bank or
Bank's designee may notify customers or account debtors of collection costs
and expenses to Borrower's account but, unless and until Bank does so or
gives Borrower other written instructions, Borrower shall collect all
Receivables for Bank, receive in trust all payments thereon as Bank's
trustee, and, if so requested to do so from Bank, Borrower shall immediately
deliver said payments to Bank in their original form as received from the
account debtor and all letters of credit, advices of credit, instruments,
documents, chattel paper or any similar property evidencing or constituting
Collateral. Notwithstanding anything to the contrary contained herein, if
sales of inventory are made for cash, Borrower shall immediately deliver to
Bank, in identical form, all such cash, checks, or other forms of payment
which Borrower receives. The receipt of any check or other item of payment
by Bank shall not be considered a payment on account until such check or
other item of payment is honored when presented for payment, in which event,
said check or other item of payment shall be deemed to have been paid to Bank
TWO (2) calendar days after the date Bank actually receives such check or
other item of payment.
4.3 Bank's security interest in inventory shall attach to all inventory
without further act on the part of Bank or Borrower. Upon Bank's request
Borrower will from time to time at Borrower's expense pledge, assemble and
deliver such inventory to Bank or to a third party as Bank's bailee; or hold
the same in trust for Bank's account or store the same in a warehouse in
Bank's name; or deliver to Bank documents of title representing said
inventory; or evidence of Bank's security interest in some other manner
acceptable to Bank. Until a default by Borrower under this Agreement or any
other Agreement between Borrower and Bank, Borrower may, subject to the
provisions hereof and consistent herewith, sell the inventory, but only in
the ordinary course of Borrower's business. A sale of inventory in
Borrower's ordinary course of business does not include an exchange or a
transfer in partial or total satisfaction of a debt owing by Borrower.
4.4 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Agreement, and at any time or times hereafter at
the request of Bank, all financing statements, continuation financing
statements, security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may request, in form satisfactory
to Bank, to perfect and maintain perfected Bank's security interest in the
Collateral and in order to fully consummate all of the transactions
contemplated under this Agreement. Borrower hereby irrevocably makes,
constitutes and appoints Bank (and any of Bank's officers, employees or
agents designated by Bank) as Borrower's true and lawful attorney-in-fact
with power to sign the name of Borrower on any financing statements,
continuation financing statements, security agreement, mortgage, assignment,
certificate of title, affidavit, letter of authority, notice of other similar
documents which must be executed and/or filed in order to perfect or continue
perfected Bank's security interest in the Collateral.
Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Receivables. Bank (through any of its
officers, employees or agents) shall have the right at any time or times
hereafter during Borrower's usual business hours, or during the usual
business hours of any third party having control over the records of
Borrower, to inspect and verify Borrower's Books in order to verify the
amount or condition of, or any other matter, relating to, said Collateral and
Borrower's financial condition.
4.5 Borrower appoints Bank or any other person whom Bank may designate
as Borrower's attorney-in-fact, with power to endorse Borrower's name on any
checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank's possession; to sign Borrower's name on any
invoice or bill of lading relating to any Receivables, on drafts against
account debtors, on schedules and assignments of Receivables, on
verifications of Receivables and on notices to account debtors; to establish
a lock box arrangement and/or to notify the post office authorities to change
the address for delivery of Borrower's mail addressed to Borrower to an
address designated by Bank, to receive and open all mail addressed to
Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower; to send, whether in writing or by telephone, requests
for verification of Receivables; and to do all things necessary to carry out
this Agreement. Borrower ratifies and approves all acts of the attorney-in-
fact. Neither Bank nor its attorney-in-fact will be liable for any acts or
omissions or for any error of judgement or mistake of fact or law. This
power being coupled with an interest, is irrevocable so long as any
Receivables in which Bank has a security interest remain unpaid and until the
Obligations have been fully satisfied.
4.6 In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or, obtain any records, and all costs for the same shall be added to
the Obligations and shall be payable on demand.
4.7 Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank's parent, affiliates, subsidiaries
and service providers.
5. CONDITIONS PRECEDENT
5.1 Conditions precedent to the making of the loans and the extension of
the financial accommodations hereunder, Borrower shall execute, or cause to
be executed, and deliver to Bank, in form and substance satisfactory to Bank
and its counsel, the following:
a. This Agreement and other documents required by Bank;
b. Financing statements (Form UCC-1) in form satisfactory to Bank for
filing and recording with the appropriate governmental authorities;
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(Accunts & Inventory)
c. If Borrower is a corporation, then certified extracts from the
minutes of the meeting of its board of directors, authorizing the
borrowings and the granting of the security interest provided for
herein and authorizing specific officers to execute and deliver the
agreements provided for herein;
d. If Borrower is a corporation, then a certificate of good standing
showing that Borrower is in good standing under the laws of the state
of its incorporation and certificates indicating that Borrower is
qualified to transact business and is in good standing in any other
state in which it conducts business;
e. If Borrower is a partnership, then a copy of Borrower's partnership
agreement certified by each general partner of Borrower;
f. UCC searches, tax lien and litigation searches, fictitious business
statement filings, insurance certificates, notices or other similar
documents which Bank may require and in such form as Bank may require,
in order to reflect, perfect or protect Bank's first priority security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
g. Evidence that Borrower has obtained insurance and acceptable
endorsements;
h. Waivers executed by landlords and mortgagees of any real property on
which any Collateral is located; and
i. Warranties and representations of officers.
6. WARRANTIES REPRESENTATIONS AND COVENANTS.
6.1 If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank.
Borrower's Borrowing Base at all times pertinent hereto shall not be less
than the advances made hereunder. Bank shall have the right to recompute
Borrower's Borrowing Base in conformity with this Agreement.
