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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
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.
(Exact name of Registrant as specified in its charter)
California 94-1517641
(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. /X/
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 31, 1996 as reported on the Nasdaq
National Market, was approximately $8,007,704. 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
31, 1996 was 2,479,920.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy statement for Annual Meeting of Shareholders scheduled for April 8,
1997 -- Part III
Exhibit Index on Page 23
Total Pages 59
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SBE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for The Registrant's Common Equity
and Related Shareholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners
and Management 22
Item 13 Certain Relationships and Related Transactions 22
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 23
SIGNATURES 26
SCHEDULE 41
EXHIBITS 42
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PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION
CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS REPORT PARTICULARLY IN THE SECTIONS ENTITLED
"BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
ITEM 1. BUSINESS
SBE, Inc. (the "Company") 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 its
netXpand-Registered Trademark- products 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 Company's remote access products are netXpand SoHo, Central and
Routeman-TM-. 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 and
Windows NT workstations.
RISK FACTORS
FUTURE SUCCESS DEPENDENT ON NEW PRODUCT LINE. Since early 1995, the Company
focused a significant portion of its research and development, marketing and
sales efforts on netXpand, its new line of standalone remote LAN products aimed
at the small-office/home-office market. The success of these products is
dependent on several factors, including timely completion of new product
designs, achievement of acceptable manufacturing quality and yields,
introduction of competitive products by other companies and market acceptance of
the Company's products. If the netXpand products or new products developed by
the Company do not gain widespread market acceptance, the Company's business,
operating results and financial condition may be materially adversely affected.
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Although the Company believes that its focus on remote access products provides
it with competitive advantages in the remote access market, this focus also may
leave the Company more vulnerable to a decline in the remote access market than
companies with more diverse product offerings. Moreover, the Company's future
success will depend in large part on continued growth in the remote access
market, which in turn will depend in large part on the growth in the number of
organizations utilizing remote access products and the number of applications
developed for use with those products. There can be no assurance that these
markets will continue to grow or that the Company will be able to respond
effectively to the evolving requirements of these markets.
HIGHLY COMPETITIVE ENVIRONMENT. 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. The Company also competes with
suppliers of routers, hubs and other data communications products. In the
future, the Company expects competition from companies offering remote access
solutions based on emerging technologies such as switched digital telephone
services. In addition, the Company may encounter increased competition from
operating system and network operating system vendors to the extent such vendors
include full remote access capabilities in their products. The Company may also
encounter future competition from telephony service providers (such as AT&T or
the regional Bell operating companies) that may offer remote access services
through their telephone networks.
The basic method of corporate remote access using the Company's netXpand
products involves a remote user establishing a connection directly to a remote
access server located on the corporation's network. This method of remote
access could migrate to one in which the remote user establishes a connection to
a public network, such as the Internet, to which the corporate network is also
connected. The development of remote access service offerings from public
networks could have a material adverse effect on the Company's business,
operating results and financial condition.
Increased competition with respect to any of the Company's products could result
in price reductions and loss of market share, which would adversely affect the
Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have greater financial, marketing,
technical and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully with its existing competitors
or will be able to compete successfully with new competitors.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating results
have fluctuated significantly in the past and will significantly fluctuate in
the future due to several factors, some of which are outside the control of the
Company, including fluctuating market demand for, and declines in, the average
selling prices of the Company's products, timing of significant orders from OEM
customers, delays in the introduction of the Company's new products, competitive
product introductions, the mix of products sold, changes in the Company's
distribution network, the failure to anticipate changing customer product
requirements, the cost and availability of components and general economic
conditions. The Company generally does not operate with a significant order
backlog and a substantial portion of the Company's revenues in any quarter is
derived from orders booked in that quarter. Accordingly, the Company's sales
expectations are based almost entirely on its internal estimates of future
demand and not on firm customer orders. Based on the foregoing, the Company
believes that quarterly operating results are likely to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some
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future quarter the Company's revenues or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock will again be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; ONGOING NEW PRODUCT DEVELOPMENT REQUIREMENTS. The
markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its existing products and to introduce new products and features to meet
and adapt to changing customer requirements and emerging technologies such as
ISDN (Integrated Services Digital Network), Frame Relay and ATM (Asynchronous
Transfer Mode). There can be no assurance that the Company will be successful
in identifying, developing, manufacturing and marketing new products or
enhancing its existing products. In addition, there can be no assurance that
services, products or technologies developed by others will not render the
Company's products noncompetitive or obsolete.
DEPENDENCE ON A LIMITED NUMBER OF OEM CUSTOMERS. Due largely to its shift from
board-level products to standalone remote access products, the Company's
customer base has been expanding and diversifying, and the Company expects this
trend to continue. However, a substantial portion of the Company's sales,
virtually all of which were attributable to sales of board-level products, has
been derived from a limited number of OEM customers.. The Company's OEM
customers' orders are affected by factors such as new product introductions,
product life cycles, inventory levels, manufacturing strategy, contract awards,
competitive conditions and general economic conditions. The Company's agreements
with OEM customers typically do not require minimum purchase quantities. A
significant reduction in orders from any of the Company's OEM customers could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's sales to any single OEM customer are also
subject to significant variability from quarter to quarter. Such fluctuations
may have a material adverse effect on the Company's operating results. In
addition, there can be no assurance that the Company will become a qualified
supplier for new OEM customers or that the Company will remain a qualified
supplier with existing OEM customers.
EXPANDED DISTRIBUTION REQUIRED FOR REMOTE ACCESS PRODUCTS. Although to date a
substantial percentage of the Company's sales has been made to OEM customers
through the Company's direct sales force, the Company expects that an increasing
percentage of its revenues will be derived from sales of its netXpand products
to end users. The Company sells its netXpand products through distributors and,
to date, has signed agreements with over 42 distributors worldwide.
Distributors generally offer products of several different companies, including
products that may compete with the Company's products. Accordingly, these
distributors may give higher priority to products of other suppliers, thus
reducing their efforts to sell the Company's products.
Agreements with distributors are generally terminable at the distributor's
option. A reduction in sales effort or termination of a distributor's
relationship with the Company may have a material adverse effect on future
operating results. Use of distributors also entails the risk that distributors
will build up inventories in anticipation of substantial growth in sales. If
such growth does not occur as anticipated, these distributors may substantially
decrease the amount of product ordered in subsequent quarters. Such
fluctuations could contribute to significant variations in the Company's future
operating results. In addition, distributors generally have stock rotation
rights and price protection on unsold merchandise, which may adversely impact
the Company's profit margins.
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DEPENDENCE ON SUPPLIERS. The chipsets used in the Company's products are
currently available only from Motorola. The inability to obtain sufficient key
components as required, or to develop alternative sources if and as required in
the future, could result in delays or reductions in product shipments which, in
turn, could have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURER. In December 1996 the Company sold all of
its manufacturing operations to XeTel Corporation (XeTel), a contract
manufacturing company headquartered in Austin, Texas. At the same time the
Company and XeTel entered into an exclusive manufacturing service agreement
under which XeTel is to manufacture all of the Company's products until at least
December 2000. The Company is dependent on XeTel's ability to manufacture the
Company's products according to specifications and in required volumes on a
timely basis. The failure of XeTel to perform its obligations under the
manufacturing service agreement could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent on the technical,
management, marketing and sales skills of a limited number of key employees.
The Company does not have employment agreements with, or life insurance on the
life of, any of its key employees. The loss of the services of any key
employees could adversely affect the Company's business and operating results.
The Company's success also depends on its ability to continue to attract and
retain additional highly talented personnel. Competition for qualified
personnel in the networking industry is intense. There can be no assurance that
the Company will be successful in retaining its key employees or that it can
attract or retain additional skilled personnel as required.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Although the Company believes that its
future success will depend primarily on continuing innovation, sales, marketing
and technical expertise, the quality of product support and customer relations,
the Company must also 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. There
can be no assurance that steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of its
technology. Although the Company believes that its products and technology do
not infringe proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against the Company.
