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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
DATE OF REPORT: FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
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)
Commission File No. 0-8419
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of 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, 1999 as reported on the Nasdaq
National Market, was $12,504,231. 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, 1999 was 2,905,861.
DOCUMENTS INCORPORATED BY REFERENCE
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(1) Proxy statement for Annual Meeting of Stockholders scheduled for March 21,
2000 - Part III
Exhibit Index on Page 22
Total Pages 44
SBE, INC.
FORM 10-K
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TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for The Registrant's Common Equity
and Related Stockholder Matters 14
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures about Market Risk 19
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
2
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") designs, markets, sells and supports innovative
communication controller solutions for the global communications marketplace.
The Company's solutions enable both traditional carriers and new emerging
carriers to rapidly deliver advanced communications products and services in
order to compete effectively in today's fast-evolving public communications
network environment. 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 year the Company expanded its product lines to include its
Highwire (tm) family of high performance telecommunications controllers. The
Highwire family provides high bandwidth intelligent connectivity to servers
designed to act as gateways and signaling points within telecommunication
networks. The Highwire coprocessing controllers enable operators of wireline
and wireless networks to deliver Intelligent Network (IN) and Advanced
Intelligent Network (AIN) services such as Caller ID, voice messaging, personal
number calling, Service Provider Local Number Portability and customized routing
and billing, as well as digital wireless services such as Personal
Communications Systems (PCS) and Global System for Mobile Telecommunications
(GSM). The Highwire products are designed for integration with standard server
platforms that will enable traditional carriers and new telecom entrants to
pursue cost-reduced and performance-enhanced network architectures based on
Internet Protocol (IP), Asynchronous Transfer Mode (ATM) or other "packet"
technologies. The Company is focusing substantial resources on the continued
development, marketing and sales activities for the Highwire products.
The Company markets, sells and supports three lines of high-speed intelligent
communications controller products: Highwire, WanXL and VMEbus. All of these
products are 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 Highwire communications controllers leverage the Company's core
technology strength into the telecommunications applications market. The
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Company's WanXL products are designed for applications that require
high-performance and high-speed communications capability such as financial data
feed video feeds. The Company's VMEbus products are designed for high
reliability industrial applications and are used in many wireline, wireless, and
satellite based communications networks. 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. All three product lines are
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 1999, most of the
Company's sales were derived from a limited number of OEM customers. In fiscal
1999, sales to Compaq Computer accounted for 70 percent of the Company's net
sales. The Company expects that sales from Compaq Computer will also constitute
a substantial portion of the Company's net sales in fiscal 2000. 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 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. A significant reduction in
orders from any of the Company's OEM customers, particularly Compaq Computer and
Lockheed Martin, would have a material effect on the Company's operating results
and financial condition. 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 late 1998, the Company has
focused a significant portion of its research and development, marketing and
sales efforts on Highwire 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 Highwire products or other new products developed by the
Company do not gain market acceptance, the Company's business, operating results
and financial condition would 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
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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
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.
NEED TO RECRUIT AND RETAIN QUALIFIED PERSONNEL. 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, and in the San Francisco Bay Area, 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
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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, would have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURER. In December 1996, the Company sold all of
its manufacturing operations to XeTel Corporation ("XeTel"), a contract
manufacturing company headquartered in Austin, Texas. At the same time the
Company and XeTel entered into an exclusive manufacturing service agreement
under which XeTel is to manufacture all of the Company's products until at least
December 2000. The Company is dependent on XeTel's ability to manufacture the
Company's products according to specifications and in required volumes on a
timely basis. The failure of XeTel to perform its obligations under the
manufacturing service agreement could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Although the Company believes that its
future success will depend primarily on continuing innovation, sales, marketing
and technical expertise, the quality of product support and customer relations,
the Company must also protect the proprietary technology contained in its
products. The Company does not currently hold any patents and relies on a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in its products. There
can be no assurance that steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of its
technology. Although the Company believes that its products and technology do
not infringe proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against the Company.
STOCK PRICE VOLATILITY. The trading price of the Company's Common Stock is
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 perform-ance 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
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.
6
YEAR 2000 COMPLIANCE.
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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 had already modified, upgraded and
replaced systems that had been identified as potentially being adversely
affected at the end of year 1999.
The Company depends on third party suppliers for the manufacturing of its
products. The Company has been gathering information from, and is communicating
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 has developed contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 problems affecting its internal
systems. Depending on the systems affected, these plans 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.
PRODUCTS
The Company designs, markets, sells and supports innovative communications
controller solutions for the global communications marketplace. The Company
offers three principal lines of products: Highwire, WanXL and VMEbus. All three
families offer a variety of intelligent communications controllers that enable
computers to exchange data across networks.
