SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-8419
SBE, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 94-1517641
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4550 Norris Canyon Road, San Ramon, California 94583
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(Address of principal executive offices and Zip Code)
(925) 355-2000
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(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, 1998 as reported on the Nasdaq
National Market, was approximately $17,158,812. Shares of Common Stock held by
each executive officer, director and stockholder 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, 1998 was 2,837,384.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
(1) Proxy statement for Annual Meeting of Stockholders scheduled for March 23,
1999 - Part III
Exhibit Index on Page 23
Total Pages 67
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SBE, INC.
FORM 10-K
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TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for The Registrant's Common Equity
and Related Stockholder Matters 13
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners
and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 22
SIGNATURES 25
SCHEDULE 42
EXHIBITS 43
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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 "Item 1-Business-Risk Factors" and "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ITEM 1. BUSINESS
OVERVIEW
SBE, Inc. (the "Company") develops, markets, sells and supports 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 supplier of
radio communications equipment to a provider of comprehensive network
communications solutions for original equipment manufacturers and end users.
Over the last three years the Company expanded its product lines to include a
family of wide area networking communications controllers for PCI (Peripheral
Component Interface/Interconnect) based workstations and network servers called
WanXL. WanXL products are targeted to meet the growing need for high-speed
communications servers and client/server data communications products. The
market served by this new product line is significantly larger and more
competitive than the other markets in which the Company participates. See
"-Products" for product mix by percentages.
The Company markets, sells and supports a broad range of high-speed intelligent
communications controller products sold primarily to original equipment
manufacturers ("OEMs"). These products are often customized for a specific
customer's application, and they support applications in a broad spectrum of
industrial and commercial markets. Markets and application areas include
cellular network data communication, data networking, process control, medical
imaging, CAE/automated test equipment, military defense systems and
telecommunications networks.
The Company's WanXL communications controllers leverage the Company's core
technology strength into a large applications market. The Company's WanXL
products are designed for applications that require high-performance and
high-speed communications capability. All of these products are "intelligent,"
containing their own microprocessors and memory. This architecture allows these
communications controllers to offload many of the lower-level communications
tasks that would typically be performed by the host platform, improving overall
system performance. The family of WanXL products is supported by communications
software developed by both the Company and a variety of third party partners.
RISK FACTORS
DEPENDENCE ON A LIMITED NUMBER OF OEM CUSTOMERS. In fiscal 1998, most of the
Company's sales were attributable to sales of board-level products and were
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derived from a limited number of OEM customers. In the fiscal 1998, sales to
Tandem Computers ("Tandem") and Motorola, Inc. ("Motorola") accounted for 49
percent and 15 percent, respectively, of the Company's net sales. The Company
expects that sales from these two companies will also constitute a substantial
portion of the Company's net sales in fiscal 1999. Orders by the Company's OEM
customers 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, particularly Tandem and Motorola, 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 with new OEM
customers or that the Company will remain a qualified supplier with existing OEM
customers.
FUTURE SUCCESS DEPENDENT ON NEW PRODUCT LINES. Since early 1995, the Company
has focused a significant portion of its research and development, marketing and
sales efforts on WanXL products. 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 WanXL products or other 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.
HIGHLY COMPETITIVE ENVIRONMENT. The market for communications products is
highly competitive. The Company competes directly with traditional vendors of
terminal servers, modems, remote control software, terminal emulation software
and application-specific communications solutions. The Company also competes
with suppliers of routers, hubs, network interface cards and other data
communications products. In the future, the Company expects competition from
companies offering client/server 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 communications
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 communications services through their
telephone networks.
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 are likely to fluctuate
significantly in the future due to several factors, some of which are outside
the control of the Company, including timing of significant orders from OEM
customers, fluctuating market demand for, and declines in, the average selling
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prices of the Company's products, 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 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 is likely to 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, ADSL (Asymmetric
Digital Subscriber Line) 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 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
lives 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 KEY SUPPLIERS. The chipsets used in the Company's products are
currently available only from Motorola. In addition, certain other components
are currently available only from single suppliers. 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
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manufacturing service agreement could have a material adverse effect on the
Company's business, operating results and financial condition.
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.
YEAR 2000 COMPLIANCE; REPLACEMENT OF MANAGEMENT INFORMATION SYSTEMS. The
Company's current products, to the extent they have the capability to process
date-related information, were designed to be Year 2000 compliant; in other
words, the products were designed to manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results relating to such dates. There can be no assurance
that systems operated by third parties that interface with or contain the
Company's products will timely achieve Year 2000 compliance. Any failure of
these third parties' systems to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company updated its internal management information systems in fiscal 1998
to be Year 2000 compliant. The Company currently projects future non-recurring
capitalized costs of approximately $50,000 for the replacement of its various
non-critical systems, the majority of which will be capitalized in 1999. The
Company believes it has allocated adequate resources to replace such systems and
otherwise timely achieve Year 2000 compliance. However, there can be no
assurance to that effect.
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, the failure to meet analyst estimates, 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 AND DELAWARE LAW. The Company's Board of Directors has
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be materially adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
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difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Furthermore, certain provisions of the company's
Certificate of Incorporation may have the effect of delaying or preventing
changes in control or management of the Company, which could adversely affect
the market price of the Company's Common Stock. In addition, the Company is
subject to the provisions of Section 203 of the Delaware General Corporation
Law, an anti-takeover law.
PRODUCTS
The Company designs and markets data communications products designed to allow
the connection of LANs to external WANs. In 1996 the Company began shipping its
WanXL products to meet the growing demand for client/server networking products.
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 communication applications.
Client/Server WAN products. The need to collect, store, analyze and distribute
information in a secure, timely and efficient manner has become an integral part
of operating a successful organization. Developments in computer technology
have resulted in less reliance on centralized mainframes and greater reliance on
distributed computing, which has led to the computer software architecture
concept of "client/server" computing systems. Client/server computing systems
typically provide for a large number of desktop computers, or clients,
interconnected with one, or often more than one, file server. The server
provides central resources to all remote computer users and provides common
services such as printing, communications and data backup and information
gateways to other local or distant client/server systems. The fundamental
premise of this architecture relies heavily on computer networking for both LAN
interconnections for desktop-to-server communications and WAN interconnections
for server-to-server communications.
As a result of the growing installed base of client/server computing systems,
the market opportunity for client/server networking products is rapidly
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expanding. According to a recent industry study, there were approximately 91
million computers with network interface connections installed worldwide in
1995, and the number of those connections is expected to grow to over 249
million by the year 2000. This growth, combined with other market trends, is
expected to cause the computer networking equipment industry to continue to
experience substantial growth.
The Company's WanXL products are specifically targeted to meet the
interconnectivity needs of client/server systems. The Company offers a family
of products with one to four ports per controller with various physical
connection options and software features.
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.
Integrated Circuits. The Company has designed a number of proprietary
integrated circuits that are used on many SBE products. The Company has a small
group of customers that purchase some of these proprietary chips for their
applications. The Company is not actively pursuing this line of business.
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.
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.
The following table shows sales by major product type as a percentage of net
sales for fiscal 1998, 1997 and 1996.
Year Ended October 31,
1998 1997 1996
---- ---- ----
(percentage of net sales)
Communication Controllers 80% 72% 73%
WanXL products 4 14 1
Single Board Computer 5 3 4
Integrated Circuits 6 1 1
Other 5 10 21
---- ---- ----
100% 100% 100%
==== ==== ====
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*Multibus is a Trademark of Intel Corporation.
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DISTRIBUTION, SALES AND MARKETING
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 manufacturers' representatives. The Company also sells certain
products directly to end users. 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's intelligent communications controller sales are concentrated among
a small number of customers and, consequently, the timing of significant orders
from major customers has caused and is likely to continue to cause the Company's
operating results to fluctuate. See "Risk Factors-Dependence on a Limited
Number of OEM Customers."
The Company markets its WanXL client/server products through multiple indirect
distribution channels worldwide, including distributors, manufacturers'
representatives, value-added resellers and certain OEM partners. 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 WanXL product line.
The Company has focused its sales and marketing efforts principally in the
United States, Asia and Europe. 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 conducts its sales and marketing activities from its principal
offices in San Ramon, California. The Company's direct sales force is based in
four locations in the United States and one location in the United Kingdom.
RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused principally on its
strategic businesses, client/server 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 internetworking
products, high-performance communications controllers and communications-related
software is critical to attracting new and retaining existing customers.
During the past three years, the Company has developed communications products
based on PCIbus, VMEbus and EISA architecture. The Company has also redesigned
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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 1998, the Company focused the majority of its development efforts
on the WanXL product line, and it expects to continue WanXL development, while
also developing other new product platforms, in 1999.
Information relating to accounting for research and development costs is
included in Note 1 of Notes to Consolidated Financial Statements. Also see the
section labeled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANUFACTURING
The Company does not use raw materials in any of its products or production
activity. Products are constructed from components that 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 Motorola. See
"Risk Factors-Dependence on Key Suppliers." The Company believes these
components will become available from alternative suppliers over time. Although
the Company has rarely experienced any significant problems in obtaining
sole-source components, the Company has sought to establish a close relationship
with sole-source suppliers and, if necessary, build up an inventory of such
components.