6.2 If any warranty is breached as to any account, or any account is not
paid in full by an account debtor within NINETY (90) days from the date of
invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a petition in bankruptcy or other application for relief
under the Bankruptcy Code or any other insolvency law is filed by or against
an account debtor, or an account debtor makes an assignment for the benefit
of creditors, becomes insolvent, fails or goes out of business, then Bank may
deem ineligible any and all accounts owing by that account debtor, and reduce
Borrower's Borrowing Base by the amount thereof. Bank shall retain its
security interest in all Receivables and accounts, whether eligible or
ineligible, until all Obligations have been fully paid and satisfied.
Returns and allowances, if any, as between Borrower and its customers, will
be on the same basis and in accordance with the usual customary practices of
the Borrower, as they exist at this time. Any merchandise which is returned
by an account debtor or otherwise recovered shall be set aside, marked with
Bank's name, and Bank shall retain a security interest therein. Borrower
shall promptly notify Bank of all disputes and claims and settle or adjust
them on terms approved by Bank. After default by Borrower hereunder, no
discount, credit or allowance shall be granted to any account debtor by
Borrower and no return of merchandise shall be accepted by Borrower without
Bank's consent. Bank may, after default by Borrower, settle or adjust
disputes and claims directly with account debtors for amounts and upon terms
which Bank considers advisable, and in such cases Bank will credit Borrower's
account with only the net amounts received by Bank in payment of the
accounts, after deducting all Bank Expenses in connection therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank has
and shall continue to have a first priority perfected security interest
in and to the Collateral. The Collateral shall at all times remain
free and clear of all liens, encumbrances and security interests
(except those in favor of Bank).
b. All accounts are and will, at all times pertinent hereto, be bona
fide existing obligations created by the sale and delivery of
merchandise or the rendition of services to account debtors in the
ordinary course of business, free of liens, claims, encumbrances and
security interests (except as held by Bank and except as may be
consented to, in writing, by Bank) and are unconditionally owed to
Borrower without defenses, disputes, offsets, counterclaims, rights of
return or cancellation, and Borrower shall have received no notice of
actual or imminent bankruptcy or insolvency of any account debtor at
the time an account due from such account debtor is assigned to Bank.
c. At the time each account is assigned to Bank, all property giving
rise to such account shall have been delivered to the account debtor or
to the agent for the account debtor for immediate shipment to, and
unconditional acceptance by, the account debtor. Borrower shall
deliver to Bank, as Bank may from time to time require, delivery
receipts, customer's purchase orders, shipping instruction, bills of
lading and any other evidence of shipping arrangements. Absent such a
request by Bank, copies of all such documentation shall be held by
Borrower as custodian for Bank.
6.4 At the time each eligible account is assigned to Bank, all such
eligible accounts will be due and payable on terms set forth in Section 1.12,
or on such other terms approved in writing by Bank in advance of the creation
of such accounts and which are expressly set forth on the face of all
invoices, copies of which shall be held by Borrower as custodian for Bank,
and no such eligible account will then be past due.
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(ACCOUNTS & INVENTORY)
6.5 Borrower shall keep the inventory only at the following locations:
4550 Norris Canyon Road, San Ramon, CA 94583 and the owner or mortgagees of
the respective locations are: None.
a. Borrower, immediately upon demand by Bank therefor, shall now and from
time to time hereafter, at such intervals as are requested by Bank,
deliver to Bank, designations of inventory specifying Borrower's cost of
inventory, the wholesale market value thereof and such other matters and
information relating to the inventory as Bank may request;
b. Borrower's inventory, valued at the lower of Borrower's cost or the
wholesale market value thereof, at all times pertinent hereto shall not be
less than N/A Dollars ($ N/A) of which no less than N/A Dollars ($ N/A)
shall be in raw materials and finished goods;
c. All of the inventory is and shall remain free from all purchase money
or other security interests, liens or encumbrances, except as held by
Bank;
d. Borrower does now keep and hereafter at all times shall keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of the inventory, its cost therefor and selling price thereof,
and the daily withdrawals therefrom and additions thereto, all of which
records shall be available upon demand to any of Bank's officers, agents
and employees for inspection and copying;
e. All inventory, now and hereafter at all times, shall be new inventory
of good and merchantable quality free from defects;
f. Inventory is not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party without
Bank's prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third
party to issue and deliver to Bank, in a form acceptable to Bank,
warehouse receipts in Bank's name evidencing the storage of inventory or
other evidence of Bank's prior rights in the inventory. In any event,
Borrower shall instruct any third party to hold all such inventory for
Bank's account subject to Bank's security interests and its instructions;
and
g. Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower's usual business hours, to inspect and examine
the inventory and to check and test the same as to quality, quantity,
value and condition and Borrower agrees to reimburse Bank for Bank's
reasonable costs and expenses in so doing.