Highwire Products. The Highwire products are focused on providing
communications solutions to the telecommunications applications market. The
telecommunications applications market is characterized as an Intelligent
Network. The Intelligent Network (IN) utilizes out of band signaling to
provide the basis for virtually all new telecommunications services. The IN
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architecture uses two separate but parallel paths; one to handle the voice or
data traffic and a second to carry the signaling information for call set up and
routing. The signaling channel utilizes a protocol called SS7 (signaling system
7). Network operators utilize the IN architecture to increase the efficiency of
their networks by offloading signaling traffic onto the SS7 network, thus
freeing up trunk line capacity needed for revenue generating traffic.
A second generation Intelligent Network called the Advanced Intelligent Network
(AIN) is used by carriers and service providers seeking to differentiate
themselves by offering advanced voice and data communications services. The AIN
is a network architecture and a set of standards designed to allow network
operators to create, deploy and modify these services quickly and economically.
AIN services represent the merging of telephony with database information
through SS7 signaling. Such services include Caller ID, voice messaging,
personal number calling, Service Provider Local Number Portability and
customized routing and billing as well as digital wireless services such as PCS
and GSM.
Network operators are increasingly using SS7 networks as a source of competitive
advantage to introduce new services through software changes in IN elements
rather than in central office switches. The Company's Highwire products are
designed to provide from 1 to 128 SS7 signaling channels per controller card and
to integrate easily with the industry's leading applications providers.
WanXL 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 Company believes the market opportunity for client/server networking
products is rapidly expanding. According to a recent industry study, the market
for WAN access equipment was $2.8 billion in 1999, with increased demand in
2000.
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.
VMEbus 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
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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 VMEbus 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.
Other Products
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Single-Board Computer Products. The Company supplies high-performance
single-board computers (SBC) for Multibus*foot1 Multibus is a Trademark of Intel
Corporation. 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 1999, 1998 and 1997.
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*Multibus is a Tradmark of Intel Corporation
9
Year Ended October 31,
1999 1998 1997
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(percentage of net sales)
VME Communication Controllers 92% 80% 72%
WanXL products 3 4 14
Single Board Computer 4 5 3
Integrated Circuits -- 6 1
Other 1 5 10
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100% 100% 100%
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DISTRIBUTION, SALES AND MARKETING
The Company primarily markets its Highwire and VMEbus 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 products from
those of its competitors.
The Company's product 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.
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RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused principally on its
strategic businesses, telecommunications applications, client/server
internetworking and VMEbus 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 CPCIbus, PCIbus, VMEbus and EISA architecture. The Company has also
redesigned and upgraded certain communications products to improve the products'
performance and lower the products' manufacturing costs. In addition, the
Company has acquired or licensed certain hardware products that have been
integrated principally through the addition of software into the Company's
product line.
During fiscal 1999, the Company focused the majority of its development efforts
on the Highwire product line, and it expects to continue Highwire development,
while also developing other new product platforms, in fiscal 2000.
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.
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COMPETITION
The market for telecommunications and 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
telecommunications market is fragmented principally by application segment. The
Company's Highwire products compete with offerings from Radisys, Performance
Technology, Artesyn, SBS Technology and Adax along with various other platform
and controller products providers. 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.
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, 1999 the Company had a backlog of orders of approximately $6.9
million for shipment within the next 12 months. On December 31, 1998 the
Company had a backlog of orders of approximately $4.4 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 3, 2000 the Company had 71 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
12
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY &
RELATED STOCKHOLDER MATTERS
Fiscal quarter ended
----------------------------------------------
1999 January 31 April 30 July 31 October 31
- -------------------------------------------------------------------------
High $ 9.00 $ 8.50 $ 6.50 $ 5.06
Low 6.63 4.19 4.63 3.50
1998
High $ 15.88 $ 8.50 $ 6.50 $ 6.63
Low 7.00 6.25 3.13 2.88
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 1999
and 1998 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. As of December 31, 1999, the Company had 676
named 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 1999 1998 1997 1996 1995
- --------------------------------- ------- ------- ------- --------- ---------
Net sales $18,022 $18,985 $24,970 $ 13,350 $ 19,368
Net income (loss) $ 52 $ 380 $ 3,333 ($9,625) ($4,568)
Net income (loss) per share $ 0.05 $ 0.13 $ 1.23 ($4.51) ($2.22)
Product research and development $ 4,634 $ 3,592 $ 2,808 $ 5,084 $ 6,900
Working capital $ 7,102 $ 7,609 $ 7,492 $ 2,049 $ 7,644
Total assets $10,480 $11,183 $11,269 $ 7,894 $ 14,978
Long-term obligations $ 503 $ 631 $ 925 $ 757 $ 1,218
Stockholders' equity $ 8,490 $ 8,534 $ 7,966 $ 3,981 $ 12,108
Shares outstanding 2,895 2,680 2,641 2,233 2,074
Number of employees 68 64 80 92 173
14
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 Highwire products are
focused on the telecommunications applications market and the significant
increases in communications activity that are driven by the convergence of
traditional telephony applications with the Internet. While the Company
believes the market for the Highwire product family 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, 1999, 1998 and 1997. These operating results are not necessarily indicative
of Company's operating results for any future period.