STOCK PRICE VOLATILITY. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to quarter-to-quarter fluctuations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, general conditions in the computer and
communications industries, and other events or factors. In addition, stock
markets have experienced extreme price and trading volume volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities of many high technology companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
ANTI-TAKEOVER PROVISIONS. The Company's charter provides for 2,000,000 shares
of authorized but unissued Preferred Stock, the terms of which may be fixed by
the Board of Directors, who also have the right to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders of the
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Company. The rights of the holders of the Company's capital stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of such
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire control of the outstanding
voting stock of the Company. Accordingly, such provisions could delay or
prevent a change of control of the Company.
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 that 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.
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. According to International Data Corporation (IDC)
it is estimated that the number of users linked to the Internet has grown from
less than 2 million in 1992 to, approximately 45 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
that 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 notebook 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. Additionally, as
these technologies become more mature, the retail prices for
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products utilizing these technologies generally decline, thereby making the
products more economically accessible to a larger portion of computer users.
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.
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 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 either 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 its netXpand products to meet the growing demand for remote access data
communications products in September 1995.
REMOTE ACCESS PRODUCTS. The products for the Company's family of netXpand
remote access products are netXpand SoHo, Central and Routeman. 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 and Routeman is a smaller less
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expensive version of SoHo. The products have been designed to provide cost-
effective internetworking capabilities to the broadest range of end-users, the
users of UNIX and Novell, Artisoft and Windows NT networking products. These
products allow users to access remote networks' resources as full network
clients or 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 remote access products list from $599 to $2,499 with
various software configurations available.
INTELLIGENT COMMUNICATIONS CONTROLLER PRODUCTS. Intelligent communications
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. The Company does
not seek 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
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* Multibus is a Trademark of Intel Corporation.
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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 supported. The Company's software products are
principally bundled with the hardware platform based upon the customer's
application requirement.
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The following table shows sales by major product type as a percentage of total
sales for fiscal 1996, 1995 and 1994.
Year Ended October 31,
(percentage of annual sales)
1996 1995 1994
----------------------------------------
Communication Controllers 73% 72% 62%
netXpand Remote Access 15 3 --
Single Board Computer 4 9 9
Integrated Circuits 1 3 10
Custom -- 1 11
Other 7 12 8
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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 70 distributors and value-added resellers as of
October 31, 1996. 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 70 percent of total netXpand sales in fiscal 1996 and
92 percent for 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 intelligent communications 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 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 high
speed serial 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
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workstations. The Company believes that its 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.
The Company's intelligent communications controller sales are concentrated among
a small number of customers and, consequently, the timing of significant orders
from major customers causes 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 additional
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 two years, the Company has developed communications 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. In addition, the
Company has acquired or licensed certain hardware products that have been
integrated principally through the addition of software into the Company's
product line.
During fiscal 1996 the Company focused the majority of its development efforts
on the netXpand remote access product line and it expects to continue this focus
in 1997. The new products will leverage existing product designs and
incorporate more sophisticated routing software.
Information relating to accounting for research and development costs is
included in Note 1 of the Notes to the Consolidated Financial Statements on Page
33 of this document. Also see the section labeled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing on Pages 16
through 20 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 (see Risk Factors "Dependence on Suppliers"). 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
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has sought to establish a close relationship with sole-source suppliers and if
necessary build up an inventory of such components.
The Company in December 1996 sold all of its manufacturing assets and entered
into an contract manufacturing agreement with XeTel Corporation to supply
manufacturing services. The Company believes that XeTel may be able to provide
lower prices and a more efficient and timely product delivery then the Company
could produce with its previous manufacturing resources.
COMPETITION
The market for remote access products is highly competitive. Many of the Company
competitors have greater financial resources and are more established than the
Company. 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, Bay Networks, Livingston Enterprises, Inc. 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 it can compete successfully in the remote access market by (1)
providing low-cost hardware and easy-to-use software, suited specifically to the
needs of the non-sophisticated user: (2) developing distribution channels that
provide close sales and support to end users; (3) providing economical,
accessible support services; (4) expanding into the Asia-Pacific markets. By
focusing on the above factors the Company believes that it can successfully
compete within the remote access market, although there can be no assurance to
that effect.
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 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 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 to
anticipate product needs.
INTELLECTUAL PROPERTY
The Company believes that its future success will depend principally on its
continuing product innovation, sales, marketing and technical expertise, product
support and customer relations. The Company also believes that it needs to
protect the proprietary technology contained in its
-13-
<PAGE>
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 1, 1997, the Company had a backlog of orders of approximately $3.6
million for shipment within the next twelve months. On January 1, 1996, the
Company had a backlog of orders of approximately $2.4 million for shipment
within the next twelve months. 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, 1997, the Company had 55 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.
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. In
December 1996, in conjunction with the sale of all of the Company's
manufacturing assets, the Company subleased approximately 24,000 square feet of
office and manufacturing space to XeTel for a four year term with options to
renew for an additional five years.
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
-14-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER
MATTERS.
Fiscal quarter ended
--------------------------------------------------------
1996 January 31 April 30 July 31 October 31
- ----------------------------------------------------------------------
High $14.25 $12.50 $12.25 $6.63
Low 11.00 5.75 5.75 3.88
1995
High $10.50 $15.75 $14.25 $16.00
Low 7.00 8.75 10.75 10.75
SBE. 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 1996 and
1995 for the quarters indicated. The Company has not paid cash dividends on its
common stock and anticipates that for the foreseeable future it would retain
earnings for use in its business. Additionally, the Company is currently
prohibited from paying dividends by its credit line agreement. As of December
31, 1996, SBE. had approximately 756 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except for per share
amounts and number of employees)
For years ended October 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Net sales $13,350 $19,368 $22,337 $26,732 $28,057
Net (loss) income (9,625) (4,568) 1,336 2,461 2,565
Net (loss) income per share ($4.51) ($2.22) $0.63 $1.18 $1.24
Product research and development 5,084 6,900 4,769 4,739 4,455
Working capital 2,049 7,644 7,436 6,608 4,563
Total assets 7,894 14,978 17,665 16,563 14,325
Long-term obligations 757 1,218 410 44 39
Shareholders' equity 3,981 12,108 15,864 14,889 12,001
Shares outstanding 2,233 2,074 2,035 2,005 1,922
Number of employees 92 173 165 148 147
-15-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION
CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION AND THE SECTION ENTITLED "BUSINESS"
(PARTICULARLY "BUSINESS-RISK FACTORS.")
For the last decade, the Company has specialized in the development of
communication controller 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, a 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.
The Company began shipping its netXpand products in September 1995. Sales of
these products constituted over 15 percent of net sales for fiscal year 1996.
The Company expects the netXpand product line to constitute an increasing
percentage of net sales in future periods; however, there can be no assurance to
that effect. The netXpand products are targeted at the high-growth, price-
sensitive sectors of the internetworking market. Based upon market information
supplied by market research firms, the Company expects these segments to grow at
a compounded annual rate in excess of 35 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 and expand its existing communication
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 communication controller 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 cause
fluctuations in the Company's operating results.
Over the last eight quarters, the Company has invested significant resources in
the development of new products and sales channels. The Company expects that
sales of netXpand products may reduce the concentration of its customer base and
provide significant sales growth as the Company develops its sales channels.
There are numerous risks associated with the sale of netXpand products and
therefore the Company cannot determine whether or not it will be successful in
the distribution of netXpand products. Primarily as a result of this investment
in netXpand products combined with decreased sales of communication controller
products attributable to the decline in business with America Online, Cisco
Systems, GTE Spacenet Services and Siemens, the Company has incurred substantial
operating losses in fiscal 1996 and fiscal 1995.