6.6 Borrower represents, warrants and covenants with Bank that Borrower
will not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance
upon any of the Collateral to any person, association, firm, corporation,
entity or governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower's assets;
e. Change its name, business structure, corporate identity or structure;
add any new fictitious names, liquidate, merge or consolidate with or into
any other business organization;
f. Move or relocate any Collateral;
g. Acquire any other business organization;
h. Enter into any transaction not in the usual course of Borrower's
business;
i. Make any investment in securities of any person, association, firm,
entity, or corporation other than the securities of the United States of
America;
j. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would adversely effect
the ability of Borrower to repay Borrower's Obligations;
k. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
l. Make any advance or loan except in the ordinary course of Borrower's
business as currently conducted;
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m. Make loans, advances or extensions of credit to any Person, except for
sales on open account and otherwise in the ordinary course of business;
n. Guarantee or otherwise, directly or indirectly, in any way be or become
responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the
furnishing of funds to any other Person through the furnishing of goods,
supplies or services, by way of stock purchase, capital contribution,
advance or loan, for the purpose of paying or discharging (or causing the
payment or discharge of) the indebtedness of any other Person, or
otherwise, except for the endorsement of negotiable instruments by the
Borrower in the ordinary course of business for deposit or collection.
o. (a) Sell, lease, transfer or otherwise dispose of properties and assets
having an aggregate book value of more than N/A Dollars ($ N/A) (whether
in one transaction or in a series of transactions) except as to the sale
of inventory in the ordinary course of business; (b) change its name,
consolidate with or merge into any other corporation, permit another
corporation to merge into it, acquire all or substantially all the
properties or assets of any other Person, enter into any reorganization or
recapitalization or reclassify its capital stock, or (c) enter into any
sale-leaseback transaction;
p. Subordinate any indebtedness due to it from a person to indebtedness of
other creditors of such person;
q. Purchase or hold beneficially any stock or other securities of, or make
any investment or acquire any interest whatsoever in, any other Person,
except for the common stock of the Subsidiaries owned by the Borrower on
the date of this Agreement and except for certificates of deposit with
maturities of one year or less of United States commercial banks with
capital, surplus and undivided profits in excess of $100,000,000 and
direct obligations of the United States Government maturing within one
year from the date of acquisition thereof; or
r. Allow any fact, condition or event to occur or exist with respect to
any employee pension or profit sharing plans established or maintained by
it which might constitute grounds for termination of any such plan or for
the court appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for
personal, family or household purposes exceeded seventy-five percent (75%) in
dollar volume of its total sales of all goods during the 12 months preceding
the filing by Bank of a financing statement describing the Collateral. At no
time hereafter shall Borrower's sales for resale of goods for personal,
family or household purposes exceed seventy-five percent (75%) in dollar
volume of its total sales.
6.8 Borrower's sole place of business or chief executive office or
residence is located at the address indicated above and Borrower covenants
and agrees that it will not, during the term of this Agreement, without prior
written notification to Bank, relocate said sole place of business or chief
executive office or residence.
6.9 If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:
a. Borrower will not make any distribution or declare or pay any dividend
(in stock or in cash) to any shareholder or on any of its capital stock,
of any class, whether now or hereafter outstanding, or purchase, acquire,
repurchase, redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or
any other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of incorporation
or by-laws.
6.10 The execution of and performance by Borrower of all of the terms and
provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now
or hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition by
purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of inventory in
the ordinary course of business.
6.12 All assessments and taxes, whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will make
timely payment or deposit of all F.I.C.A. payments and withholding taxes
required of it by applicable laws, and will upon request furnish Bank with
proof satisfactory to it that Borrower has made such payments or deposit. If
Borrower fails to pay any such assessment, tax, contribution, or make such
deposit, or furnish the required proof, Bank may, in its sole and absolute
discretion and without notice to Borrower,
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(i) make payment of the same or any part thereof; or (ii) set up such
reserves in Borrower's account as Bank deems necessary to satisfy the
liability therefor, or both. Bank may conclusively rely on the usual
statements of the amount owing or other official statements issued by the
appropriate governmental agency. Each amount so paid or deposited by Bank
shall constitute a Bank Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise
during the term of the Agreement, Borrower shall immediately notify Bank in
writing.
6.14 a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use
such properties in similar businesses for the full insurable value thereof.
Borrower shall also keep and maintain business interruption insurance and
public liability and property damage insurance relating to Borrower's
ownership and use of the Collateral and its other assets. All such policies
of insurance shall be in such form, with such companies, and in such amounts
as may be satisfactory to Bank. Borrower shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All such policies of insurance (except those of public
liability and property damage) shall contain an endorsement in a form
satisfactory to Bank showing Bank as a loss payee thereof, with a waiver of
warranties (Form 438-BFU), and all proceeds payable thereunder shall be
payable to Bank and, upon receipt by Bank, shall be applied on account of the
Obligations owing to Bank. To secure the payment of the Obligations,
Borrower grants Bank a security interest in and to all such policies of
insurance (except those of public liability and property damage) and the
proceeds thereof, and Borrower shall direct all insurers under such policies
of insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocable appoints Bank (and any of Bank's officers,
employees or agents designated by Bank) as Borrower's attorney for the
purpose of making, selling and adjusting claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of
insurance. Borrower will not cancel any of such policies without Bank's
prior written consent. Each such insurer shall agree by endorsement upon the
policy or policies of insurance issued by it to Borrower as required above,
or by independent instruments furnished to Bank, that it will give Bank at
least ten (10) days written notice before any such policy or policies of
insurance shall be altered or cancelled, and that no act or default of
Borrower, or any other person, shall affect the right of Bank to recover
under such policy or policies of insurance required above or to pay any
premium in whole or in part relating thereto. Bank, without waiving or
releasing any Obligations or any Event of Default, may, but shall have no
obligation to do so, obtain and maintain such policies of insurance and pay
such premiums and take any other action with respect to such policies which
Bank deems advisable. All sums so disbursed by Bank, as well as reasonable
attorneys' fees, court costs, expenses and other charges relating thereto,
shall constitute Bank Expenses and are payable on demand.
6.15 All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and
correct and have been prepared in accordance with GAAP consistently applied
and there has been no material adverse change in the financial condition of
Borrower since the submission of such financial information to Bank.