In December 1996, the Company sold all of its manufacturing assets and entered
into a contract manufacturing agreement with XeTel to supply manufacturing
services. The Company believes that XeTel has been able to provide lower prices
and a more efficient and timely product delivery than the Company could produce
with its previous manufacturing resources.
COMPETITION
The market for client/server access products is highly competitive. Many of the
Company's competitors have greater financial resources and are more established
than the Company. Competition within the intelligent communications controller
market is fragmented principally by application segment. The Company's VMEbus
and WanXL communications controller products compete primarily with products
from Digi International, Motorola, Interphase Corp., CMC, a Rockwell Company,
Themis Computers, 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's 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.
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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 staffs 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 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, Channel
Partners and suppliers and limits access to the distribution of its proprietary
information.
BACKLOG
On December 31, 1998 the Company had a backlog of orders of approximately $4.4
million for shipment within the next 12 months. On January 5, 1998 the Company
had a backlog of orders of approximately $2.4 million for shipment within the
next 12 months. Because 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 4, 1999 the Company had 65 employees. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages. The Company believes its employee relations are good.
The Company believes that the Company's future success will depend, in part, on
its ability to attract and retain qualified technical (particularly
engineering), 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
The Company's engineering and administrative headquarters are located in 63,000
square feet of leased space in a building located in San Ramon, California. The
lease expires in 2006. 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 this space to XeTel for a
four-year term with an option to renew for an additional five years.
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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
(a) A special meeting of stockholders of the Company was held on Thursday,
October 22, 1998, at the Company's corporate offices located at 4550 Norris
Canyon Road, San Ramon, California.
The stockholders approved the following item:
(i) Approval of the Company's 1992 Employee Stock Purchase Plan, as amended
to increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 100,000 and extend the term of such plan. (For -
2,331,610; Against - 62,089; Abstain - 30,598)
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
MATTERS
Fiscal quarter ended
-----------------------------------------------
1998 January 31 April 30 July 31 October 31
- ----------------------------------------------------------------------------
High $ 15.88 $ 8.50 $ 6.50 $ 6.63
Low 7.00 6.25 3.13 2.88
1997
High $ 4.50 $ 6.50 $ 9.75 $ 19.50
Low 3.38 3.63 4.88 8.00
The Company's common stock is quoted on the Nasdaq National Market under the
symbol SBEI. The above table sets forth the high and low bid prices for 1998
and 1997 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's credit line
agreement currently prohibits the Company from paying cash dividends without
consent of the bank. As of December 31, 1998, the Company had approximately 700
stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except for per share
amounts and number of employees)
For years ended October 31,
and at October 31 1998 1997 1996 1995 1994
- --------------------------------- ------- ------- -------- -------- -------
Net sales $18,985 $24,970 $13,350 $19,368 $22,337
Net income (loss) 380 3,333 (9,625) (4,568) 1,336
Net income (loss) per share $ 0.13 $ 1.23 ($4.51) ($2.22) $ 0.63
Product research and development 3,592 2,808 5,084 6,900 4,769
Working capital 7,609 7,492 2,049 7,644 7,436
Total assets 11,183 11,269 7,894 14,978 17,665
Long-term obligations 631 925 757 1,218 410
Stockholders' equity 8,534 7,966 3,981 12,108 15,864
Shares outstanding 2,680 2,641 2,233 2,074 2,035
Number of employees 64 80 92 173 165
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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 "Item
1-Business" (particularly "Item 1-Business-Risk Factors").
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 causes fluctuations in the Company's
operating results. See "Item 1-Business-Risk Factors-Dependence on Limited
Number of OEM Customers." The Company is attempting to diversify its sales with
the introduction of new products that are targeted at large growing markets such
as telecommunications and client/server. The Company's WanXL products are
focused on the client/server market and the significant increases in
communications activity that are driven by applications such as email,
electronic commerce, geographically diverse corporate networks and general
computer communications. While the Company believes the market for the WanXL
products is large, there can be no assurance that the Company will be able to
succeed in penetrating this market and diversifying its sales. See "Item
1-Business-Risk Factors-Future Success Dependent on New Product Lines."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the fiscal years ended October
31, 1998, 1997 and 1996. These operating results are not necessarily indicative
of Company's operating results for any future period.
YEAR ENDED OCTOBER 31,
----------------------
1998 1997 1996
Net sales 100% 100% 100%
Cost of sales 40 49 62
----- ----- -----
Gross profit 60 51 38
Operating expenses:
Product research and development 19 11 38
Sales and marketing 23 15 34
General and administrative 17 15 24
Restructuring and other --- --- 14
----- ----- -----
Total operating expenses 59 41 110
----- ----- -----
Operating income (loss) 1 10 (72)
Gain on sale of assets --- 3 ---
Interest and other expense, net 1 --- ---
----- ----- -----
Income (loss) before taxes 2 13 (72)
Income tax provision (benefit) --- --- ---
----- ----- -----
Net income (loss) 2% 13% (72)%
===== ===== =====
14
<PAGE>
NET SALES
Net sales for fiscal 1998 were $19.0 million, a 24 percent decrease from fiscal
1997. Net sales for fiscal 1997 were $25.0 million, an 87 percent increase from
fiscal 1996. The decrease from fiscal 1997 to fiscal 1998 was primarily
attributable to lower sales to Silicon Graphics and Lockheed Martin and certain
telecommunications integrators that distribute product primarily in Asia. The
increase from fiscal 1996 to fiscal 1997 was primarily attributable to increased
sales of controller products and WanXL products. Sales to individual customers
in excess of 10 percent of net sales of the Company included net sales to Tandem
and Motorola of $9.4 million and $2.8 million, respectively, in fiscal 1998; net
sales to Tandem, Motorola, and Silicon Graphics of $8.8 million, $3.8 million,
and $3.0 million, respectively, in fiscal 1997; and net sales to Tandem of $2.7
million in fiscal 1996. Net sales to Silicon Graphics were $175,000 in fiscal
1998. Net sales to Motorola were $700,000 in fiscal 1996. There were no sales
to Silicon Graphics in fiscal 1996. The Company expects to continue to
experience fluctuation in communication controller product sales as large
customers' needs change. See "Item 1-Business-Risk Factors-Dependence on a
Limited Number of OEM Customers."
International sales constituted 5 percent, 12 percent and 26 percent of net
sales in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The decrease
in international sales from fiscal 1997 to fiscal 1998 is primarily attributable
to lower demand in Asia. The decrease from fiscal 1996 to fiscal 1997 is
primarily attributable to lower sales to certain Korean customers. Sales of
VMEbus-based communications products through the Company's Channel Partner
relationship with Hewlett Packard constituted 2 percent of net sales in fiscal
1998 and fiscal 1997 and 11 percent of net sales in fiscal 1996. No customer
within this channel represented more than 5 percent of total sales. The Company
expects that future sales through the HP channel will continue at current
levels; however, sales through this channel will be subject to significant
variability from quarter to quarter.
GROSS PROFIT
Gross profit as a percentage of sales was 60 percent, 51 percent and 38 percent
in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The increase from
fiscal 1997 to fiscal 1998 was primarily attributable to discontinuance of
low-margin netXpand(R) products and improved operational efficiencies. The
increase from fiscal 1996 to fiscal 1997 was primarily attributable to lower
component costs and favorable pricing with XeTel. 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. The Company also entered into a contract to
purchase manufacturing services from XeTel, which has decreased, and may
continue to decrease, the volatility of the quarterly cost of sales as a
percentage of sales. See "Item 1-Business-Risk Factors-Dependence on Contract
Manufacturer."
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $3.6 million in fiscal 1998, $2.8
million in fiscal 1997 and $5.1 million in fiscal 1996, representing 19 percent,
11 percent and 38 percent of sales, respectively. The increase in research and
development spending from fiscal 1997 to fiscal 1998 was due to expanded
software development programs for the WanXL product line. The decrease from
15
<PAGE>
fiscal 1996 to fiscal 1997 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 Company expects that
product research and development expenses will decrease as a percentage of sales
as the Company focuses its resources on developing new telecommunications
product offerings and enhancing its traditional board-level products. See "Item
1-Business-Risk Factors-Future Success Dependent on New Product Lines; -Rapid
Technological Change;-Ongoing Product Development Requirements."
The Company capitalized no internal software development costs in fiscal 1998,
fiscal 1997 or fiscal 1996. All previously capitalized software development
costs have been fully amortized.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1998 were $4.3 million, up 12 percent
from $3.8 million in fiscal 1997. This increase was due to expanded marketing
programs and the establishment of a UK branch office. Sales and marketing
expenses for fiscal 1996 were $4.6 million. The decrease from fiscal 1996 to
fiscal 1997 was due to lower sales and commission expenses and the completion of
one-time costs associated with product launch of the netXpand product line. The
Company expects sales and marketing expenses, as new products are announced, to
increase slightly as a percentage of total sales from fiscal 1998 levels for the
foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1998 decreased 11 percent from
$3.7 million in fiscal 1997 to $3.3 million. General and administrative
expenses for fiscal 1997 were $3.7 million, an 18 percent increase from fiscal
1996. The decrease from fiscal 1997 to fiscal 1998 represents lower variable
expenses for profit sharing and bonuses. The increase from fiscal 1996 to
fiscal 1997 represents increased variable compensation expense due to additional
executive compensation and the Company's employee profit sharing plan.