RESULTS OF OPERATIONS
-16-
<PAGE>
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the fiscal years ended October
31, 1996, 1995 and 1994. These operating results are not necessarily indicative
of Company's operating results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1996 1995 1994
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 62 49 44
-- -- --
Gross profit 38 51 56
Operating expenses:
Product research and development 38 36 21
Sales and marketing 34 26 12
General and administrative 24 20 16
Restructuring and other 14 --
---- ---- ----
Total operating expenses 110 82 50
---- ---- ----
Operating (loss) income (72) (31) 6
Interest and other (expense) income, net -- (1) 2
---- ---- ----
Income (loss) before taxes (72) (32) 8
(Benefit) provision for income taxes -- (8) 2
---- ---- ----
Net (loss) income (72)% (24)% 6%
---- ---- ----
---- ---- ----
</TABLE>
NET SALES
Net sales for fiscal 1996 were $13.4 million, a 31 percent decrease from fiscal
1995. Net sales for fiscal 1995 were $19.4 million, a 13 percent decrease from
fiscal 1994. These decreases were primarily attributable to lower sales of the
Company's board-level products to certain large customers. Sales to individual
customers in excess of 10 percent of net sales of the Company included sales to
Tandem Computers of $2.7 million in fiscal 1996 and sales to America Online and
Tandem Computers of $3.1 million and $2.8 million, respectively, in fiscal 1995.
Sales to Cisco Systems and G.E. Capital Spacenet Services, respectively,
accounted for $4.6 million and $2.5 million of sales in fiscal 1994. There were
no sales to America Online in 1996 or to Cisco in fiscal 1996 and fiscal 1995.
Partially offsetting the lower sales of board level products, sales of netXpand
remote access/router products increased by $1.5 million from fiscal 1995 to
fiscal 1996 to approximately 15 percent of total sales in fiscal 1996. The
Company expects to continue to experience fluctuation in communication
controller product sales as large customers' needs change.
International sales constituted 26 percent, 11 percent and 4 percent of net
sales in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The increase
in international sales is primarily attributable to increased sales of VME
communication controller products to a large customer in Korea and sales of
netXpand products in Taiwan and Japan. Sales of VMEbus-based communications
products through the Company's Channel Partner relationship with Hewlett Packard
constituted 11 percent, 27 percent and 13 percent of net sales in fiscal 1996,
fiscal 1995 and fiscal 1994, respectively. No customer within this channel,
other than America Online during fiscal 1995, represented more than 5% of total
sales. The Company expects that future sales through the HP channel will
continue; however, sales through this channel will be subject to significant
variability from quarter to quarter.
GROSS PROFIT
-17-
<PAGE>
Gross profit as a percentage of sales was 38 percent, 51 percent and 56 percent
in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The decrease from
fiscal 1995 to fiscal 1996 was primarily attributable to lower sales and
increased fixed manufacturing costs. The Company in fiscal 1995 added
significant manufacturing capacity in anticipation of netXpand sales increases.
The costs for the additional capacity included the cost of leasing high speed
placement and testing equipment, facility lease costs and depreciation. In late
fiscal 1996 the Company concluded that it would not be able to maintain a
production facility that would allow it to be competitive with the production
costs of its competitors; therefore, in December 1996 the Company sold its
manufacturing assets and operations to XeTel Corporation, a contract
manufacturing company ("XeTel") with headquarters in Austin, Texas. The Company
also entered into a contract to purchase manufacturing services from XeTel,
which may decrease the volatility of the quarterly cost of sales as a percentage
of sales. The decrease in gross profit as a percentage of sales 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.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses net of capitalized software costs were
$5.1 million in fiscal 1996, $6.9 million in fiscal 1995 and $4.8 million in
fiscal 1994, representing 38 percent, 36 percent and 21 percent of sales,
respectively. The decrease in research and development spending from fiscal 1995
to fiscal 1996 was a result of the completion of the base netXpand product line
and a corresponding decrease in third party consulting costs associated with the
launch of the netXpand products. The increases in net research and development
expenses from fiscal 1994 to fiscal 1995 as a percentage of sales was primarily
attributable to additional staff, consulting costs and contract professional
expenses relating to development of the netXpand product line. The Company
expects that product research and development expenses will decrease as a
percent of sales as the Company focuses its resources on improving its netXpand
product line and enhancing its traditional board-level products.
The Company capitalized software development costs of $1.5 million and $230,000
in fiscal 1995 and fiscal 1994, respectively, in accordance with Statement of
Financial Accounting Standards No. 86. There were no such costs capitalized in
fiscal 1996. The amounts capitalized represented 22 percent and 5 percent,
respectively, of gross product research and development expenditures in fiscal
1995 and fiscal 1994. The increase in software costs capitalized in fiscal 1995
was due to software development related to the netXpand product line. Those
costs are being amortized over a three year period.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1996 were $4.6 million, down from $5.0
million in fiscal 1995. Sales and marketing expenses decreased due to lower
sales and commission expenses and the completion of one time costs associated
with product launch of the netXpand product line. Sales and marketing expenses
for fiscal 1994 were $2.7 million, representing a significantly lower level of
marketing costs prior to the introduction of the netXpand product line. The
Company expects sales and marketing expenses to decrease as a percentage of
total sales for the foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1996 decreased 20 percent from
fiscal 1995 to $3.1 million. General and administrative expenses for fiscal 1995
were $3.9 million, a 7 percent increase
-18-
<PAGE>
from fiscal 1994. The decrease from fiscal 1995 to fiscal 1996 represents
decreases in consulting, accounting and other administrative costs. 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.
RESTRUCTURING COSTS AND OTHER.
The Company incurred nonrecurring charges in fiscal 1996 for severance costs,
disposition of certain assets related to a reorganization of the Company and
writedown of capitalized software costs. Additionally, in fiscal 1995 the
Company recorded a nonrecurring charge to write off an equity investment in a
strategic software partner and to record realized losses on the liquidation of
investments.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income, net, decreased in fiscal 1996 from fiscal 1995 and fiscal 1994
due to lower investment balances. Interest expense for fiscal 1996 increased
from fiscal 1995 due to interest on outstanding borrowings.
INCOME TAXES
The Company did not record any significant tax expense in fiscal 1996 as a
result of not being able to realize any benefit from its net operating losses
and unused tax credits. The Company's effective tax rate was (27) percent and 26
percent in fiscal 1995 and fiscal 1994, respectively. The Company's operating
losses in fiscal 1995 enabled it to realize a $1.7 million tax benefit, all of
which was realized as a carryback against prior taxes paid. The Company has
recorded a valuation allowance in fiscal 1996 and 1995 for certain deferred tax
assets due to the uncertainty of realization. This valuation allowance
increased from approximately $948,000 in fiscal 1995 to $4.3 million in fiscal
1996. In the event of future taxable income, the Company's effective income tax
rate in future periods could be lower then the statutory rate as such tax assets
are realized.
NET (LOSS) INCOME
As a result of the factors discussed above, the Company recorded net losses of
$9.6 million and $4.6 million in fiscal 1996 and fiscal 1995, respectively, and
net income of $1.3 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company had cash and cash equivalents of $41,061, as
compared to $857,206 at October 31, 1995. In fiscal 1996 $2.9 million of cash
was used in operating activities, principally as a result of the $9.6 million
loss, the loss for fiscal 1996 was offset by; $1.8 million refund of federal
income taxes, $1.3 million reduction in accounts receivable, $1.7 million in
depreciation and amortization charges, $1.0 million in customer advances,
$794,000 writedown of capitalized software, and $434,498 of other non cash
charges. Working capital at October 31, 1996 was $2.0 million, as compared to
$7.6 million at October 31, 1995.
In fiscal 1996 the Company purchased $385,236 of fixed assets, consisting
primarily of computer and manufacturing equipment. The Company expects capital
expenditures during fiscal 1997 to be similar to fiscal 1996 levels.