6.16 a. Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or
change its method of accounting or enter into, modify or terminate any
agreement presently existing, or at any time hereafter entered into with any
third party accounting firm and/or service bureau for the preparation and/or
storage of Borrower's accounting records without the written consent of Bank
first obtained and without said accounting firm and/or service bureau
agreeing to provide information regarding the Receivables and inventory and
Borrower's financial condition to Bank; permit Bank and any of its employees,
officers or agents, upon demand, during Borrower's usual business hours, or
the usual business hour of third persons having control thereof, to have
access to and examine all of the Borrower's Books relating to the Collateral,
Borrower's Obligations to Bank, Borrower's financial condition and the
results of Borrower's operations and in connection therewith, permit Bank or
any of its agents, employees or officers to copy and make extracts therefrom.
b. Borrower shall deliver to Bank within thirty (30) days after the end of
each MONTH, a COMPANY PREPARED balance sheet and profit and loss statement
covering Borrower's operations and deliver to Bank within ninety (90) days
after the end of each of Borrower's fiscal years a(n) AUDITED statement of
the financial condition of the Borrower for each such fiscal year, including
but not limited to, a balance sheet and profit and loss statement and any
other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared
information of any kind or nature relating to the foregoing or documents
delivered or caused to be delivered to Bank under this subparagraph are
complete, correct and thoroughly present the financial condition of borrower
and that there exists on the date of delivery to Bank no condition or event
which constitutes a breach or Event of Default under this Agreement.
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c. In addition to the financial statements requested above, the Borrower
agrees to provide Bank with the following schedules:
X Accounts Receivable Agings on a MONTHLY basis:
----------- -----------------
X Accounts Payable Agings on a MONTHLY basis;
----------- -----------------
X Summary Distributor Sell- on a MONTHLY basis; and
----------- Through Report -----------------
X BORROWING BASE CERTIFICATE on a MONTHLY basis
----------- -----------------
6.17 Borrower shall maintain the following financial ratios and covenants
on a consolidated and non-consolidated basis:
a. Working Capital in an amount not less than n/a
b. Tangible Effective Net Worth in an amount not less than $10,800,000.00
DEFINED AS MINIMUM TANGIBLE NET WORTH LESS INTANGIBLE ASSETS (eg.
CAPITALIZED SOFTWARE COSTS AND SOFTWARE) PLUS 100% OF ANY NEW EQUITY
RAISED AND 75% OF NET QUARTERLY PROFITS.
c. a ratio of Current Assets to Current Liabilities of not less than N/A
d. a quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than 1.25:1.00
e. a ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 0.60:1.00
f. a ratio of Cash Flow to Fixed Charges of not less than N/A
g. Net income after taxes of QUARTERLY BASIS. BORROWER IS NOT TO HAVE
OPERATING AND AFTER TAX LOSSES GREATER THAN $1,450,000.00 IN THE QUARTER
ENDING 7-31-95, AND THE MAXIMUM NET LOSS ALLOWED FOR THE FOURTH QUARTER
ENDING 10-31-95 IS $750,000.00. BORROWER IS TO BE PROFITABLE QUARTERLY ON
AN OPERATING AND AFTER TAX BASIS THEREAFTER WITH ONE LOSS QUARTER ALLOWED
PER YEAR NOT TO EXCEED $250,000.00
h. Borrower shall not without Bank's prior written consent acquire or
expend for or commit itself to acquire or expend for fixed assets by
lease, purchase or otherwise in an aggregate amount that exceeds n/a
Dollars ($ n/a) in any fiscal year; and
ADDITIONAL PROVISION:
i. BORROWER SHALL REGISTER ALL ESSENTIAL COPYRIGHTABLE MATERIAL WITHIN 90
DAYS OF THE DATE OF THIS AGREEMENT AND SHALL FURTHER ALLOW BANK TO PERFECT
THE SECURITY INTEREST ON SUCH COPYRIGHT. FAILURE TO COMPLY WITH THIS
PROVISION SHALL CONSTITUTE AN EVENT OF DEFAULT UNDER THE TERMS SETFORTH
HEREIN.
All financial covenants shall be computed in accordance with GAAP
consistently applied except as otherwise specifically set forth in this
Agreement. All monies due from affiliates (including officers, directors and
shareholders) shall be excluded from Borrower's assets for all purposes
hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning
its financial affairs (or that of any guarantor) as Bank may request from
time to time hereafter, and shall promptly notify Bank of any material
adverse change in Borrower's financial condition and of any condition or
event which constitutes a breach of or an event which constitutes an Event of
Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and able
to pay its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for all
sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including all
Bank Expenses; Borrower authorizes and approves all advances and payments by
Bank for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this
Agreement shall be automatically deemed repeated with each advance and shall
be conclusively presumed to have been rolled on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements
which Borrower shall give, or cause to be given, to Bank, either now or
hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank and
shall notify the Bank immediately in writing of the existence of any other
bank account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to the Bank: (a) as soon as possible, but in
no event later than thirty (30) days after Borrower knows or has reason to
know that any reportable event with respect to any deferred compensation plan
has occurred, a statement of the chief financial officer of Borrower setting
forth the details concerning such reportable
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event and the action which Borrower proposes to take with respect thereto,
together with a copy of the notice of such reportable event given to the
Pension Benefit Guaranty Corporation, if a copy of such notice is available
to Borrower; (b) promptly after the filing thereof with the United States
Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of
each annual report with respect to each deferred compensation plan; (c)
promptly after receipt thereof, a copy of any notice Borrower may receive
from the Pension Benefit Guaranty Corporation or the Internal Revenue Service
with respect to any deferred compensation plan; provided, however, this
subparagraph shall not apply to notice of general application issued by the
Pension Benefit Guaranty Corporation or the Internal Revenue Service; and (d)
when the same is made available to participants in the deferred compensation
plan, all notices and other forms of information from time to time
disseminated to the participants by the administrator of the deferred
compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic
substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.