RESTRUCTURING COSTS AND OTHER
The Company incurred nonrecurring charges of $1.9 million in fiscal 1996 for
severance costs, disposition of certain assets related to a reorganization of
the Company and writedown of capitalized software costs.
GAIN ON SALE OF ASSETS
In December 1996, the Company sold all the assets of its manufacturing operation
to XeTel for $1.6 million. Additionally, the Company entered into a four-year
exclusive agreement to purchase manufacturing services from XeTel and subleased
a portion of its San Ramon facility to XeTel. The Company reported a gain of
$685,000 net of expenses on the sale of these assets in fiscal 1997.
INTEREST AND OTHER EXPENSE, NET
Interest income decreased in fiscal 1998 from fiscal 1997 due to lower cash
balances in fiscal 1998. Interest income increased in fiscal 1997 from fiscal
1996 due to higher cash balances in fiscal 1997. Interest expense for fiscal
16
<PAGE>
1998 decreased from fiscal 1997 and from fiscal 1996 due to the repayment of
borrowings in fiscal 1996 and fiscal 1997.
INCOME TAXES
The Company recorded a tax provision of $31,600 in fiscal 1998. The Company
recorded a tax benefit of $82,000 in fiscal 1997 due to carryback of certain
credits to prior year returns. 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 7 percent and (3) percent in fiscal 1998 and 1997, respectively. The
Company has recorded a valuation allowance in fiscal 1998, 1997 and 1996 for
certain deferred tax assets due to the uncertainty of realization. This
valuation allowance increased from approximately $3.4 million in fiscal 1997 to
$3.9 million in fiscal 1998. In the event of future taxable income, the
Company's effective income tax rate in future periods could be lower than the
statutory rate as such tax assets are realized.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company recorded net income of
$380,000 and $3.3 million in fiscal 1998 and fiscal 1997, respectively, and a
net loss of $9.6 million in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998 the Company had cash and cash equivalents of $3.4 million,
as compared to $5.6 million at October 31, 1997. In fiscal 1998, $1.2 million
of cash was used by operating activities, principally as a result of a $1.1
million increase in accounts receivable, a $903,000 increase in inventories, a
$705,000 decrease in current liabilities, and $553,000 used by other operating
assets and liabilities. These decreases in cash were offset by $1.0 million in
noncash depreciation and amortization charges, $380,000 in net income, and
$619,000 provided by other operating assets and liabilities. Working capital at
October 31, 1998 was $7.6 million, as compared to $7.5 million at October 31,
1997.
In fiscal 1998 the Company purchased $971,000 of fixed assets, consisting
primarily of a management information system, as well as computer and
engineering equipment, and purchased $207,000 of capitalized software. The
Company expects capital expenditures during fiscal 1999 to be less than fiscal
1998 levels.
The Company received $187,000 in fiscal 1998 from employee stock option
exercises and stock purchase plan purchases, a decrease of 70 percent from
fiscal 1997 amounts.
In August 1997, the Company entered into a revolving working capital line of
credit agreement. The agreement allows for a $2,000,000 line of credit and
expires on March 1, 1999. Borrowings under the line of credit bear interest at
the bank's prime rate plus one-half 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 a minimum
tangible net worth of $6.1 million, a quick ratio of cash, investments, and
receivables to current liabilities of not less than 1.30:1.00, and minimum
profitability levels. The line of credit agreement also prohibits the payment
of cash dividends without consent of the bank.
17
<PAGE>
As of January 4, 1999, there were no borrowings outstanding under the line of
credit.
Based on the current operating plan, the Company anticipates that its current
cash balances, cash flow from operations and credit facilities will be
sufficient to meet its working capital needs in the foreseeable future.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean the year 1900
instead. If not corrected, those programs could cause date-related transaction
failures.
The Company's current products, to the extent they have the capability to
process date-related information, were designed to be Year 2000 compliant; in
other words, the products were designed to manage and manipulate data involving
the transition of dates from 1999 to 2000 without functional or data abnormality
and without inaccurate results relating to such dates. There can be no
assurance that systems operated by third parties that interface with or contain
the Company's products will timely achieve Year 2000 compliance. Any failure of
these third parties' systems to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes it has identified substantially all of the major
information systems used in connection with its internal operations that must be
modified, upgraded or replaced to minimize the possibility of a material
disruption of its business. The Company has commenced the process of modifying,
upgrading and replacing systems that have been identified as potentially being
adversely affected and expects to complete this process before the end of its
1999 fiscal year. The Company does not expect the cost related to these efforts
to be material to its business, financial condition or operating results.
The Company depends on third party suppliers for the manufacturing of its
products. The Company has been gathering information from, and has initiated
communication with, these suppliers and, to the extent possible, has resolved
issues involving the Year 2000 problem. However, the Company has limited or no
control over the actions of its suppliers. Therefore, the Company cannot
guarantee that its manufacturing services suppliers will resolve any or all Year
2000 problems with their systems before the occurrence of a material disruption
to their businesses. Any failure of these suppliers to resolve Year 2000
problems with their systems in a timely manner could have a material adverse
effect on the Company's business, financial condition or operating results.
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 problems affecting its internal
systems. The Company expects to complete its contingency plans by the end of
its 1999 fiscal year. Depending on the systems affected, these plans could
include (a) accelerated replacement of affected equipment or software; (b)
increased work hours; and (c) other similar approaches. If the Company is
required to implement any of these contingency plans, such plans could have a
material adverse effect on its business, financial condition or operating
results.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under Item 8 are
provided under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors; Section 16(a) Beneficial Ownership Reporting
Compliance
- -------------------------------------------------------------------------
The information called for by Item 10 concerning the Company's directors is
incorporated by reference from the information in the section entitled "Election
of Directors" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on March 23, 1999 (the "1999 Proxy
Statement"). The information called for by Item 10 concerning the compliance of
certain persons with the beneficial ownership reporting requirements of Section
16(a) of the Act is incorporated by reference from the information in the
section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in the 1999 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. 60 President and Chief Executive Officer
Timothy J. Repp 38 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Michael R. Coker 45 Vice President, Sales and Marketing
Paul Garbaczeski 46 Vice President, Engineering
Mr. Heye has served as President, Chief Executive Officer, and a director of the
Company since November 1991. From 1989 to November 1991, he served as Executive
Vice President of Ampex Corporation, a manufacturer of high-performance scanning
recording systems, and President of Ampex Video Systems Corporation, a
wholly-owned subsidiary of Ampex Corporation and a manufacturer of professional
video recorders and editing systems for the television industry. From 1986 to
1989, Mr. Heye served as Executive Vice President of Airborn, Inc., a
manufacturer of components for the aerospace and military markets. Prior to
1986, Mr. Heye served in various senior management positions at Texas
Instruments, Inc. in the United States and overseas, including Vice President
and General Manager of Consumer Products and President of Texas Instruments
Asia, Ltd., with headquarters in Tokyo, Japan.
20
<PAGE>
Mr. Repp has served as Secretary of the Company since December 1996 and as Vice
President, Finance, Chief Financial Officer and Treasurer 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 & Lybrand (now
PricewaterhouseCoopers LLP), an international professional services firm.
Mr. Coker has been Vice President, Sales and Marketing since October 1996. He
joined the Company as Vice President, Sales in 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 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.
Mr. Garbaczeski joined the Company as Vice President, Engineering in June 1998.
From 1996 to 1997, he was Vice President, Engineering of GAI-Tronics Corp., a
manufacturer of communication products for heavy industrial customers. From
1994 to 1996, he was a self-employed consultant with clients in the
telecommunications and utilities industries. From 1986 to 1994, he was
President of Pentagram Software Corp., a software development and systems
integrator of data communication systems for airlines. Prior to 1986, Mr.
Garbaczeski served in various consulting and product development positions.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from the
information in the section entitled "Executive Compensation" appearing in the
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from the
information in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" appearing in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from the
information in the section entitled "Certain Transactions" appearing in the 1999
Proxy Statement.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) Financial Statements (see Item 8).
---------------------------------
Page
----
Report of Independent Accountants 26
Consolidated Balance Sheets at October 31, 1998 and 1997 27
Consolidated Statements of Operations for fiscal years 1998, 1997
and 1996 28
Consolidated Statements of Stockholders' Equity for fiscal years 1998,
1997 and 1996 29
Consolidated Statements of Cash Flows for fiscal years 1998, 1997
and 1996 30
Notes to Consolidated Financial Statements 31
(b) Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts 42
All other schedules are omitted as the required information is not applicable or
has been included in the consolidated financial statements or the notes thereto.