-19-
<PAGE>
The Company received $387,869 in fiscal 1996 from employee stock option
exercises and stock purchase plan purchases, an increase of 35 percent from
fiscal 1995 amounts.
As of October 31, 1996 the Company was in default on the minimum profitability
covenant of its $2.0 million credit line, as amended. The Company received a
letter of forbearance from the bank that provided for a revised credit limit of
$1.0 million with borrowings limited to 65 percent of adjusted accounts
receivable balances and for other revised covenants. These revised covenants
specified minimum monthly profitability levels, a minimum tangible net worth of
$4.0 million and a minimum debt ratio of 1.0:1.0.
As of December 15, 1996 the credit line was canceled and the Company entered
into a new working capital credit facility for $500,000 that expires on May 15,
1997. Borrowings under the new line bear interest at the bank's prime rate plus
two percent and are collateralized by accounts receivable and other assets.
Borrowings are limited to 75 percent of adjusted accounts receivable balances
and the Company is required to maintain minimum tangible net worth of $4.0
million, a minimum debt ratio of 0.7:1.0, a quick ratio of cash, investments and
accounts receivable to current liabilities of 1.0:1.0. The line of credit also
prohibits the payment of cash dividends without the consent of the bank.
As discussed above in "Business" the Company sold all the assets of its
manufacturing operation to XeTel Corporation, for $1.6 million. Additionally,
the Company entered into a multi-year exclusive agreement to purchase
manufacturing services from XeTel and to sublease a portion of its San Ramon
facility to XeTel. As a result of the sale, the Company expects to report a
gain on the sale of these assets, net of expenses, in the first quarter of 1997.
Based on the current operating plan, the Company anticipates that it may require
additional working capital in excess of its working capital line of credit to
meet operating requirements. The additional working capital is required to
support the expansion of sales of the netXpand product line through planned
sales channel expansion and marketing programs as well as accounts receivable
and inventory growth. The Company is currently seeking additional capital
through an increase of credit facilities. If the Company does not receive
sufficient increases in credit facilities, it may seek alternative sources of
financing, including equity sales, or it may reduce overall expense and capital
expenditure levels. There can be no assurance that the Company will be
successful in obtaining additional working capital or in expanding its netXpand
business.
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.
-20-
<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 8 1997 (the "1997 Proxy Statement").
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 B. Heye, Jr. 58 President and Chief Executive Officer, and
Chairman
Timothy J. Repp 36 Vice President, Finance, Chief
Financial Officer, Treasurer and Secretary
Michael R. Coker 48 Vice President, Sales and Marketing
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 was Executive Vice President of Airborn, Inc., a manufacturer of
components for the aerospace and military markets. Prior to 1986 Mr. Heye
served in various senior management positions at Texas Instrument, Inc. in the
U.S. and overseas, including, Vice President and General Manager of Consumer
Products and President of Texas Instruments Asia, Ltd. headquartered in Tokyo,
Japan.
Mr. Repp has served as Vice President, Finance and Chief Financial Officer since
January 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. Coker has been Vice President, Sales since March 1996. From January 1993
until February 1996, he was President and Chief Executive Officer of Syskonnect,
a provider of networking communication equipment. From October 1983 to December
of 1993, Mr. Coker served in
-21-
<PAGE>
various senior management positions, including Vice President of International
Sales, Vice President, Marketing and Director of Marketing, at Vitalink, a
provider of routers, bridges and networking products.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" appearing in the 1997 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 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-22-
<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, 1996 and 1995 28
Consolidated Statements of Operations for fiscal years 1996, 1995,
and 1994 29
Consolidated Statements of Shareholders' Equity for fiscal years 1996,
1995 and 1994 30
Consolidated Statements of Cash Flows for fiscal years 1996, 1995,
and 1994 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.
-23-
<PAGE>
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------ ----------- --------
(a) 3.1 Articles of Incorporation, as amended ---
(a) 3.2 Certificate of Determination ---
10.1 1996 Incentive Stock Option Plan 43
(b) 10.2 1991 Non-Employee Directors' Stock Option Plan,
as amended ---
(f) 10.3 1992 Employee Stock Purchase Plan, as amended ---
(c) 10.4 Lease for 4550 Norris Canyon Road, San Ramon,
California dated November 2, 1992 between the
Company and PacTel Properties ---
(d) 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) ---
(e) 10.6 Asset Purchase Agreement between XeTel Corporation
and SBE, Inc. dated as of December 6, 1996 ---
11.1 Statement re computation of per share earnings 58
24.1 Consent of Coopers & Lybrand, Independent Public
Accountants 59
27.1 Financial Data Schedule 60
(d) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K, dated August 29, 1996, disclosing
the sale of 167 shares of Series A Preferred Stock for net proceeds of
approximately $1.1 million.
-24-
<PAGE>
Explanations for letter footnotes:
- --------------------------------------------------------------------------------
(a) Filed as an exhibit to the current report on Form 8-K dated August
29, 1996 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.
(d) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(e) Filed as an exhibit to the current report on Form 8-K dated December
6, 1997 and incorporated herein by reference
-25-
<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 28, 1997 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 28, 1997.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- ------------------------
William B. Heye Jr. Chief Executive Officer, President and
Chairman of the Board,
(Principal Executive Officer)
/s/ Timothy J. Repp
- -------------------
Timothy J. Repp Chief Financial Officer, Vice President of
Finance (Principal Financial and Accounting Officer)
/s/ Raimon L. Conlisk
- ---------------------
Raimon L. Conlisk Director
/s/ George E. Grega
- -------------------
George E. Grega Director
-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, 1996 and 1995 and for each of the three years in
the period ended October 31, 1996. 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, 1996 and 1995 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996, 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.
San Francisco, California
December 16, 1996
-27-
<PAGE>
SBE, INC.
CONSOLIDATED BALANCE SHEETS
October 31 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 41,061 $ 857,206
Trade accounts receivable, net 2,043,959 3,387,732
Inventories 2,741,356 2,611,413
Income tax recoverable 8,990 1,836,315
Deferred income taxes 291,275 224,681
Other 78,118 377,733
------------ ------------
Total current assets 5,204,759 9,295,080
Property, plant and equipment, net 2,070,389 3,329,913
Deferred income taxes 27,083 654,319
Capitalized software costs, net 551,168 1,656,419
Other 40,700 41,968
------------ ------------
Total assets $ 7,894,099 $ 14,977,699
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 980,340 $ ---
Trade accounts payable 1,084,813 940,888
Accrued payroll and employee benefits 261,726 593,106
Customer advances 617,453 ---
Other 211,856 117,410
------------ ------------
Total current liabilities 3,156,188 1,651,404
Deferred tax liabilities 318,358 879,000
Deferred rent 438,939 339,134
------------ ------------
Total liabilities 3,913,485 2,869,538
------------ ------------
Commitments (Note 8).