6.25 Borrower shall maintain insurance on the life of N/A in an amount
not to be less than NO/100 Dollars ($ n/a) under one or more policies issued
by insurance companies satisfactory to Bank, which policies shall be assigned
to Bank as security for the Obligations and on which Bank shall be named as
sole beneficiary.
6.26 Borrower shall limit direct and indirect compensation paid to the
following employees: N/A, to an aggregate of N/A Dollars ($ N/A) per
__________________.
7. EVENTS OF DEFAULT
Any one or more of the following events shall constitute a default by
Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation
contained in this Agreement, or any other present or future agreement between
Borrower and Bank;
b. If any representation, statement, report or certificate made or delivered
by Borrower, or any of its officers, employees or agents to Bank is not true
and correct;
c. If Borrower fails to pay when due and payable or declared due and payable,
all or any portion of the Borrower's Obligations (whether of principal,
interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of all or
any portion of Borrower's Obligations or a material impairment of the value
or priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a writ
or distress warrant, or are levied upon, or come into the possession of any
Judicial Officer or Assignee and the same are not released, discharged or
bonded against within ten (10) days thereafter;
f. If any insolvency Proceeding is filed or commenced by or against Borrower
without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. If Borrower is enjoined, restrained or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs;
i. If a notice of lien, levy or assessment is filed of record with respect to
any or all of Borrower's assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any
time hereafter to any one or more of such entities becomes a lien, whether
choate or otherwise, upon any or all of the Borrower's assets and the same is
not paid on the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or all
of Borrower's assets and the same is not satisfied, dismissed or bonded
against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer service
bureau at the time this Agreement is entered into or during the term of this
Agreement such an agreement with an outside service bureau is entered into,
and at any time thereafter, without first obtaining the written consent of
Bank, Borrower terminates, modifies, amends or changes its contractual
relationship with said computer service bureau or said computer service
bureau fails to provide Bank with any requested information or financial data
pertaining to Bank's Collateral, Borrower's financial condition or the
results of Borrower's operations;
l. If Borrower permits a default in any material agreement to which Borrower
is a party with third parties so as to result in an acceleration of the
maturity of Borrower's indebtedness to others, whether under any indenture,
agreement or otherwise;
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LOAN & SECURITY AGREEMENT
(ACCOUNTS & INVENTORY)
m. If Borrower makes any payment on account of indebtedness which has been
subordinated to Borrower's Obligations to Bank;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if any
such warranty or representation is withdrawn by any officer or director;
o. If any party subordinating its claims to that of Bank's or any guarantor
of Borrower's Obligations dies or terminates its subordination or guaranty,
becomes insolvent or an insolvency Proceeding is commenced by or against any
such subordinating party or guarantor;
p. If Borrower is an individual and Borrower dies;
q. If there is a change of ownership or control of N/A percent ( %) or more
of the issued and outstanding stock of Borrower;
r. If any reportable event, which the Bank determines constitutes grounds for
the termination of any deferred compensation plan by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any such plan, shall have occurred
and be continuing thirty (30) days after written notice of such determination
shall have been given to Borrower by Bank, or any such Plan shall be
terminated within the meaning of Title IV of the Employment Retirement Income
Security Act ("ERISA"), or a trustee shall be appointed by the appropriate
United States District Court to administer any such plan, or the Pension
Benefit Guaranty Corporation shall institute proceedings to terminate any
plan and in case of any event described in this Section 7.0, the aggregate
amount of the Borrower's liability to the Pension Benefit Guaranty
Corporation under Sections 4062, 4063 or 4064 of ERISA shall exceed five
percent (5%) of Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank
shall refrain from exercising its rights and remedies and Event of Default
shall thereafter not be deemed to have occurred by reason of the occurrence
of any of the events set forth in Sections 7.e, 7.f or 7.j of this Agreement
if, within ten (10) days from the date thereof, the same is released,
discharged, dismissed, bonded against or satisfied; provided, however, if the
event is the institution of insolvency Proceedings against Borrower, Bank
shall not be obligated to make advances to Borrower during such cure period.
8. BANK'S RIGHTS AND REMEDIES
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
a. Declare Borrower's Obligations, whether evidenced by this Agreement,
installment notes, demand notes or otherwise, immediately due and payable
to the Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower and
Bank;
c. Terminate this Agreement as to any future liability or obligation of
Bank, but without affecting Bank's rights and security interests in the
Collateral, and the Obligations of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to
assemble the Collateral if Bank so requires and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, take and maintain
possession of the Collateral and the premises (at no charge to Bank), or
any part thereof, and to pay, purchase, contest or compromise any
encumbrance, charge or lien which in the opinion of Bank appears to be
prior or superior to its security interest and to pay all expenses
incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets,
trade names, trademarks and advertising matter, or any property of a
similar nature as it pertains to the Collateral, in completing production
of, advertising for sale and selling any Collateral and Borrower's rights
under all licenses and all franchise agreement shall inure to Bank's
benefit, and Bank shall have the right and power to enter into sublicense
agreements with respect to all such rights with third parties on terms
acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sales and sell (in the manner provided for herein) the
inventory;
g. Sell or dispose the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises)
as is commercially reasonable in the opinion of Bank. It is not necessary
that the Collateral be present at any such sale;
h. Bank shall give notice of the disposition of the Collateral as follows:
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(1) Bank shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Bank a written
request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some disposition
other than a public sale is to be made of the Collateral, the time
on or after which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address appearing in this Agreement, at
least five (5) calendar days before the date fixed for the sale, or
at least five (5) calendar days before the date on or after which
the private sale or other disposition is to be made, unless the
Collateral is perishable or threatens to decline speedily in
value. Notice to persons other than Borrower claiming an interest
in the Collateral shall be sent to such addresses as they have
furnished to Bank;
(3) If the sale is to be a public sale, Bank shall also give notice
of the time and place by publishing a notice one time at least five
(5) calendar days before the date of the sale in a newspaper of
general circulation in the country in which the sale is to be held;
and
(4) Bank may credit bid and purchase at any public sale.