YEAR ENDED OCTOBER 31,
----------------------
1999 1998 1997
Net sales 100% 100% 100%
Cost of sales 37 40 49
----- ----- -----
Gross profit 63 60 51
Operating expenses:
Product research and development 26 19 11
Sales and marketing 22 23 15
General and administrative 16 17 15
----- ----- -----
Total operating expenses 63 59 41
----- ----- -----
Operating income 0 1 10
Gain on sale of assets --- --- 3
Interest and other expense, net 1 1 ---
----- ----- -----
Income before taxes 1 2 13
Income tax provision --- --- ---
----- ----- -----
Net income 1 % 2% 13%
===== ===== =====
15
NET SALES
Net sales for fiscal 1999 were $18.0 million, a five percent decrease from
fiscal 1998. Net sales for fiscal 1998 were $19.0 million, a 24 percent
decrease from fiscal 1997. The decrease from fiscal 1998 to fiscal 1999 was
primarily attributable to lower sales of VMEbus and Integrated Circuit products.
The decrease from fiscal 1997 to fiscal 1998 was primarily attributable to lower
sales of WanXL and VMEbus products and lower sales to integrators that
distribute product primarily in Asia. Sales to individual customers in excess
of 10 percent of net sales of the Company included net sales to Compaq of $12.6
million in fiscal 1999; net sales to Compaq and Motorola of $9.4 million and
$2.8 million, respectively, in fiscal 1998; and net sales to Compaq, Motorola,
and Silicon Graphics of $8.8 million, $3.8 million and $3.0 million,
respectively, in fiscal 1997. Net sales to Motorola were $500,000 in fiscal
1999. Net sales to Silicon Graphics were $200,000 and $100,000 in fiscal 1998
and 1999, respectively. The Company expects to continue to experience
fluctuation in product sales as large customers' needs change. See "Item
1-Business-Risk Factors-Dependence on a Limited Number of OEM Customers."
International sales constituted 4 percent, 5 percent and 12 percent of net sales
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The decrease in
international sales from fiscal 1997 is primarily attributable to lower demand
in Asia.
GROSS PROFIT
Gross profit as a percentage of sales was 63 percent, 60 percent and 51 percent
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The increase from
fiscal 1998 to fiscal 1999 was primarily attributable to lower material costs
and improved operational efficiencies. The increase from fiscal 1997 to fiscal
1998 was primarily attributable to discontinuance of low-margin netXpand
products and improved operational efficiencies.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $4.6 million in fiscal 1999, $3.6
million in fiscal 1998 and $2.8 million in fiscal 1997, representing 26 percent,
19 percent and 11 percent of sales, respectively. The increase in research and
development spending from fiscal 1998 to fiscal 1999 was a result of higher
spending on new telecommunications product development. 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 Company
expects that product research and development expenses will increase from fiscal
1999 levels 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 1999,
fiscal 1998 or fiscal 1997. All previously capitalized software development
costs have been fully amortized.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1999 were $3.9 million, down 8 percent
from $4.3 million in fiscal 1998. This decrease was due to lower marketing
16
program costs for advertising and tradeshows. Sales and marketing expenses for
fiscal 1997 were $3.8 million. The increase from fiscal 1997 to fiscal 1998 was
due to expanded marketing programs and the establishment of an UK branch office.
The Company expects sales and marketing expenses, as new products are announced,
will increase slightly as a percentage of total sales from fiscal 1999 levels
for the foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1999 decreased 14 percent from
$3.3 million in fiscal 1998 to $2.8 million. General and administrative
expenses for fiscal 1998 decreased 11 percent from $3.7 million in fiscal 1997.
The decrease from fiscal 1998 to fiscal 1999 was a result of lower outside costs
and continued expense control efforts. The decrease from fiscal 1997 to fiscal
1998 represents lower variable expenses for profit sharing and bonuses.
INTEREST AND OTHER INCOME, NET
Interest income increased in fiscal 1999 from fiscal 1998 due to higher cash
balances in fiscal 1999. Interest income decreased in fiscal 1998 from fiscal
1997 due to lower cash balances in fiscal 1998. Interest expense remained
constant from fiscal 1998 to fiscal 1999. Interest expense for fiscal 1998
decreased from fiscal 1997 due to the repayment of borrowings in fiscal 1997.