Shareholders' equity:
Preferred stock (no par value); authorized
2,000 shares; issued 167 shares;
outstanding 113 shares at October 31, 1996;
none issued at October 31, 1995 750,460 ---
Common stock (no par value); authorized
6,000,000 shares; issued and outstanding
2,232,858 and 2,074,254 shares at October 31,
1996 and 1995, respectively 8,426,315 7,679,819
Retained earnings (deficit) (5,196,161) 4,428,342
------------ ------------
Total shareholders' equity 3,980,614 12,108,161
------------ ------------
Total liabilities and shareholders' equity $ 7,894,099 $ 14,977,699
------------ ------------
------------ ------------
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
1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 13,350,228 $ 19,367,776 $ 22,336,777
Cost of sales 8,277,879 9,566,784 9,838,663
------------ ------------ ------------
Gross profit 5,072,349 9,800,992 12,498,114
Product research and development 5,083,707 6,900,420 4,769,306
Sales and marketing 4,605,275 4,961,438 2,656,240
General and administrative 3,137,132 3,929,544 3,683,237
Restructuring costs 960,747 --- ---
Write-off of prepaid offering costs 105,000 --- ---
Writedown of software costs 794,018 --- ---
------------ ------------ ------------
Total expenses 14,685,879 15,791,402 11,108,783
Operating (loss) income (9,613,530) (5,990,410) 1,389,331
Interest income 34,486 342,463 407,937
Interest expense (43,859) (14,783) (1,217)
Write-off of equity investment --- (330,000) ---
Loss on sale of investments --- (293,797) ---
------------ ------------ ------------
(Loss) income before income taxes (9,622,903) (6,286,527) 1,796,051
Provision (benefit) for income taxes 1,600 (1,718,556) 459,743
------------ ------------ ------------
Net (loss) income $ (9,624,503) $ (4,567,971) $ 1,336,308
------------ ------------ ------------
------------ ------------ ------------
Net (loss) income per common share $ (4.51) $ (2.22) $ 0.63
------------ ------------ ------------
Weighted average common shares 2,131,593 2,054,570 2,107,582
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balances, October 31, 1993 --- --- 2,005,131 $7,229,409
Stock issued in connection
with stock option plan --- --- 18,209 86,221
Stock issued in connection
with stock purchase plan --- --- 11,502 77,063
Unrealized losses on investments --- --- --- ---
Net income --- --- --- ---
------------ ------------ ----------- -----------
Balances, October 31, 1994 --- --- 2,034,842 7,392,693
Stock issued in connection
with stock option plan --- --- 21,543 166,454
Stock issued in connection
with stock purchase plan --- --- 17,869 120,672
Unrealized losses on investments --- --- --- ---
Net loss --- --- --- ---
------------ ------------ ----------- -----------
Balances, October 31, 1995 --- --- 2,074,254 7,679,819
Stock issued in connection
with preferred stock offering 167 $1,109,087 --- ---
Stock retired/issued in connection
with conversion to
common stock (54) (358,627) 104,719 358,627
Stock issued in connection
with stock option plans --- --- 35,283 221,939
Stock issued in connection
with stock purchase plan --- --- 18,602 165,930
Net loss --- --- --- ---
------------ ------------ ----------- -----------
Balances, October 31, 1996 113 $750,460 2,232,858 $8,426,315
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
<CAPTION>
Unrealized Losses Retained
on Investments Earnings (Deficit) Total
--------------- ----------------- ------------
Balances, October 31, 1993 --- $7,660,005 $14,889,414
Stock issued in connection
with stock option plan --- --- 86,221
Stock issued in connection
with stock purchase plan --- --- 77,063
Unrealized losses on investments $(525,370) --- (525,370)
Net income --- 1,336,308 1,336,308
------------ ------------ -----------
Balances, October 31, 1994 (525,370) 8,996,313 15,863,636
Stock issued in connection
with stock option plan --- --- 166,454
Stock issued in connection
with stock purchase plan --- --- 120,672
Unrealized losses on investments 525,370 --- 525,370
Net loss --- (4,567,971) (4,567,971)
------------ ------------ -----------
Balances, October 31, 1995 --- 4,428,342 12,108,161
Stock issued in connection
with preferred stock offering --- --- 1,109,087
Stock retired/issued in connection
with conversion to
common stock --- --- ---
Stock issued in connection
with stock option plans --- --- 221,939
Stock issued in connection
with stock purchase plan --- --- 165,930
Net loss --- (9,624,503) (9,624,503)
------------ ------------ -----------
------------ ------------ -----------
Balances, October 31, 1996 $ --- $(5,196,161) $3,980,614
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
<PAGE>
<TABLE>
<CAPTION>
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (9,624,503) $ (4,567,971) $ 1,336,308
Adjustments to reconcile net (loss) income to net cash (used)
provided by operating activities:
Depreciation and amortization 1,659,787 1,312,061 1,115,173
Restructuring costs 329,498 --- ---
Write-off of prepaid offering costs 105,000 --- ---
Writedown of capitalized software 794,018 --- ---
Write-off of equity investment --- 330,000 ---
Loss on sale of investments --- 293,797 7,730
Deferred taxes --- 10,178 199,822
Other --- 955 9,010
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable 1,343,773 56,465 (8,392)
(Increase) decrease in inventories (129,943) (563,621) 92,316
Decrease (increase) in income tax recoverable 1,827,325 (1,776,485) ---
Decrease (increase) in other assets 195,883 30,355 (160,880)
Increase (decrease) in trade accounts payable 143,925 138,613 256,782
Decrease in income taxes payable --- --- (26,201)
Increase (decrease) in other current liabilities 380,519 122,174 (502,289)
Increase in noncurrent liabilities 99,805 218,725 76,048
------------ ------------ ------------
Net cash (used) provided by operating activities (2,874,913) (4,394,754) 2,395,427
------------ ------------ ------------
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (385,236) (1,802,826) (772,899)
Proceeds from sale of fixed assets 8,208 2,729 2,000
Capitalized software costs (41,500) (1,486,967) (230,000)
Proceeds from sale of investments --- 5,936,416 974,522
Purchase of investments --- (250,585) (2,163,595)
------------ ------------ ------------
Net cash (used) provided by investing activities (418,528) 2,398,767 (2,189,972)
------------ ------------ ------------
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings on line of credit 5,528,595 --- ---
Repayment of borrowings on line of credit (4,548,255)
Proceeds from sale of preferred stock 1,109,087 --- ---
Proceeds from stock plans 387,869 287,126 163,284
Principal payments on capital lease obligations --- --- (26,466)
------------ ------------ ------------
Net cash provided by financing activities 2,477,296 287,126 136,818
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (816,145) (1,708,861) 342,273
Cash and cash equivalents at beginning of year 857,206 2,566,067 2,223,794
------------ ------------ ------------
Cash and cash equivalents at end of year $ 41,061 $ 857,206 $ 2,566,067
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 43,859 $ 14,783 $ 1,217
------------ ------------ ------------
Income taxes $ 417 $ 33,824 $ 447,590
------------ ------------ ------------
------------ ------------ ------------
</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 AND BASIS OF PRESENTATION:
SBE, Inc. and subsidiary (the Company) designs and manufactures high-performance
network systems and products for world-wide distribution. The Company's business
falls exclusively within one industry segment.
During 1996 the Company invested significant resources in developing netXpand, a
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 1996. As a result of
the losses the Company restructured its operations and reduced expense levels to
improve operating results. In connection with the restructuring, charges of
$960,747 were recorded, primarily related to severance, asset writedowns and
facility lease termination costs.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Based on the current operating plan, the
Company anticipates that it may require additional working capital in excess of
its working capital line of credit to meet operating requirements. The
additional working capital is required to support the expansion of sales of the
netXpand product line through planned sales channel expansion and marketing
programs as well as accounts receivable and inventory growth. The Company is
currently seeking additional capital through an increase of credit facilities.
If the Company does not receive sufficient increases in credit facilities, it
may seek alternative sources of financing, including equity sales, or it may
reduce overall expense and capital expenditure levels. There can be no assurance
that the Company will be successful in obtaining additional working capital or
in expanding its netXpand business.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
-32-
<PAGE>
equivalents. Substantially all of its cash and cash equivalents are held in one
large financial institution.
INVESTMENTS:
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, 1996 and 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.
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 US dollars.
-33-
<PAGE>
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, 1996, 1995 and 1994, direct costs incurred under R&D contracts
were $42,543, $112,868 and 382,397 respectively and reimbursements earned were
$73,852, $221,120 and 439,000 respectively.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "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 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.