I. Borrower shall pay all Bank Expenses incurred in connection with Bank's
enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;
J. Any deficiency which exists after disposition of the Collateral as
provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank's discretion, to any party who Bank
believes, in good faith, is entitled to the excess; and
K. Without constituting a retention of Collateral in satisfaction of an
obligation within the meaning of 9505 of the Uniform Commercial Code or an
action under California Code of Civil Procedure 726, apply any and all
amounts maintained by Borrower as deposit accounts (as that term is defined
under 9105 of the Uniform Commercial Code) or other accounts that Borrower
maintains with Bank against the Obligations.
8.2 Bank's rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and
remedies not inconsistent herewith as provided by law or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and
no waiver by Bank of any default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election or
acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
------------------------------------------------
If Borrower fails to pay promptly when due to another person or entity,
monies which Borrower is required to pay by reason of any provision in
this Agreement, Bank may, but need not, pay the same and charge Borrower's
account therefor, and Borrower shall promptly reimburse Bank. All such sums
shall become additional indebtedness owing to Bank, shall bear interest at the
rate hereinabove provided, and shall be secured by all Collateral. Any
payments made by Bank shall not constitute (i) an agreement by it to make
similar payments in the future; or (ii) a waiver by Bank of any default under
this Agreement. Bank need not inquire as to, or contest the validity of, any
such expense, tax, security interest, encumbrance or lien and the receipt of
the usual official notice of the payment thereof shall be conclusive evidence
that the same was validly due and owing. Such payments shall constitute Bank
Expenses and additional advances to Borrower.
10. WAIVERS
-------
10.1 Borrower agrees that checks and other instruments received by
Bank in payment or on account of Borrower's Obligations constitute
only conditional payment until such items are actually paid to Bank
and Borrower waives the right to direct the application of any and
all payments at any time or times hereafter received by Bank on
account of Borrower's Obligations and Borrower agrees that Bank
shall have the continuing exclusive right to apply and reapply
such payments in any manner as Bank may deem advisable,
notwithstanding any entry by Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, documents,
instruments chattel paper, and guarantees at any time held by Bank on which
Borrower may in any way be liable.
10.3 Bank shall not in any way or manner be liable or
responsible for (a) the safekeeping of the inventory; (b) any loss
or damage thereto occurring or arising in any manner or fashion
from any cause; (c) any diminution in the value thereof; or (d) any
act or default of any carrier, warehouseman, bailee, forwarding agency
or other person whomsoever. All risk of loss, damage or destruction
of inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a
confidential relationship, if any, it may have with any accountant,
accounting firm and/or service bureau or consultant in connection
with any information requested by Bank pursuant to or in accordance
with this Agreement, and agrees that a Bank may contact directly
any such accountants, accounting firm and/or service bureau or
consultant in order to obtain such information.
10.5 BORROWER AND BANK EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY
TRANSACTION HEREUNDER, OR CONTEMPLATED HEREUNDER, OR ANY OTHER
CLAIM (INCLUDING TORT OR BREACH OF DUTY CLAIMS) OR DISPUTE
HOWSOEVER ARISING BETWEEN BANK AND BORROWER.
-56-
<PAGE>
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
10.6 In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails
to pursue or enforce any terms, such waiver, delay or failure to pursue
or enforce shall only be effective with respect to that single act and
shall not be construed to affect any subsequent transactions or Bank's
right to later pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION.
All loans and advances heretofore, new or at any time or times hereafter made by
Bank to Borrower under this Agreement or any other agreement between Bank and
Borrower, shall constitute one loan secured by Bank's security interests in the
Collateral and by all other security interests, liens, encumbrances heretofore,
now or from time to time hereafter granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the Obligations
are a consumer loan, that portion shall not be secured by any deed of trust or
mortgage on or other security interest in the Borrower's principal dwelling
which is not a purchase money security interest as to that portion, unless
expressly provided to the contrary in another place, or (ii) if the Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Obligation or the Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by either
party on the other relating to this Agreement shall be in writing and sent by
regular United States mail, postage prepaid, properly addressed to Borrower or
to Bank at the addresses stated in this Agreement, or to such other addresses as
Borrower or Bank may from time to time specify to the other in writing.
Requests to Borrower by Bank hereunder may be made orally.
13. AUTHORIZATION TO DISBURSE.
Bank is hereby authorized to make loans and advances hereunder upon telephonic
or other instructions received from anyone purporting to be an officer,
employer, or representative of Borrower, or at the discretion of Bank if said
loans and advances are necessary to meet any Obligations of Borrower to Bank.
Bank shall have no duty to make inquiry or verify the authority of any such
party, and Borrower shall hold Bank harmless from any damage, claims or
liability by reason of Bank's honor of, or failure to honor, any such
instructions.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
Any documents, schedules, invoices or other papers delivered to Bank, may be
destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the
return of the said documents, schedules, invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
15. CHOICE OF LAW.
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to the laws of the State of
California. The parties agree that all actions of proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
16. GENERAL PROVISIONS.
16.1 This Agreement shall be binding and deemed effective when executed
by the Borrower and accepted and executed by Bank at its Headquarter Office.