22
<PAGE>
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------ ----------- --------
(e) 3.1 Certificate of Incorporation, as amended through
December 15, 1997 ---
3.2 Bylaws, as amended through December 8, 1998 43
(f) 10.1 1996 Stock Option Plan, as amended ---
(a) 10.2 1991 Non-Employee Directors' Stock Option Plan, as
amended ---
(h) 10.3 1992 Employee Stock Purchase Plan, as amended ---
(g) 10.4 1998 Non-Officer Stock Option Plan ---
(b) 10.5 Lease for 4550 Norris Canyon Road, San Ramon, California
dated November 2, 1992 between the Company and
PacTel Properties ---
(c) 10.6 Amendment dated June 6, 1995 to lease for 4550 Norris
Canyon Road, San Ramon, California, between the Company
and CalProp L.P. (assignee of PacTel Properties) ---
(d) 10.7 Asset Purchase Agreement between XeTel Corporation and
the Company dated as of December 6, 1996 ---
(e) 10.8 Letter of agreement to provide credit facilities between
the Company and Comerica Bank - California, dated
August 26, 1997 ---
10.9 Full Recourse Promissory Note executed by William B.
Heye, Jr. in favor of the Company dated November 6, 1998 64
11.1 Statement re computation of per share earnings 66
23.1 Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants 67
27.1 Financial Data Schedule 68
(d) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the quarter
ended October 31, 1998.
23
<PAGE>
Explanations for letter footnotes:
- ----------------------------------
(a) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1991 and incorporated herein by reference.
(b) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1993 and incorporated herein by reference.
(c) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1995 and incorporated herein by reference.
(d) Filed as an exhibit to the current report on Form 8-K dated
December 6, 1996 and incorporated herein by reference.
(e) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1997 and incorporated herein by reference.
(f) Filed as an exhibit to Form S-8 dated September 15, 1998 and
incorporated herein by reference.
(g) Filed as an exhibit to Form S-8 dated October 16, 1998 and
incorporated herein by reference.
(h) Filed as an exhibit to Form S-8 dated November 24, 1998 and
incorporated herein by reference.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SBE, Inc.
(Registrant)
Dated: January 29, 1999 By: /s/ Timothy J. Repp
-------------------
Timothy J. Repp
Chief Financial Officer
and Vice President, 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 29, 1999.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- ------------------------
William B. Heye Jr. Chief Executive Officer and President
(Principal Executive Officer)
/s/ Timothy J. Repp
- ------------------------
Timothy J. Repp Chief Financial Officer, Vice President,
Finance, Secretary (Principal Financial and
Accounting Officer)
/s/ Raimon L. Conlisk
- ------------------------
Raimon L. Conlisk Director, Chairman of the Board
/s/ George E. Grega
- ------------------------
George E. Grega Director
/s/ Randall L-W. Caudill
- ------------------------
Randall L-W. Caudill Director
/s/ Ronald J. Ritchie
- ------------------------
Ronald J. Ritchie Director
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
November 18, 1998
To the Board of Directors and Stockholders of
SBE, Inc. and Subsidiary:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) present fairly, in all material respects, the
financial position of SBE, Inc. and subsidiary as of October 31, 1998 and 1997
and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(b) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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 schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reason-able basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
26
<PAGE>
SBE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 1998 1997
- ------------------------------------------------------------------------------------- ------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,381,021 $ 5,568,873
Trade accounts receivable, net 3,836,916 2,780,273
Inventories 1,753,771 851,141
Deferred income taxes 239,986 513,237
Other 416,576 156,370
------------ ------------
Total current assets 9,628,270 9,869,894
Property, plant and equipment, net 1,330,476 1,083,037
Capitalized software costs, net 185,084 275,588
Other 39,450 40,700
------------ ------------
Total assets $11,183,280 $11,269,219
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,374,569 $ 1,029,110
Accrued payroll and employee benefits 321,049 949,739
Accrued product warranties 207,444 251,956
Other 115,935 147,439
------------ ------------
Total current liabilities 2,018,997 2,378,244
Deferred tax liabilities 239,986 513,237
Deferred rent 390,747 411,881
------------ ------------
Total liabilities 2,649,730 3,303,362
------------ ------------
Commitments (Note 8).
Stockholders' equity:
Common stock and additional paid-in capital
($0.001 par value); authorized
10,000,000 shares; issued and outstanding
2,680,414 and 2,640,539 shares at
October 31, 1998 and 1997, respectively 10,016,181 9,828,837
Accumulated deficit (1,482,631) (1,862,980)
------------ ------------
Total stockholders' equity 8,533,550 7,965,857
------------ ------------
Total liabilities and stockholders' equity $11,183,280 $11,269,219
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended October 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $18,985,054 $24,970,427 $13,350,228
Cost of sales 7,518,068 12,151,883 8,277,879
------------ ------------ ------------
Gross profit 11,466,986 12,818,544 5,072,349
Product research and development 3,591,962 2,807,872 5,083,707
Sales and marketing 4,295,030 3,833,801 4,605,275
General and administrative 3,268,098 3,686,890 3,137,132
Restructuring costs --- --- 960,747
Write-off of prepaid offering costs --- --- 105,000
Writedown of software costs --- --- 794,018
------------ ------------ ------------
Total expenses 11,155,090 10,328,563 14,685,879
Operating income (loss) 311,896 2,489,981 (9,613,530)
Gain on sale of assets --- 684,502 ---
Interest income 100,405 101,546 34,486
Interest expense (352) (24,858) (43,859)
------------ ------------ ------------
Income (loss) before income taxes 411,949 3,251,171 (9,622,903)
Provision (benefit) for income taxes 31,600 (82,010) 1,600
Net income (loss) $ 380,349 $ 3,333,181 $(9,624,503)
============ ============ ============
Basic earnings (loss) per common share $ 0.14 $ 1.33 $ (4.51)
============ ============ ============
Diluted earnings (loss) per common share $ 0.13 $ 1.23 $ (4.51)
============ ============ ============
Basic - Shares used in per share
computations 2,666,707 2,501,786 2,131,593
============ ============ ============
Diluted - Shares used in per share
Computations 2,890,740 2,703,423 2,131,593
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock and
Preferred Stock Additional Paid-In Capital Retained
Shares Amount Shares Amount Earnings (Deficit) Total
------ ----------- --------- ----------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1995 --- --- 2,074,277 $7,679,819 $4,428,342 $12,108,161
Stock issued in connection
with preferred stock offering 167 $1,109,087 --- --- --- 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 --- 221,939
Stock issued in connection
with stock purchase plan --- --- 18,602 165,930 --- 165,930
Net loss --- --- --- --- (9,624,503) (9,624,503)
------ ----------- --------- ----------- ------------ ------------
Balances, October 31, 1996 113 750,460 2,232,881 8,426,315 (5,196,161) 3,980,614
Stock retired/issued in connection
with conversion to
common stock (113) (750,460) 240,083 750,460 --- ---
Stock issued in connection
with dividend on converted
preferred shares --- --- 8,836 31,558 --- 31,558
Stock issued in connection
with exercise of stock warrants --- --- 42,539 --- --- ---
Stock issued in connection
with stock option plans --- --- 102,588 570,988 --- 570,988
Stock issued in connection
with stock purchase plan --- --- 13,612 49,516 --- 49,516
Net income --- --- --- --- 3,333,181 3,333,181
------ ----------- --------- ----------- ------------ ------------
Balances, October 31, 1997 --- --- 2,640,539 9,828,837 (1,862,980) 7,965,857
Stock issued in connection
with stock option plans --- --- 20,325 100,908 --- 100,908
Stock issued in connection
with stock purchase plan --- --- 19,550 86,436 --- 86,436
Net income --- --- --- --- 380,349 380,349
----- ------------ --------- ----------- ------------ ------------
Balances, October 31, 1998 --- $ --- 2,680,414 $10,016,181 $(1,482,631) $ 8,533,550
===== ============ ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended October 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 380,349 $3,333,181 $(9,624,503)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 1,020,708 1,083,274 1,659,787
Gain from sale of property and equipment --- (684,502) ---
Costs and reserves related to sale of property and equipment --- (442,585) ---
Restructuring costs --- --- 329,498
Write-off of prepaid offering costs --- --- 105,000
Writedown of capitalized software --- --- 794,018
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (1,056,643) (736,314) 1,343,773
(Increase) decrease in inventories (902,630) 1,890,215 (129,943)
Decrease in deferred and recoverable income tax --- 8,990 1,827,325
(Increase) decrease in other assets (258,956) (78,252) 195,883
Increase (decrease) in trade accounts payable 345,459 (55,703) 143,925
(Decrease) increase in other current liabilities (704,706) 258,099 380,519
(Decrease) increase in noncurrent liabilities (21,134) --- 99,805
------------ ----------- ------------
Net cash (used) provided by operating activities (1,197,553) 4,576,403 (2,874,913)
------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (970,843) (290,464) (385,236)
Disposals of property and equipment --- 1,600,000 ---
Proceeds from sale of fixed assets --- 1,709 8,208
Capitalized software costs (206,800) --- (41,500)
------------ ----------- ------------
Net cash (used) provided by investing activities (1,177,643) 1,311,245 (418,528)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from borrowings on line of credit --- --- 5,528,595
Repayment of borrowings on line of credit --- (980,340) (4,548,255)
Proceeds from sale of preferred stock --- --- 1,109,087
Proceeds from stock plans 187,344 620,504 387,869
------------ ----------- ------------
Net cash provided (used) by financing activities 187,344 (359,836) 2,477,296
------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents (2,187,852) 5,527,812 (816,145)
Cash and cash equivalents at beginning of year 5,568,873 41,061 857,206
------------ ----------- ------------
Cash and cash equivalents at end of year $ 3,381,021 $5,568,873 $ 41,061
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 352 $ 24,858 $ 43,859
============ =========== ============
Income taxes $ 121,197 $ 2,540 $ 417
============ =========== ============
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Conversion of preferred stock into common stock $ --- $ 750,460 $ 358,627
============ =========== ============
Issuance of common stock in lieu of dividend on
converted preferred stock $ --- $ 31,558 $ ---
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<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.