NET INCOME (NET LOSS) PER COMMON SHARE:
Net income per common share for the year ended October 31, 1994 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 years ended October 31, 1996 and 1995, as they
have the effect of decreasing LPS. The difference between primary and fully
diluted net income (loss) 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 No. 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 and other disclosures required by
SFAS No. 123 beginning in fiscal 1997.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation with no effect on net income as
previously reported.
-34-
<PAGE>
2. INVENTORIES
Inventories at October 31, 1996 and 1995 are comprised of the following:
1996 1995
- -----------------------------------------------------------------------
Finished goods $ 750,508 $ 841,453
Subassemblies 174,620 299,315
Parts and materials 1,816,228 1,470,645
------------ ------------
$ 2,741,356 $ 2,611,413
------------ ------------
------------ ------------
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1996 and 1995 are comprised of the
following:
1996 1995
- -------------------------------------------------------------------
Machinery and equipment $ 6,988,575 $ 7,462,268
Furniture and fixtures 1,078,008 1,091,935
Leasehold improvements 519,309 519,309
------------ ------------
8,585,892 9,073,512
Less accumulated depreciation
and amortization 6,515,503 5,743,599
------------ ------------
$ 2,070,389 $ 3,329,913
------------ ------------
------------ ------------
Depreciation and amortization expense totaled $1,307,054, $1,251,513 and
$979,430 for the years ending October 31, 1996, 1995 and 1994, respectively.
4. BANK FACILITY:
The Company had a line of credit for $4.0 million which expired on April 30,
1996. On April 29, 1996 the Company modified the agreement to extend the term
to April 30, 1997 to decrease the borrowing base to $2.0 million and to modify
certain covenants.
As of October 31, 1996 the Company was in default on the minimum profitability
covenant of its credit line, as amended. The Company has received a letter of
forbearance from the Bank that provides for a revised credit limit of $1.0
million with borrowings limited to 65 percent of adjusted accounts receivable
balances and for other revised covenants. These revised covenants specify
minimum monthly profitability levels, a tangible net worth of $4,000,000 and a
minimum debt ratio of 1.0:1.0. As of October 31, 1996 borrowings under this
agreement approximate fair market value due to the short term maturity of the
credit line.
As of December 15, 1996 the credit line was canceled and the Company has entered
into a new working capital credit facility for $500,000 which expires on May 15,
1997. Borrowings under the new line bear interest at the bank's prime rate plus
two percent and are collateralized by accounts receivable and other assets.
Borrowings are limited to 75 percent of adjusted accounts receivable balances
and the Company is required to maintain minimum tangible net worth of $4.0
million, a minimum debt ratio of 0.7:1.0, a minimum quick ratio of cash,
investments and accounts receivable to current liabilities of 1.0:1.0.
Additionally, the line of credit also prohibits the payment of cash dividends
without the consent of the bank.
-35-
<PAGE>
5. CONVERTIBLE PREFERRED STOCK
On July 10, 1996, the Company issued and sold 167 shares of Series A Preferred
Stock ("Series A Preferred") for net proceeds of approximately $1.1 million The
issuance of Series A Preferred was exempt, pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended (the "Act"), from registration
requirements under the Act.
Each share of Series A Preferred is convertible into the number of shares of
Common Stock of the Company ("Common Stock") equal to $7,500 divided by the
Conversion Price. The applicable Conversion Price is lesser of $6.675 or 75
percent of the average closing bid price of the Common Stock for the five
consecutive trading days immediately prior to conversion; provided however, that
the Series A Preferred, taken as a whole, may not at any time convert into 16.7
percent or more of the Company's outstanding Common Stock (measured on July 10,
1996 and on the date of conversion). The Series A Preferred will automatically
convert into Common Stock when the average closing bid price of the Common Stock
over a five trading day period is equal to or greater than $13.35. In addition,
all unconverted shares of Series A Preferred will be converted automatically
upon the earlier to occur of July 10, 1998 and the written consent of the
holders of two thirds of the then outstanding Series A Preferred. Holders of
Series A Preferred are also entitled to certain dividend rights and liquidation
preferences. The shares of Series A Preferred have no voting rights.
As of December 4, 1996 all outstanding shares of Series A Preferred had been
converted into Common Stock.
6. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current --- $(1,731,734) $ 196,270
Deferred --- 10,178 199,822
State:
Current $ 1,600 3,000 63,651
Deferred --- --- ---
--------- ----------- ----------
Total provision (benefit) for income taxes $ 1,600 $(1,718,556) $ 459,743
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1996 1995 1994
- --------------------------------------------------------------------------------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State taxes, net of federal income tax
benefit --- --- 4.3
Change in valuation allowance 34.0% 12.2 ---
Tax credits (5.0) (8.9)
Nontaxable interest income (0.7) (3.5)
Other, net 0.2 (0.3)
---- ----- ----
0.0% (27.3)% 25.6%
---- ----- ----
---- ----- ----
-36-
<PAGE>
Significant components of the Company's deferred tax balances as of October 31,
1996 and 1995 are as follows:
1996 1995
- -------------------------------------------------------------------------------
Deferred tax assets:
Current
Accrued employee benefits $ 77,000 $ 103,000
Inventory allowances 136,000 278,000
Allowance for doubtful accounts 42,000 51,000
Warranty accruals 37,000 31,000
Other reserves not currently deductible 4,000
Noncurrent
Deferred rent 179,000 134,000
R&D credit carryforward 706,000 695,000
Alternative minimum tax carryforward 143,000 143,000
Operating loss carryforward 3,136,000 184,000
Investments 130,000 130,000
Capital loss carryforward 74,000 74,000
----------- ------------
Total deferred tax assets 4,591,000 1,827,000
----------- ------------
Deferred tax liabilities:
Noncurrent
Depreciation (96,000) (234,000)
Capitalized software costs (223,000) (645,000)
----------- ------------
Total deferred tax liabilities (319,000) (879,000)
----------- ------------
Deferred tax asset valuation allowance (4,341,000) (948,000)
----------- ------------
Net deferred tax assets $ --- $ ---
----------- ------------
----------- ------------
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 $3.4 million and $769,374 for the years
ended October 31, 1996 and 1995, respectively. The Company has research and
experimentation tax credit carryforwards of $706,000 for federal and state tax
purposes. These carryforwards expire in the periods ending 2007 through 2011.
The Company has a net operating loss carryforward for federal and state income
tax purposes of approximately $8.4 million and $7.2 million, respectively, which
expire in periods ending 1999 through 2011.
-37-
<PAGE>
7. CAPITALIZED SOFTWARE COSTS
Software costs at October 31, 1996 and 1995 comprise the following:
1996 1995
- --------------------------------------------------------------------------------
Purchased software $109,116 $ 195,000
Internally developed software 805,333 1,521,967
-------- ----------
914,449 1,716,967
Less accumulated amortization 363,281 60,548
-------- ----------
$551,168 $1,656,419
-------- ----------
-------- ----------
The Company capitalized $41,500 and $120,000 of purchased software costs in 1996
and 1995, respectively. Additionally, $1,366,967 of internally developed
software costs were capitalized in 1995. Amortization of capitalized software
costs totaled $352,733, $60,548 and $135,743 for the years ended October 31,
1996, 1995 and 1994, respectively. Additionally, the Company recorded a
writedown of its capitalized software costs of $794,000 during fiscal year 1996.
The carrying value of the asset was reduced due to the uncertainty of the future
realization of the asset, because of slower than expected sales of netXpand
products.
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, 1996 are as follows:
Year ending October 31:
1997 $ 390,816
1998 379,449
1999 370,038
2000 385,353
2001 639,838
Thereafter 2,821,366
----------
Total minimum lease payments $4,986,861
----------
----------
Under the terms of the San Ramon, California building lease, rent includes the
lessor's operating costs and is offset by any sublease proceeds. 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, 1996, 1995 and 1994 was $822,835, $794,700 and $786,513, respectively.