16.2 This Agreement shall bind and inure to the benefit of the respective
successors and assigns of each of the parties, provided, however, that
Borrower may not assign this Agreement or any rights hereunder without Bank's
prior written consent and any prohibited assignment shall be absolutely void.
No consent to an assignment by Bank shall release Borrower or any guarantor
from their Obligations to Bank. Bank may assign this Agreement and its
rights and duties hereunder. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in Bank's rights and benefits hereunder. In connection therewith,
Bank may disclose all documents and information which Bank now or hereafter
may have relating to Borrower or Borrower's business.
16.3 Paragraph headings and paragraph numbers have been set forth herein
for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire
Agreement.
16.4 Neither this Agreement nor any uncertainty or ambiguity herein shall
be construed or resolved against Bank or Borrower, whether under any rule of
construction or otherwise; on the contrary, this Agreement has been reviewed
by all parties and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes
and intentions of all parties hereto. When permitted by the context, the
singular includes the plural and vice versa.
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<PAGE>
REVOLVING
LOAN & SECURITY AGREEMENT
(Accounts & Inventory)
16.5 Each provision of this Agreement shall be severable from every other
provision of this Agreement for the purpose of determining the legal
enforceability of any specific provisions.
16.6 This Agreement cannot be changed or terminated orally. Except as to
currently existing Obligations owing by Borrower to Bank, all prior
agreements, understandings, representations, warranties, and negotiations, if
any, with respect to the subject matter hereof, are merged into this
Agreement.
16.7 The parties intend and agree that their respective rights, duties,
powers liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.
IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit Loan
& Security Agreement (Accounts and Inventory) to be executed as of the date
first hereinabove written.
ATTEST: BORROWER: SBE, INC.
By: /s/ Timothy J. Repp
- - ----------------------------------- -------------------------------------
Title: Signature of Timothy J. Repp
Accepted and effective as of May 23, Title: Chief Financial Officer
1995 at Bank's Headquarter Office ----------------------------------
By: /s/ Rebecca Cranmer
-------------------------------------
Signature of Rebecca Cranmer
(Bank) COMERICA BANK-CALIFORNIA Title: Controller
----------------------------------
By: /s/ Mary Beth Suhr By: /s/ William B. Heye
--------------------------------- -------------------------------------
Signature of MARY BETH SUHR Signature of William B. Heye
Title: VICE PRESIDENT Title: President
------------------------------ ----------------------------------
By: /s/ William R. Gage
-------------------------------------
Signature of William R. Gage
Title: Chairman
----------------------------------
-58-
<PAGE>
Exhibit 10.7
Comerica Bank - California
55 Almaden Boulevard
San Jose, California 95113
(408) 294-8940
MODIFICATION TO THE REVOLVING LOAN & SECURITY AGREEMENT
This first Modification to a Revolving Loan & Security Agreement (this
"Modification") is entered into by and between SBE, INC. ("Borrowers") and
Comerica Bank-California ("Bank") as of this 17th day of January, 1996, at San
Jose, California.
RECITALS
A. Bank and Borrower have previously entered into or are concurrently
herewith entering into a Revolving Loan & Security Agreement (Accounts &
Inventory) (the "Agreement") dated May 23, 1995.
B. Borrower has requested, and Bank has agreed, to modify the Agreement as
set forth below.
AGREEMENT
For good and valuable consideration, the parties agree as set forth below:
SECTION 1.5 "Borrowing Base" as used in this Agreement means the sum of: (1)
SEVENTY percent (70.00%) of the net amount of Eligible Accounts after deducting
therefrom all payments, adjustments and credits applicable thereto ("Accounts
Receivable Borrowing Base"); and (2) the amount, if any, of the advances against
inventory agreed to be made pursuant to any Inventory Rider ("Inventory
Borrowing Base"), or other rider, amendment or modification to this Agreement,
that may now or hereafter be entered into by Bank and Borrower.
SECTION 1.12 "Eligible Accounts" as used in this Agreement means and includes
those accounts of Borrower which are due and payable within THIRTY (30) days, or
less, from the date of invoice, have been validly assigned to Bank and strictly
comply with all of Borrower's warranties and representations, to Bank; but
Eligible Account shall not include the following: (a) accounts with respect to
which the account debtor is an officer, employee, partner, joint venturer or
agent of Borrower; (b) accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the account debtor may be conditional; (c) accounts with respect to which the
account debtor is not a resident of the United States; (d) accounts with respect
to which the account debtor is the United States or any department, agency or
instrumentality of the United States; (e) accounts with respect to which the
account debtor is any State of the United States or any city, county, town,
municipality or division thereof; (f) accounts with respect to which the account
debtor is a subsidiary of, related to, affiliated or has
-59-
<PAGE>
common shareholders, officers or directors with Borrower; (g) accounts with
respect to which Borrower is or may become liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower; (h) accounts
not paid by an account debtor within ninety (90) days from the date of invoice;
(i) accounts with respect to which account debtors dispute liability or make any
claim, or have any defense, crossclaim, counterclaim, or offset; (j) accounts
with respect to which any Insolvency Proceeding is filed by or against the
account debtor, or if an account debtor becomes insolvent, falls or goes out of
business; and (k) accounts owed by any single account debtor which exceed twenty
percent (20%) of all of the Eligible Accounts; and (l) accounts with a
particular account debtor on which over twenty-five percent (25%) of the
aggregate amount owing is greater than ninety (90) days from the date of the
invoice. CONCENTRATION ALLOWANCE OF 30% FOR SIEMENS, AOL, AND TANDEM COMPUTERS.