On December 6, 1996, the Company sold all the assets of its manufacturing
operation to XeTel Corporation (XeTel), a contract manufacturing company with
headquarters in Austin, Texas, for $1.6 million. Additionally, the Company
entered into a four-year exclusive agreement to purchase manufacturing services
from XeTel and subleased a portion of its San Ramon facility to XeTel. The
Company reported a gain of $685,000 net of expenses on the sale of these assets
in fiscal 1997.
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. Such estimates include levels of reserve for doubtful
accounts, obsolete inventory, warranty costs and deferred tax assets.
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 equivalents. Substantially all of its cash and cash
equivalents are held in one large financial institution.
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 and amortization by charges to expense, which are sufficient to
write off the costs of the assets over their estimated useful lives of three to
31
<PAGE>
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.
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable. No such events have occurred to date. In performing the review
for recoverability, the Company would estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. The amount of
the impairment loss, if an impairment exists, would be calculated based on the
excess of the carrying amount of the asset over its fair value.
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 as related sales are recorded 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.
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, 1998, 1997 and 1996, direct costs incurred under R&D contracts
were $1,032, $172,895 and $42,543, respectively, and reimbursements earned were
$7,250, $338,470 and $73,852, 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
32
<PAGE>
future tax consequences of items that have been included in the consolidated
financial statements or tax returns. 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. The provision for income taxes represents
the net change in deferred tax amounts, plus income taxes payable for the
current period.
Net Income (Net Loss) Per Common Share:
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." All historical earnings per share amounts have
been restated to conform to the provisions of this statement. Basic earnings
per common share for the years ended October 31, 1998 and 1997 was computed by
dividing net income by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share for the years ended October 31,
1998 and 1997 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 and include 224,033 and 201,637 shares
for the years ended October 31, 1998 and 1997, respectively. Common stock
equivalents are excluded from the diluted loss per common share (LPS)
calculation for the year ended October 31, 1996, as they have the effect of
decreasing LPS.
Recent Accounting Pronouncements:
In 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position Number 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company implemented the
provisions of this statement in the fiscal year ended October 31, 1998.
Reclassifications:
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation with no effect on net income or
net loss as previously reported.
2. INVENTORIES
Inventories at October 31, 1998 and 1997 are comprised of the following:
1998 1997
---------- --------
Finished goods $1,656,650 $822,670
Parts and materials 97,121 28,471
---------- --------
$1,753,771 $851,141
========== ========
33
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1998 and 1997 are comprised of the
following:
1998 1997
---------- ----------
Machinery and equipment $5,753,540 $4,840,507
Furniture and fixtures 1,015,905 1,007,679
Leasehold improvements 320,276 289,572
---------- ----------
7,089,721 6,137,758
Less accumulated depreciation
and amortization 5,759,245 5,054,721
---------- ----------
$1,330,476 $1,083,037
========== ==========
Depreciation and amortization expense totaled $723,404, $807,694 and $1,307,054
for the years ended October 31, 1998, 1997 and 1996, respectively.
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs at October 31, 1998 and 1997 are comprised of the
following:
1998 1997
---------- --------
Purchased software $ 315,916 $109,116
Internally developed software 805,333 805,333
---------- --------
1,121,249 914,449
Less accumulated amortization 936,165 638,861
---------- --------
$ 185,084 $275,588
========== ========
The Company capitalized $206,800 and $41,500 of purchased software costs in 1998
and 1996, respectively. No software costs were capitalized in 1997.
Amortization of capitalized software costs totaled $297,304, $275,580 and
$352,733 for the years ended October 31, 1998, 1997 and 1996, 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.
5. BANK FACILITY
On August 26, 1997 the Company entered into a revolving working capital line of
credit agreement with a bank. The agreement, as modified, allows for a
$2,000,000 line of credit and expires on March 1, 1999. There were no
borrowings under this line as of October 31, 1998. Borrowings under the line of
credit bear interest at the bank's prime rate plus one-half percent and are
collateralized by accounts receivable and all other tangible assets. Borrowings
are limited to 75 percent of adjusted accounts receivable balances, and the
Company is required to maintain a minimum tangible net worth of $6.1 million, a
34
<PAGE>
quick ratio of cash, investments, and receivables to current liabilities of not
less than 1.30:1.00, maximum debt to equity ratio of 1.00:1.00, and minimum
profitability levels. The line of credit agreement also prohibits the payment
of cash dividends without consent of the bank.
6. STOCKHOLDERS' EQUITY
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. As of December 4, 1996 all outstanding
shares of Series A Preferred had been converted into 240,083 shares of Common
Stock.
In connection with the sale of the Series A Preferred, the Company issued
warrants to purchase an aggregate of 93,703 shares of Common Stock with an
exercise price of $8.25 per share. The warrants expire in July 1999. As of
October 31, 1997, all the warrants had been exercised on a net basis, which
resulted in the issuance of 42,539 shares of Common Stock.
Additionally, during fiscal 1997, the Company issued 8,836 shares of Common
Stock in lieu of $31,588 of dividends due on the convertible preferred stock.
On December 15, 1997, the Company reincorporated in the state of Delaware. In
connection with the event, the Company increased the number of its authorized
shares of preferred stock to 2,000,000 shares and established a par value of
$0.001 for both its common and preferred stock.
7. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
1998, 1997 and 1996, are as follows:
1998 1997 1996
------- --------- ------
Federal:
Current $18,000 $(83,610) $ ---
Deferred --- --- ---
State:
Current 13,600 1,600 1,600
Deferred --- --- ---
------- --------- ------
Total (benefit) provision for income taxes $31,600 $(82,010) $1,600
======= ========= ======
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1998 1997 1996
------ ------ -------
Statutory federal income tax rate 34.0% 34.0% (34.0)%
State taxes, net of federal income tax benefit --- --- ---
Change in valuation allowance (26.3) (30.0) 34.0
Refund of prior year taxes --- (5.5) ---
Tax credits --- --- ---
Nontaxable interest income --- --- ---
Other, net --- (1.0) ---
------ ------ ------
7.7% (2.5)% 0.0%
====== ====== ======
35
<PAGE>
Significant components of the Company's deferred tax balances as of October 31,
1998 and 1997 are as follows:
1998 1997
------------ ------------
Deferred tax assets:
Current
Accrued employee benefits $ 62,000 $ 70,000
Inventory allowances 558,000 401,000
Allowance for doubtful accounts 80,000 67,000
Warranty accruals 83,000 100,000
Noncurrent
Deferred rent 164,000 173,000
R&D credit carryforward 1,115,000 784,000
Alternative minimum tax carryforward 143,000 251,000
Operating loss carryforward 1,252,000 1,841,000
Investments 130,000 130,000
Capital loss carryforward 74,000 74,000
------------ ------------
Total deferred tax assets 3,661,000 3,891,000
------------ ------------
Deferred tax liabilities:
Noncurrent
Depreciation 48,000 (294,000)
Capitalized software costs 192,000 (220,000)
------------ ------------
Total deferred tax liabilities 240,000 (514,000)
------------ ------------
Deferred tax asset valuation allowance (3,901,000) (3,377,000)
------------ ------------
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
changes in the valuation allowance were an increase of $524,000 and a decrease
of $964,000 for the years ended October 31, 1998 and 1997, respectively. The
Company has research and experimentation tax credit carryforwards of $1,115,000
for federal and state tax purposes. These carryforwards expire in the periods
ending 2007 through 2013. The Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $3.3 million and $2.3
million, respectively, which expire in periods ending 1999 through 2013.
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, net of sublease proceeds, with initial or remaining
noncancelable lease terms in excess of one year at October 31, 1998 are as
follows:
Year ending October 31:
1999 $ 394,633
2000 418,524
2001 646,197
2002 643,115
2003 638,796
Thereafter 1,543,757
------------------------
Total minimum lease payments $ 4,285,022
========================
36
<PAGE>
Under the terms of the San Ramon, California building lease, rent includes the
lessor's operating costs and is offset by 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,
1998, 1997 and 1996 was $657,142 (net of sublease proceeds of $363,750),
$664,409 (net of sublease proceeds of $328,911) and $822,835 respectively.
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has two employee stock option plans, the 1996 Stock Option Plan (the
1996 Plan) and the 1998 Non-Officer Stock Option Plan (the 1998 Plan).
Originally adopted as the 1987 Supplemental Stock Option Plan, the 1996 Plan was
amended and restated on January 18, 1996 and retitled the 1996 Stock Option
Plan. A total of 1,330,000 shares of common stock are reserved under the 1996
Plan. The Company's Board of Directors adopted the 1998 Plan on June 15, 1998.