-38-
<PAGE>
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has one employee stock option plan, its 1996 Incentive Stock Option
Plan. Originally adopted as the 1987 Supplemental Stock Option Plan, this plan
was amended and restated on January 18, 1996 and retitled the 1996 Incentive
Stock Option Plan. Shares of common stock reserved under the plan are 1,130,000
shares and 930,000 shares as of October 31, 1996 and 1995, respectively. Stock
options granted under the employee plan 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). A total of 140,000 shares of common stock are reserved
for issuance under this Plan. Options granted under the plan vest over a
four-year period, expire five years after the date of grant and have exercise
prices reflecting market value at the date of grant. In May 1996, due to the
reduced market price of the Company's common stock, the Company offered
employees the opportunity to have their options repriced to $8.93 in exchange
for restrictions of certain rights under their option grant.
At October 31, 1996 and 1995, 13,913 and 94,928 shares, respectively, were
available for stock option grants under the employee plans and 59,000 and 74,000
shares, respectively, were available for grant under the Non-Employee Director
Plan.
A summary of the activity under the stock option plans is set forth below:
<TABLE>
<CAPTION>
1991 Non-Employee
1996 Incentive Directors
Stock Option Plan Stock Option Plan
-----------------------------------------------------------------
Exercise Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
October 31, 1993 266,547 2.50 - 17.25 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 (14,459) 2.50 - 5.50 (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
Granted 513,998 4.38 - 10.50 15,000 7.75
Terminated (232,703) 5.31 - 12.00 --- ---
Exercised (23,033) 4.25 - 10.25 (12,250) 5.25
---------------------------------------------------------------
Outstanding at
October 31, 1996 791,050 3.75 - 10.50 63,000 $7.75 - 13.00
---------------------------------------------------------------
---------------------------------------------------------------
Exercisable at
October 31, 1996 310,398 $4.13 - 8.93 22,000 $5.25 - 13.00
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
-39-
<PAGE>
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, 1996, 92 employees were eligible to
participate in the Purchase Plan and 33,249 common shares were available for
issuance. In fiscal year 1996, 1995 and 1994, 18,602, 17,869 and 11,502 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. These contributions are payable annually, vest over five
years and cover substantially all employees who have been with the Company at
least one year. Additionally, the Company makes matching payments to the
employee savings and investment plan of 50 percent of each employee's
contribution up to three percent of employees' earnings.
For the years ended October 31, 1996, 1995 and 1994, total expense under
the above plan was $185,596, $202,228 and $169,116, respectively.
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 $105,000 and $130,000, at
October 31, 1996 and 1995, respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to Tandem Computers of $2.7 million in fiscal 1996 and
sales to America Online and Tandem Computers of $3.1 million and $2.8 million,
respectively, in fiscal 1995. Sales to Cisco Systems and G.E. Capital Spacenet
Services, respectively, accounted for $4.6 million and $2.5 million of sales in
fiscal 1994. International sales accounted for 26 percent and 11 percent of
total sales during fiscal 1996 and fiscal 1995, respectively.
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<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------
1996: Net sales $3,993 $2,662 $2,909 $3,785
Gross profit 1,659 852 1,055 1,505
Net loss (1,989) (3,915) (2,124) (1,612)
Net loss per share $(0.95) $(1.85) $(1.00) (0.72)
1995: 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 $(0.12) $(0.77) $(0.60) $(0.72)
The Company's fiscal 1996 fourth quarter reflects a $706,000 restructuring
charge and the Company's fiscal 1995 fourth quarter reflects a $330,000
write-off of an equity investment.
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.
13. SUBSEQUENT EVENT
On December 6, 1996 the Company sold all the assets of its manufacturing
operation to XeTel Corporation, a contract manufacturing company with
headquarters in Austin, Texas, for $1.6 million. Additionally, the Company
entered into a multi-year exclusive agreement to purchase manufacturing services
from XeTel and subleased a portion of its San Ramon facility to XeTel. The
Company expects to report a gain on the sale of these assets net of expenses in
the first quarter of 1997.
-41-
<PAGE>
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, AND 1995
<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
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1996
Allowance for Doubtful Accounts 130,000 0 (25,000) 105,000
Allowance for Obsolete Inventory 531,014 212,778 (577,646) 166,146
Allowance for Warranty Claims 104,894 50,290 (64,736) 90,447
Allowance for the deferred tax asset 948,000 3,393,000 0 4,341,000
YEAR ENDED OCTOBER 31, 1995
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
</TABLE>
(a) Deductions represent activity charged to related asset or liability account.
-42-
<PAGE>
EXHIBIT 10.1
SBE, INC.
1996 INCENTIVE STOCK OPTION PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON JANUARY 18, 1996
APPROVED BY SHAREHOLDERS ON APRIL 16, 1996
AMENDED BY THE COMPENSATION COMMITTEE ON NOVEMBER 26, 1996
INTRODUCTION
Originally adopted as the 1987 Supplemental Stock Option Plan, this plan
was amended and restated on January 18, 1996 and retitled the 1996 Incentive
Stock Option Plan (the "Plan").
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<PAGE>
PURPOSES.
The purpose of the Plan is to provide a means by which selected
Employees of the Company and its Affiliates may be given an opportunity to
purchase stock of the Company. (b)
The Company, by means of the Plan, seeks to retain the services of persons
who are now Employees of the Company, to secure and retain the services of new
Employees, and to provide incentives for such persons to exert maximum efforts
for the success of the Company. (c)
The Company intends that the Options issued under the Plan shall, in the
discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
Incentive Stock Options.
DEFINITIONS.
A. "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.
B. "BOARD" means the Board of Directors of the Company.
C. "CODE" means the Internal Revenue Code of 1986, as amended.
D. "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
E. "COMPANY" means SBE, Inc., a California corporation.
F. "CONTINUOUS STATUS AS AN EMPLOYEE" means the employment is not
interrupted or terminated by the Company or any Affiliate. The Board, in its
sole discretion, may determine whether Continuous Status as an Employee shall be
considered interrupted in the case of: (i) any leave of absence approved by the
Board, including sick leave, military leave, or any other personal leave;
PROVIDED, HOWEVER, that any such leave may not exceed ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract
(including certain
<PAGE>
Company policies) or statute; or (ii) transfers between locations of the Company
or between the Company, Affiliates or its successor.
G. "DIRECTOR" means a member of the Board.
H. "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
I. "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
J. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
K. "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
a) If the common stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market ("NASDAQ"), the Fair Market Value of a share of common stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reporting in the Wall Street Journal or such
other source as the Board deems reliable;
b) If the common stock is quoted on the Nasdaq Small Cap Market or
is regularly quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a share of common stock shall be the mean
between the high bid and high asked prices for the common stock on the last
market trading day prior to the day of determination, as reported in the Wall
Street Journal or such other source as the Board deems reliable;
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<PAGE>
c) In the absence of an established market for the common stock, the
Fair Market Value shall be determined in good faith by the Board.
L. "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
M. "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-
employee director" for purposes of Rule 16b-3.
N. "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
O. "OPTION" means a stock option granted pursuant to the Plan.
P. "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
Q. "OPTIONED STOCK" means the common stock of the Company subject to
an Option. (r) "OPTIONEE" means an Employee who holds an outstanding
Option.
R. "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury
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<PAGE>
regulations promulgated under Section 162(m) of the Code), is not a former
employee of the Company or an "affiliated corporation" receiving compensation
for prior services (other than benefits under a tax qualified pension plan), was
not an officer of the Company or an "affiliated corporation" at any time, and is
not currently receiving direct or indirect remuneration from the Company or an
"affiliated corporation" for services in any capacity other than as a Director,
or (ii) is otherwise considered an "outside director" for purposes of Section
162(m) of the Code.
S. "PLAN" means this 1996 Incentive Stock Option Plan.
T. "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
II. ADMINISTRATION.
A. The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
B. The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
1. To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how the Option shall be
granted; the provisions of each Option granted (which need not be identical),
including the time or times such Option may be exercised in whole or in part;
and the number of shares for which an Option shall be granted to each such
person.