ALLOW 50% ADVANCE RATE ON ELIGIBLE FOREIGN RECEIVABLES FROM NTT (JAPAN) AND
SIEMENS (GERMANY) UP TO $500,000.00 COMBINED TOTAL.
SECTION 2.2 Except as hereinbelow provided, the Credit shall bear interest,
on the Daily Balance owing, at a rate of ONE PERCENT (1.00%) percentage points
per annum above the Base Rate ("the Rate"). The Credit shall bear interest,
from and after the occurrence of an Event of Default and without constituting a
waiver of any such Event of Default, on the Daily Balance owing, at a rate three
(3) percentage points per annum above the Rate. All interest chargeable under
this Agreement that is based upon a per annum calculation shall be computed on
the basis of a three hundred sixty (360) day year for actual days elapsed.
SECTION 6.16B Borrower shall deliver to Bank within thirty (30) days after the
end of each MONTH a CONSOLIDATED balance sheet and profit and loss statement
covering Borrower's operations and deliver to Bank within ninety (90) days after
the end of each of Borrower's fiscal years an ANNUAL UNQUALIFIED CPA AUDITED
statement of financial condition of the Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss statement and
any other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared information
of any kind or nature relating to the foregoing or documents delivered or caused
to be delivered to Bank under this subparagraph are complete, correct, and
thoroughly present the financial condition of borrower and that there exists on
the date of delivery to Bank no condition or event which constituted a breach or
Event of Default under this Agreement. BORROWER TO PROVIDE QUARTERLY 10Q
REPORTS WITHIN 45 DAYS OF QUARTER END.
SECTION 6.16C In addition to the financial statements requested above, the
Borrower agrees to provide Bank with the following schedules:
x Accounts Receivable Agings on a WEEKLY basis.
- - ------------
x Accounts Payable Agings on a MONTHLY basis.
- - ------------
x Summary Distributor Sell-Through Report on a MONTHLY basis.
- - ------------
x Borrowing Base Certificate on a MONTHLY basis
- - ------------
-60-
<PAGE>
SECTION 6.17 Borrower shall maintain at all times the following financial
ratios and covenants on a consolidated and non-consolidated basis:
b. Tangible Effective Net Worth in an amount not less than $7,000,000.00.
d. A quick ratio of cash plus securities plus Receivables to Current
Liabilities of not less than 1.00:1.00.
e. A ratio of Total Liabilities (less debt subordinated to Bank) to
Tangible Effective Net Worth of less than 0.70:1.00.
g. Net Income after taxes of $0.00 with and allowance for $2,000,000.00
loss on first quarter 1996.
INCORPORATION BY REFERENCE. The Agreement as modified hereby and the
Recitals are incorporated herein by this reference.
LEGAL EFFECT. Except as specifically set forth in this Modification, all
of the terms and conditions of the Agreement remain in full force and effect.
INTEGRATION. This is an integrated Modification and supercedes all prior
negotiations and agreements regarding the subject matter hereof. All amendments
hereto must be in writing and signed by the parties.
IN WITNESS WHEREOF, the parties have agreed as of the date first set for
above.
SBE, Inc. Comerica Bank - California
/s/ Timothy J. Repp /s/ Mary Beth Suhr
- - ------------------- ------------------
Timothy J. Repp, Vice President, Mary Beth Suhr, Vice President
Chief Financial Officer
-61-
<PAGE>
Exhibit 11.1
SBE, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE YEARS ENDED OCTOBER 31
<TABLE>
<CAPTION>
Years Ended October 31
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net (Loss) Income ($4,567,971) $1,336,308 $2,461,250
Average number of common shares
outstanding during the year 2,054,570 2,021,143 1,969,506
Assumed issuance of stock under the
employee and non-employee stock
option plans 210,484 77,932 109,171
-----------------------------------------
Weighted average common shares 2,265,054 2,099,075 2,078,677
-----------------------------------------
Primary earnings per share ($2.02) $0.64 $1.18
-----------------------------------------
-----------------------------------------
FULLY DILUTED EARNINGS PER SHARE:
Average number of common shares
outstanding during the year 2,054,570 2,021,143 1,969,506
Assumed issuance of stock under the
employee and non-employee stock
option plans 228,245 86,439 120,398
-----------------------------------------
Weighted average common shares 2,282,815 2,107,582 2,089,904
-----------------------------------------
Fully diluted earnings per share ($2.00) $0.63 $1.18
-----------------------------------------
-----------------------------------------
</TABLE>
-62-
<PAGE>
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
SBE, Inc. on Form S-8 (File No. 33-42629) of our report dated December 14, 1995,
on our audits of the consolidated financial statements and financial statement
schedule of the Company as of October 31, 1995 and 1994, and for the years ended
October 31, 1995, 1994, and 1993, which report is included in this 1995 Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Oakland, California
January 23, 1996
-63-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<CASH> 857
<SECURITIES> 0
<RECEIVABLES> 3388
<ALLOWANCES> 0
<INVENTORY> 2611
<CURRENT-ASSETS> 9295
<PP&E> 3330
<DEPRECIATION> 0
<TOTAL-ASSETS> 14978
<CURRENT-LIABILITIES> 1651
<BONDS> 0
0
0
<COMMON> 7680
<OTHER-SE> 4428
<TOTAL-LIABILITY-AND-EQUITY> 14978
<SALES> 19368
<TOTAL-REVENUES> 19368
<CGS> 9567
<TOTAL-COSTS> 9567
<OTHER-EXPENSES> 15791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (6287)
<INCOME-TAX> (1719)
<INCOME-CONTINUING> (4568)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4568)
<EPS-PRIMARY> (2.22)
<EPS-DILUTED> (2.22)
</TABLE>