A total of 300,000 shares of common stock are reserved under the 1998 Plan.
Stock options granted under the 1996 and 1998 Plans are exercisable over a
maximum term of ten years from the date of grant, vest in various installments
over this period and have exercise prices reflecting market value at the date of
grant.
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 under the 1996
Plan repriced to $8.93 in exchange for restrictions of certain rights under
their option grants. In July 1998, due to the reduced market price of the
Company's common stock, the Company offered employees the opportunity to cancel
their existing options under the 1996 Plan and have the options reissued under
the 1998 Plan at a price of $5.125. The new options retain their original
vesting periods but carry restrictions of certain rights that had existed under
the original option grants.
Additionally, in 1991, stockholders approved a "Non-Employee Director Stock
Option Plan." A total of 140,000 shares of common stock are reserved for
issuance under this plan. Options granted under this 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.
At October 31, 1998 and 1997, 326,470 and 38,320 shares, respectively, were
available for stock option grants under the 1996 Plan. A total of 100,300
shares were available for grant under the 1998 Plan at October 31, 1998. A
total of 52,000 and 70,000 shares were available for grant under the
Non-Employee Director Plan at October 31, 1998 and 1997, respectively.
37
<PAGE>
A summary of the activity under the stock option plans is set forth below:
Weighted
Average
Number of Price Per Aggregate Exercise
Shares Share Price Price
--------------- -------------- ------------ ---------
Outstanding at
October 31, 1995 593,038 $4.13 - $13.00 $ 4,355,755 $ 7.34
Granted 528,998 4.38 - 10.50 3,314,709 6.27
Terminated (244,553) 5.31 - 12.00 (1,902,625) 7.78
Exercised (35,283) 4.25 - 10.25 (221,939) 6.29
--------------- -------------- ------------ ---------
Outstanding at
October 31, 1996 842,200 4.13 - 13.00 5,545,900 6.59
Granted 222,100 3.69 - 17.25 1,296,903 5.84
Terminated (245,937) 3.75 - 13.50 (1,952,804) 7.94
Exercised (102,588) 4.38 - 9.75 (571,011) 5.57
--------------- -------------- ------------ ---------
Outstanding at
October 31, 1997 715,775 3.69 - 17.25 4,318,988 6.03
Granted 453,650 3.44 - 15.50 3,436,502 7.58
Terminated (324,100) 3.69 - 17.25 (2,838,040) 8.76
Exercised (20,325) 3.69 - 8.93 (100,908) 4.96
--------------- -------------- ------------ ---------
Outstanding at
October 31, 1998 825,000 3.44 - 13.00 4,816,541 5.84
=============== ============
Exercisable at
October 31, 1998 413,125 $3.69 - $10.50 $ 2,073,718 $ 5.02
=============== ============
38
<PAGE>
The following table summarizes information with respect to stock options
outstanding at October 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 10/31/98 (years) Price at 10/31/98 Price
------------------- ------------------- ------------------ -------- ------------ --------
$ 3.44 50,000 6.6 $ 3.44 0 $ 0.00
3.45 - 5.18 553,750 3.5 4.54 346,875 4.47
5.18 - 6.90 43,750 5.4 5.46 18,750 5.30
6.90 - 8.63 65,000 3.4 7.98 28,750 8.15
8.63 - 10.35 10,000 1.4 9.50 7,500 9.50
10.35 - 12.08 22,500 4.1 10.50 11,250 10.50
12.08 - 13.00 80,000 6.1 13.00 0 0.00
------------------- ------------
825,000 413,125
=================== ============
</TABLE>
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which
200,000 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, 1998, 57 employees were eligible to
participate in the Purchase Plan and 100,087 common shares were available for
issuance. In fiscal year 1998, 1997 and 1996, 19,550, 13,612 and 18,602 shares
were issued under the Purchase Plan, respectively.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for stock options under its three plans
under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined pursuant to the provisions
of SFAS No. 123, the Company's pro forma net income would have been as follows:
<TABLE>
<CAPTION>
Years ended October 31 1998 1997 1996
---------- ---------- -------------
<S> <C> <C> <C>
Pro forma net (loss) income $(983,566) $2,516,518 $(10,343,702)
Pro forma net (loss) income per share $ (0.37) $ 0.93 $ (4.85)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Options granted in years ended October 31 1998 1997 1996
------ ------ ------
Expected life (in years) 5.00 6.45 5.21
Risk-free interest rate 4.50% 7.00% 7.00%
Volatility 91.00% 93.41% 99.84%
Dividend yield 0.00% 0.00% 0.00%
39
<PAGE>
The weighted average estimated fair value of each option granted during fiscal
1998, 1997 and 1996 was $7.53, $5.32 and $5.32, respectively.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to November 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
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, 1998, 1997 and 1996, total expense under the
above plan was $173,847, $279,899 and $185,596, 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. One customer accounted for
80 percent of total accounts receivable at October 31, 1998, and two customers
accounted for 50 percent and 10 percent of total accounts receivable at October
31, 1997. 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
$200,000 and $169,000 at October 31, 1998 and 1997, respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to Tandem Computers and Motorola of $9.4 million and $2.8
million, respectively, in 1998; sales to Tandem Computers, Motorola, and Silicon
Graphics of $8.8 million, $3.8 million and $3.0 million, respectively, in 1997;
and sales to Tandem Computers of $2.7 million in fiscal 1996. International
sales accounted for 5 percent and 12 percent of total sales during fiscal 1998
and fiscal 1997, respectively.
40
<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------- ----------- --------- -------- --------
<S> <C> <C> <C> <C>
1998: Net sales $ 4,444 $ 4,412 $ 4,041 $6,088
Gross profit 2,722 2,768 2,438 3,539
Net (loss) income (469) (241) 154 936
Basic (loss) earnings per share $ (0.18) $ (0.09) $ 0.06 $ 0.35
Diluted (loss) earnings per share $ (0.18) $ (0.09) $ 0.06 $ 0.35
1997: Net sales $ 4,217 $ 5,852 $ 7,393 $7,508
Gross profit 1,961 2,593 3,711 4,553
Net income 830 384 740 1,379
Basic earnings per share $ 0.35 $ 0.15 $ 0.29 $ 0.53
Diluted earnings per share $ 0.35 $ 0.15 $ 0.27 $ 0.46
</TABLE>
The Company's fiscal 1997 first quarter reflects a $685,000 gain on the sale of
assets.
13. SUBSEQUENT EVENT
On November 6, 1998 the Company made a loan to an officer in the amount of
$592,450 under a two-year recourse promissory note bearing an interest rate of
4.47 percent and collateralized by 145,313 shares of Common Stock of the
Company.
41
<PAGE>
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<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, 1998
Allowance for Doubtful Accounts 169,205 32,373 (1,578) 200,000
Allowance for Obsolete Inventory 1,022,463 353,461 24,076 1,400,000
Allowance for Warranty Claims 251,956 47,410 (91,922) 207,444
Allowance for the deferred tax asset 3,377,000 524,000 0 3,901,000
YEAR ENDED OCTOBER 31, 1997
Allowance for Doubtful Accounts 105,000 78,000 (13,795) 169,205
Allowance for Obsolete Inventory 166,146 1,075,014 (218,697) 1,022,463
Allowance for Warranty Claims 90,447 280,462 (118,953) 251,956
Allowance for the deferred tax asset 4,341,000 (964,000) 0 3,377,000
</TABLE>
(a) Deductions represent activity charged to related asset or liability account.
42
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
SBE, INC.
I.
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware will be in the City of Wilmington, County of New
Castle.
SECTION 2. OTHER OFFICES. The corporation will also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
II.
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal will consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
III.
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation will be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, will be held on such date and at such time as may be designated
from time to time by the Board of Directors. Nominations of persons for election
to the Board of Directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders:
(1) pursuant to the corporation's notice of meeting of stockholders; (2) by or
at the direction of the Board of Directors; or (3) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in the following paragraph, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in Section 5.
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(b) At an annual meeting of the stockholders, only such business
will be conducted as will have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (3) of Section 5(a) of these Bylaws, (1) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (2) such other business must be a proper matter for stockholder
action under the Delaware General Corporation Law, (3) if the stockholder, or
the beneficial owner on whose behalf any such proposal or nomination is made,
has provided the corporation with a Solicitation Notice (as defined in this
Section 5(b)), such stockholder or beneficial owner must, in the case of a
proposal, have delivered a proxy statement and form of proxy to holders of at
least the percentage of the corporation's voting shares required under
applicable law to carry any such proposal, or, in the case of a nomination or
nominations, have delivered a proxy statement and form of proxy to holders of a
percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (4) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice must be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty (30) days prior to,
or delayed by more than thirty (30) days after, the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be delivered
not earlier than the close of business on the one hundred twentieth (120th) day
prior to such annual meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such annual meeting or the tenth
(10th) day following the day on which public announcement of the date of such
meeting is first made. In no event will public announcement of an adjournment
of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth: (1) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (2) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (3) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (A) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, (B) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such beneficial owner, and
(C) whether either such stockholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders of, in the case of the proposal, at
least the percentage of the corporation's voting shares required under
applicable law to carry the proposal or, in the case of a nomination or
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nominations, a sufficient number of holders of the corporation's voting shares
to elect such nominee or nominees (an affirmative statement of such intent, a
"Solicitation Notice").