2. To construe and interpret the Plan and Options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
-47-
<PAGE>
3. To amend the Plan as provided in Section 11.
4. Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
C. The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee shall be, in the discretion of the Board, Non-Employee
Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible persons who (1)
are not then subject to Section 16 of the Exchange Act and/or (2) are either (i)
not then subject to Section 162(m) of the Code and are not expected to be so
subject at the time of recognition of income resulting from such Option, or (ii)
not persons with respect to whom the Company wishes to comply with Section
162(m) of the Code.
III. SHARES SUBJECT TO THE PLAN.
A. Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate one million one hundred thirty thousand (1,130,000)
shares of the Company's common stock. If any
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<PAGE>
Option shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such Option shall again become
available for the Plan.
B. The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
IV. ELIGIBILITY.
A. Options may be granted only to Employees.
B. No person shall be eligible for the grant of an Option if, at the
time of grant, such person owns (or is deemed to own pursuant to Section 424(d)
of the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such stock at the date of grant and the
Option is not exercisable after the expiration of five (5) years from the date
of grant.
C. Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, no person shall be eligible to be granted options
covering more than 150,000 shares of the Company's common stock in any calendar
year.
V. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
A. TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
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<PAGE>
B. PRICE. The exercise price of each Option shall be not less than
one hundred percent (100%) of the fair market value of the stock subject to the
Option on the date the Option is granted.
C. CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (1) in cash at the time the option is exercised, or (2) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, (a) by delivery to the Company of other common stock of
the Company, (b) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
common stock of the Company) with the person to whom the Option is granted or to
whom the Option is transferred pursuant to subsection 6(d), or (C) in any other
form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
D. TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person.
E. VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. During the remainder of
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<PAGE>
the term of the Option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the Option. The provisions of this subsection
6(e) are subject to any Option provisions governing the minimum number of shares
as to which an Option may be exercised.
F. SECURITIES LAW COMPLIANCE. The Company may require any Optionee,
or any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. These requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (1) the issuance of the
shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), or (2) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws.
G. TERMINATION OF EMPLOYMENT. In the event an Optionee's Continuous
Status as an Employee terminates (other than upon the Optionee's death or
Disability), the Optionee may exercise his or her Option, but only within such
period of time as is determined by the Board, and unless otherwise expressly
determined by the Board, only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term
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<PAGE>
of such Option as set forth in the Option Agreement). With respect to Incentive
Stock Options, the Board shall determine such period of time (in no event to
exceed three (3) months from the date of termination) when the Option is
granted. If, at the date of termination of the term of the Option (as extended
by the Board, if applicable), the Optionee is not entitled to exercise his or
her entire Option, the shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after such time, the Optionee does not exercise
his or her, the Option shall terminate, and the shares covered by such Option
shall revert to the Plan.
H. DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee terminates as a result of the Optionee's Disability, the
Optionee may exercise his or her Option, but only within twelve (12) months from
the date of such termination (or such shorter period specified in the Option
Agreement), and only to the extent that the Optionee was entitled to exercise it
at the date of such termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). If, at the date
of termination, the Optionee is not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified herein, the Option shall terminate, and
the shares covered by such Option shall revert to the Plan.
I. DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (or such shorter period specified in the Option Agreement) (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
the Optionee was entitled to exercise the Option at the date of death. If, at
the time of death, the Optionee was not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the
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<PAGE>
Option shall revert to the Plan. If, after death, the Optionee's estate or a
person who acquired the right to exercise the Option by bequest or inheritance
does not exercise the Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to the Plan.
J. EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee to
exercise the Option as to any part or all of the shares subject to the Option
prior to the full vesting of the Option. Any unvested shares so purchased may
be subject to a repurchase right in favor of the Company or to any other
restriction the Board determines to be appropriate.
K. WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2)
authorizing the Company to withhold shares from the shares of the common stock
otherwise issuable to the participant as a result of the exercise of the Option;
or (3) delivering to the Company owned and unencumbered shares of the common
stock of the Company.
VI. COVENANTS OF THE COMPANY.
A. During the terms of the Options, the Company shall keep available
at all times the number of shares of stock required to satisfy such Options.
B. The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; PROVIDED, HOWEVER,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company
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<PAGE>
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.
VII. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
VIII. MISCELLANEOUS.
A. The Board shall have the power to accelerate the time at which an
Option may first be exercised or the time during which an Option or any part
thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in
the Option stating the time at which it may first be exercised or the time
during which it will vest.
B. Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
C. Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee or Optionee any right to
continue in the employ of the Company or any Affiliate or shall affect the right
of the Company or any Affiliate to terminate the employment of any Employee or
Optionee with or without cause.
D. To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by any Optionee during any
calendar year under all plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
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<PAGE>
exceed such limit (according to the order in which they were granted) shall not
be treated as Incentive Stock Options.
IX. ADJUSTMENTS UPON CHANGES IN STOCK.
A. If any change is made in the stock subject to the Plan, or
subject to any Option (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan and outstanding Options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding Options.
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<PAGE>
B. In the event of: (1) a dissolution or liquidation of the
Company; (2) a merger or consolidation in which the Company is not the surviving
corporation; or (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's common stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then to the extent
permitted by applicable law: (i) any surviving corporation shall assume any
Options outstanding under the Plan or shall substitute similar Options for those
outstanding under the Plan, or (ii) such Options shall continue in full force
and effect. In the event any surviving corporation refuses to assume or
continue such Options, or to substitute similar options for those outstanding
under the Plan, then, with respect to Options held by persons then performing
services as Employees, the time during which such Options may be exercised shall
be accelerated and the Options terminated if not exercised prior to such event.
X. AMENDMENT OF THE PLAN.
A. The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
a) Increase the number of shares reserved for options under the
Plan;
b) Modify the requirements as to eligibility for participation
in the Plan (to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code); or
c) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
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<PAGE>
B. It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Options granted under it into compliance
therewith.
C. Rights and obligations under any Option granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
XI. TERMINATION OR SUSPENSION OF THE PLAN.
A. The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on January 17, 2006. No Options may
be granted under the Plan while the Plan is suspended or after it is terminated.
B. Rights and obligations under any Option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Option was granted.
XII. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, and, if required, an appropriate
permit has been issued by the Commissioner of Corporations of the State of
California.
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Exhibit 11.1
SBE, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE YEARS ENDED OCTOBER 31
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net (loss) income ($9,624,503) ($4,567,971) $1,336,308
Average number of common shares
outstanding during the year 2,131,593 2,054,570 2,021,143
Assumed issuance of stock under the
employee and non-employee stock
option plans (a) (a) 77,932
-------------------------------------------
Weighted average common shares 2,131,593 2,054,570 2,099,075
-------------------------------------------
Primary (loss) earnings per share ($4.51) ($2.22) $0.64
-------------------------------------------
-------------------------------------------
FULLY DILUTED EARNINGS PER SHARE:
Average number of common shares
outstanding during the year 2,131,593 2,054,570 2,021,143
Assumed issuance of stock under the
employee and non-employee stock
option plans (a) (a) 86,439
-------------------------------------------
Weighted average common shares 2,131,593 2,054,570 2,107,582
-------------------------------------------
Fully diluted (loss) earnings per share ($4.51) ($2.22) $0.63
-------------------------------------------
-------------------------------------------
</TABLE>
(a) In loss years common share equivalents would have an anti dilutive effect
on (loss) per share and therefore have been excluded.
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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 16, 1996,
on our audits of the consolidated financial statements and financial statement
schedule of the Company as of October 31, 1996 and 1995 and for the years ended
October 31, 1996, 1995 and 1994, which report is included in this 1996 Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
January 28, 1997
-59-
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