(c) Notwithstanding anything in the second sentence of Section
5(b) of these Bylaws to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the corporation
at least one hundred (100) days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Section 5 shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section 5, in
order to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholders' meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" will
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (1) the Chairman of the Board of
Directors, (2) the Chief Executive Officer, (3) the Board of Directors pursuant
to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (4) by the holders of shares entitled to cast not
less than a majority of the votes at the meeting, and will be held at such
place, on such date, and at such time as the Board of Directors, will fix.
(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request will be in writing,
specifying the general nature of the business proposed to be transacted, and
will be delivered personally or sent by registered mail or by telegraphic or
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other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may
be transacted at such special meeting otherwise than specified in such notice.
The Board of Directors will determine the time and place of such special
meeting, which will be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request will cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) will
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (1) by or at the
direction of the Board of Directors or (2) by any stockholder of the corporation
who is a stockholder of record at the time of giving notice provided for in
these Bylaws who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 6(c). In the event the
corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of
stockholders will be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting, such notice to specify the place, date and hour and purpose or
purposes of the meeting. Notice of the time, place and purpose of any meeting
of stockholders may be waived in writing, signed by the person entitled to
notice thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Any stockholder so waiving notice
of such meeting will be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote will
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
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shares represented thereat, but no other business will be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by statute, the Certificate of
Incorporation or these Bylaws, in all matters other than the election of
directors, the affirmative vote of the majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders. Except as otherwise provided by statute,
the Certificate of Incorporation or these Bylaws, directors will be elected by
a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where
a separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, will constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by the statute or by the Certificate of Incorporation
or these Bylaws, the affirmative vote of the majority (plurality, in the case
of the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series will be the act of such
class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting will be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, will be entitled to vote at any meeting of stockholders. Every
person entitled to vote will have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy will be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety, or otherwise, or if two (2) or more persons have the
same fiduciary relationship respecting the same shares, unless the Secretary is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting will have the following effect:
(a) if only one (1) votes, his act binds all; (b) if more than one (1) votes,
the act of the majority so voting binds all; (c) if more than one (1) votes, but
the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the Delaware General Corporation Law, Section
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217(b). If the instrument filed with the Secretary shows that any such tenancy
is held in unequal interests, a majority or even-split for the purpose of
subsection (c) will be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary will prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list will be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place will be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list will be
produced and kept at the time and place of meeting during the whole time,
thereof and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING. No action will be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action will be taken by the stockholders
by written consent.
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
will act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, will act as secretary of the meeting.
(b) The Board of Directors of the corporation will be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
will deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting will
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman will permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders will not be required to be
held in accordance with rules of parliamentary procedure.
IV.
DIRECTORS
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SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation will be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors will not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation will be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, the directors will be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors will be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the
adoption and filing of this Certificate of Incorporation, the term of office of
the Class I directors will expire and Class I directors will be elected for a
full term of three years. At the second annual meeting of stockholders
following the adoption and filing of this Certificate of Incorporation, the term
of office of the Class II directors will expire and Class II directors will be
elected for a full term of three years. At the third annual meeting of
stockholders following the adoption and filing of this Certificate of
Incorporation, the term of office of the Class III directors will expire and
Class III directors will be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors will be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting. Notwithstanding the foregoing provisions of this Article,
each director will serve until his or her successor is duly elected and
qualified or until his or her death, resignation or removal. No decrease in the
number of directors constituting the Board of Directors will shorten the term of
any incumbent director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, will
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships will be filled by stockholders, be filled only by
the affirmative vote of a majority of the directors then in office, even though
less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence will hold office for the remainder of the
full term of the director for which the vacancy was created or occurred and
until such director's successor will have been elected and qualified. A vacancy
in the Board of Directors will be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it will be deemed effective at the pleasure of the Board of Directors. When one
or more directors will resign from the Board of Directors, effective at a future
date, a majority of the directors then in office, including those who have so
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resigned, will have power to fill such vacancy or vacancies, the vote thereon to
take effect when such resignation or resignations will become effective, and
each Director so chosen will hold office for the unexpired portion of the term
of the Director whose place will be vacated and until his successor will have
been duly elected and qualified.
SECTION 20. REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock, no director will be removed without cause. Subject
to any limitations imposed by law, the Board of Directors or any individual
director may be removed from office at any time with cause by the affirmative
vote of the holders of a majority of the voting power of all the then-
outstanding shares of voting stock of the corporation, entitled to vote at an
election of directors (the "Voting Stock").
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
will be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors will be necessary and such meeting will be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) REGULAR MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may be
held at any time or date and at any place within or without the State of
Delaware that has been designated by the Board of Directors and publicized among
all directors. No formal notice will be required for regular meetings of the
Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means will constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors will be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, will be as valid as though had at a meeting duly held
after regular call and notice, if a quorum be present and if, either before or
after the meeting, each of the directors not present will sign a written waiver
of notice. All such waivers will be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum will be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors will consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business will be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors will be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained will be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors will have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee will have
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the power or authority in reference to (1) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval,
or (2) adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors will consist of one (1) or more members of
the Board of Directors and will have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event will such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
will serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
subsections (a) or (b) of this Bylaw may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The
membership of a committee member will terminate on the date of his death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) MEETINGS. Unless the Board of Directors will otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 will be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee will constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present will be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
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is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, will preside over the meeting.
The Secretary, or in his absence, an assistant secretary directed to do so by
the President, will act as secretary of the meeting.
V.
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation will
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the President, one or more Vice Presidents, the Secretary,
the Chief Financial Officer, all of whom will be elected at the annual
organizational meeting of the Board of Directors. The Board of Directors may
also appoint other officers and agents with such powers and duties as it will
deem necessary. The Board of Directors may assign such additional titles to
one or more of the officers as it will deem appropriate. The Board of
Directors may empower the chief executive officer of the corporation to appoint
such officers, other than the Chairman of the Board, President, Secretary or
Chief Financial Officer, as the business of the corporation may require. Any
one person may hold any number of offices of the corporation at any one time
unless specifically prohibited therefrom by law. The salaries and other
compensation of the officers of the corporation will be fixed by or in the
manner designated by the Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers will hold office at the pleasure of the
Board of Directors and until their successors will have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, will preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
will perform other duties commonly incident to his office and will also perform
such other duties and have such other powers as the Board of Directors will
designate from time to time. If there is no President, then the Chairman of the
Board of Directors will also serve as the general manager and chief executive
officer of the corporation and will have the powers and duties prescribed in
paragraph (c) of this Section 28.
(c) DUTIES OF PRESIDENT. The President will preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
The President will be general manager and chief executive officer of the
corporation and will, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President will have discretion to prescribe the duties of
other officers and employees of the corporation in a manner not inconsistent
with the provisions of these bylaws and the directions of the Board of
Directors. The President will perform other duties commonly incident to his
office and will also perform such other duties and have such other powers as the
Board of Directors will designate from time to time.
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(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents, in order of
their rank as fixed by the Board of Directors, or if not ranked, the Vice
President designated by the Board of Directors, may assume and perform the
duties of the President in the absence or disability of the President or
whenever the office of President is vacant. The Vice Presidents will perform
other duties commonly incident to their office and will also perform such other
duties and have such other powers as the Board of Directors or the President
will designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary will attend all meetings
of the stockholders and of the Board of Directors and will record all acts and
proceedings thereof in the minute book of the corporation. The Secretary will
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary will perform all other duties given him in
these Bylaws and other duties commonly incident to his office and will also
perform such other duties and have such other powers as the Board of Directors
will designate from time to time. If any assistant secretaries are appointed,
the President may direct the assistant secretary or one of the assistant
secretaries in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant secretary designated by the Board of
Directors, to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary will perform other
duties commonly incident to his office and will also perform such other duties
and have such other powers as the Board of Directors or the President will
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer will be responsible for all functions and duties of the treasurer of the
corporation. The Chief Financial Officer will keep or cause to be kept the
books of account of the corporation in a thorough and proper manner and will
render statements of the financial affairs of the corporation in such form and
as often as required by the Board of Directors or the President. The Chief
Financial Officer, subject to the order of the Board of Directors, will have the
custody of all funds and securities of the corporation. The Chief Financial
Officer will perform other duties commonly incident to his office and will also
perform such other duties and have such other powers as the Board of Directors
or the President will designate from time to time. If any assistant financial
officers are appointed, the President may direct the assistant financial
officer, or one of the assistant financial officers, if there are more than one,
in the order of their rank as fixed by the Board of Directors or if they are not
so ranked, the assistant financial officer designated by the Board of Directors,
to assume and perform the duties of the Chief Financial Officer in the absence
or disability of the Chief Financial Officer, and each assistant financial
officer will perform other duties commonly incident to his office and will also
perform such other duties and have such other powers as the Board of Directors
or the President will designate from time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation will be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
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therein, in which event the resignation will become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation will not be necessary to make it effective. Any resignation will
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time with cause by the affirmative vote of a majority of the directors in office
at the time, or by the unanimous written consent of the directors in office at
the time, or by any committee or superior officers upon whom such power of
removal may have been conferred by the Board of Directors.
VI.
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature will be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation will be
signed by such person or persons as the Board of Directors will authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee will have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, will be voted, and all proxies
with respect thereto will be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the President, or any Vice President.
VII.
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation will be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation will be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Chief Financial Officer or assistant financial
officer or the Secretary or assistant secretary, certifying the number of shares
owned by him in the corporation. Any or all of the signatures on the
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certificate may be facsimiles. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate will have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate will state upon the face or back thereof, in full or in summary, all
of the powers, designations, preferences, and rights, and the limitations or
restrictions of the shares authorized to be issued or will, except as otherwise
required by law, set forth on the face or back a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional, or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated stock, the
corporation will send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series will be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates will
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it will require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation will
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation will have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date will not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date will,
subject to applicable law, not be more than sixty (60) nor less than ten (10)
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days before the date of such meeting. If no record date is fixed by the Board
of Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders will be at the close of business on the
day next preceding the day on which notice is given, or if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders will apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation will be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and will not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it will have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
VIII.
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an assistant secretary, or the Chief Financial Officer or
assistant financial officer; provided, however, that where any such bond,
debenture or other corporate security will be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
will be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, will be signed by the Chief Financial
Officer or assistant financial officer of the corporation or such other person
as may be authorized by the Board of Directors, or bear imprinted thereon the
facsimile signature of such person. In case any officer who will have signed
or attested any bond, debenture or other corporate security, or whose facsimile
signature will appear thereon or on any such interest coupon, will have ceased
to be such officer before the bond, debenture or other corporate security so
signed or attested will have been delivered, such bond, debenture or other
corporate security nevertheless may be adopted by the corporation and issued
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and delivered as though the person who signed the same or whose facsimile
signature will have been used thereon had not ceased to be such officer of the
corporation.
IX.
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation and applicable law, if any, may be declared by the Board of
Directors pursuant to law at any regular or special meeting. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors will think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
X.
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation will be
fixed by resolution of the Board of Directors.
XI.
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation will
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers will have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation will not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).
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(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
will have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation will advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance will be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such executive
officer is or was a director of the corporation in which event this paragraph
will not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (2) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw will be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer will be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (1) the claim for indemnification or advances is
denied, in whole or in part, or (2) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, will be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation will be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation will be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
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prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, will be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct. In any suit
brought by a director or executive officer to enforce a right to indemnification
or to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise will be on the
corporation.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Bylaw will not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw will continue as to a person who has ceased to be a director,
officer, employee or other agent and will inure to the benefit of the heirs,
executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw will
only be prospective and will not affect the rights under this Bylaw in effect at
the time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof will be
invalidated on any ground by any court of competent jurisdiction, then the
corporation will nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that will
not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions will apply:
(i) The term "proceeding" will be broadly construed and will
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
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(ii) The term "expenses" will be broadly construed and will
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(iii) The term the "corporation" will include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, will stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(iv) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation will include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(v) References to "other enterprises" will include employee
benefit plans; references to "fines" will include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" will include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan will be deemed
to have acted in a manner "not opposed to the best interests of the corporation"
as referred to in this Bylaw.
XII.
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it will be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally will be sent to such address as such director will have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
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(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, will in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, will be deemed to have been given as at the time of mailing, and
all notices given by facsimile, telex or telegram will be deemed to have been
given as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It will not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, will not be affected or extended in any manner
by the failure of such stockholder or such director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person will
not be required and there will be no duty to apply to any governmental authority
or agency for a license or permit to give such notice to such person. Any
action or meeting which will be taken or held without notice to any such person
with whom communication is unlawful will have the same force and effect as if
such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate will state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person will not be
required. Any action or meeting which will be taken or held without notice to
such person will have the same force and effect as if such notice had been duly
given. If any such person will deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person will be reinstated. In the event that the action taken by the
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corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
XIII.
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors will also
have the power to adopt, amend, or repeal Bylaws.
XIV.
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee
who is a Director of the corporation or its subsidiaries, whenever, in the
judgment of the Board of Directors, such loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The loan, guarantee or
other assistance may be with or without interest and may be unsecured, or
secured in such manner as the Board of Directors will approve, including,
without limitation, a pledge of shares of stock of the corporation. Nothing in
these Bylaws will be deemed to deny, limit or restrict the powers of guaranty
or warranty of the corporation at common law or under any statute.
63
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EXHIBIT 10.9
FULL RECOURSE
PROMISSORY NOTE
$622,800 NOVEMBER 6, 1998
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay
to the order of SBE, INC., a Delaware corporation (the "Company"), at San Ramon,
California, or at such other place as the holder hereof may designate in
writing, in lawful money of the United States of America and in immediately
available funds, the principal sum of six hundred twenty two thousand eight
hundred Dollars ($622,800) together with interest accrued from the date hereof
on the unpaid principal at the rate of 4.47% per annum (which shall be not less
than the Applicable Federal Rate of interest in effect on the date hereof), or
the maximum rate permissible by law (which under the laws of the State of
California shall be deemed to be the laws relating to permissible rates of
interest on commercial loans), whichever is less, as follows:
PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be
due and payable in full on the second anniversary of the date of this Note;
and
INTEREST PAYMENTS. Interest shall be payable annually in arrears and
shall be calculated on the basis of a 360-day year for the actual number of
days elapsed;
provided, however, that in the event that the undersigned's employment by or
association with the Company is terminated for any reason prior to payment in
full of this Note, this Note shall be accelerated and all remaining unpaid
principal and interest shall become due and payable immediately after such
termination.
If the undersigned fails to pay any of the principal and accrued interest
when due, the Company, at its sole option, shall have the right to accelerate
this Note, in which event the entire principal balance and all accrued interest
shall become immediately due and payable, and immediately collectible by the
Company pursuant to applicable law.
This Note may be prepaid at any time without penalty. All money paid
toward the satisfaction of this Note shall be applied first to the payment of
interest as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Common
Stock of the Company, and is subject to all of the terms and provisions of the
Supplemental Stock Option dated November 19, 1991, as amended to date, and the
Pledge Agreement of even date herewith, each between the undersigned and the
Company.
The undersigned hereby represents and agrees that the amounts due under
This Note are not consumer debt, and are not incurred primarily for personal,
Family or household purposes, but are for business and commercial purposes only.
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The undersigned hereby waives presentment, protest and notice of protest,
Demand for payment, notice of dishonor and all other notices or demands in
Connection with the delivery, acceptance, performance, default or endorsement
of this Note.
The holder hereof shall be entitled to recover, and the undersigned
agrees to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorneys' fees.
This Note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of California, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction.
Signed _________________________________
WILLIAM B. HEYE, JR.
65
<PAGE>
EXHIBIT 11.1
SBE, Inc.
Computation of earnings per share
for the three years ended October 31
<TABLE>
<CAPTION>
Years ended October 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Net income (loss) $380,349 $3,333,181 ($9,624,503)
Weighted average number of common
shares outstanding during the year 2,666,707 2,501,786 2,131,593
------------ ------------ -------------
Number of shares for computation of
net income (loss) per share 2,666,707 2,501,786 2,131,593
============ ============ ============
Basic earnings (loss) per share $0.14 $1.33 ($4.51)
============ ============ ============
Diluted earnings per share:
Weighted average number of common
shares outstanding during the year 2,666,707 2,501,786 2,131,593
Assumed issuance of stock under the
employee and non-employee stock
option plans 224,033 201,637 (a)
------------ ------------ ------------
Number of shares for computation of
net income (loss) per share 2,890,740 2,703,423 2,131,593
============ ============ ============
Diluted earnings (loss) per share $0.13 $1.23 ($4.51)
============ ============ ============
</TABLE>
(a) In loss years common share equivalents would have an anti dilutive effect
on (loss) per share and therefore have been excluded.
66
<PAGE>
EXHIBIT 23.1
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 November 18, 1998
on our audits of the consolidated financial statements and financial statement
schedule of the Company as of October 31, 1998 and 1997 and for the years ended
October 31, 1998, 1997 and 1996, which report is included in this 1998 Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 28, 1998
67
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 3381
<SECURITIES> 0
<RECEIVABLES> 3837
<ALLOWANCES> 0
<INVENTORY> 1754
<CURRENT-ASSETS> 9628
<PP&E> 1330
<DEPRECIATION> 0
<TOTAL-ASSETS> 11183
<CURRENT-LIABILITIES> 2019
<BONDS> 0
0
0
<COMMON> 10016
<OTHER-SE> (1483)
<TOTAL-LIABILITY-AND-EQUITY> 11183
<SALES> 18985
<TOTAL-REVENUES> 18985
<CGS> 7518
<TOTAL-COSTS> 7518
<OTHER-EXPENSES> 11155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 412
<INCOME-TAX> 32
<INCOME-CONTINUING> 380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