INCOME TAXES
The Company recorded tax provisions of $1,600 and $31,600 in fiscal 1999 and
fiscal 1998, respectively. The Company recorded a tax benefit of $82,000 in
fiscal 1997 due to the application of certain credits to prior year returns.
The Company's effective tax rate was 1 percent and 7 percent in fiscal 1999 and
1998, respectively. The Company has recorded a valuation allowance in fiscal
1999, 1998 and 1997 for certain deferred tax assets due to the uncertainty of
realization. This valuation allowance increased from approximately $3.9 million
in fiscal 1998 to $4.1 million in fiscal 1999. 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
As a result of the factors discussed above, the Company recorded net income of
$151,000, $380,000 and $3.3 million in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $3.3 million and $3.4 million on
October 31, 1999 and October 31, 1998, respectively. In fiscal 1999, $1.3
million of cash was provided by operating activities, principally as a result of
a $547,000 decrease in accounts receivable, a $237,000 decrease in inventories
and a $119,000 decrease in other assets, along with a $151,000 net income and
$780,000 of non cash depreciation and amortization charges. These increases in
cash were offset by a $440,000 decrease in trade accounts payable, a $93,000
decrease in other current liabilities, and a $46,000 decrease in non current
liabilities. Working capital at October 31, 1999 was $7.1 million, as compared
to $7.6 million at October 31, 1998.
In fiscal 1999 the Company purchased $847,000 of fixed assets, consisting
17
primarily of an enterprise resource planning system, computers, and engineering
equipment, and purchased $268,000 of capitalized software. The Company expects
capital expenditures during fiscal 2000 to approximate the same level as fiscal
1999.
The Company received $164,000 in fiscal 1999 from employee stock option
exercises and stock purchase plan purchases, a decrease of 13 percent from
fiscal 1998 amounts.
In fiscal 1999, the Company made a loan to an officer and stockholder in the
amount of $743,800 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. The loan was used to pay for the exercise of 139,400 shares of Company
stock options and related taxes.
In May 1999, the Board of Directors authorized the Company to repurchase up to
100,000 shares of the Company's issued and outstanding common stock. The
Company repurchased 74,500 shares of its common stock in the open market for an
aggregate purchase price of $358,000 in fiscal 1999. Repurchases may be made
from time to time, subject to prevailing conditions, in the open market or in
privately negotiated transactions.
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 had already modified, upgraded and
replaced systems that had been identified as potentially being adversely
affected at the end of year 1999.
The Company depends on third party suppliers for the manufacturing of its
products. The Company has been gathering information from, and is communicating
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
18
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 has developed contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 problems affecting its internal
systems. Depending on the systems affected, these plans 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash and cash equivalents are subject to interest rate risk. The
Company invests primarily on a short-term basis. The Company's financial
Instrument holdings at October 31, 1999 were analyzed to determine their
sensitivity to interest rate changes. The fair values of these instruments
were determined by net present values. In our sensitivity analysis, the same
change in interest rate was used for all maturities and all other factors were
held constant. If interest rates increased by 10%, the expected effect on
net income related to the Company's financial instruments would be immaterial.
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
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 21, 2000 (the "2000 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 2000 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. 61 President and Chief Executive Officer
Timothy J. Repp 39 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Michael R. Coker 46 Vice President, Sales
David Schaetzel 43 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.
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.
20
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 since December 1998. He joined the
Company as Vice President, Sales in March 1996. From October 1996 to December
1998, he was Vice President, Sales and Marketing. From January 1993 to 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. Schaetzel has been Vice President, Engineering since June 1999. He joined
the Company as a Hardware Engineer in August 1997 and has served in various
engineering management positions since then. From 1994 to June 1997, Mr.
Schaetzel was an executive of Woodward Governor Co., a manufacturer of engine
control systems. From 1992 to 1994, he was a consultant in microelectronics
design, development and manufacturing. Prior to 1992, he was a manager at TRW,
a manufacturer of electronic products.
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
2000 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 2000 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 2000
Proxy Statement.
21
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
--------------------
Page
----
Report of Independent Accountants 26
Consolidated Balance Sheets at October 31, 1999 and 1998 27
Consolidated Statements of Operations for fiscal years 1999, 1998
and 1997 28
Consolidated Statements of Stockholders' Equity for fiscal years 1999,
1998 and 1997 29
Consolidated Statements of Cash Flows for fiscal years 1999, 1998
and 1997 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
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------ ----------- ----------
(e) 3.1 Certificate of Incorporation, as amended through
December 15, 1997 ---
(i) 3.2 Bylaws, as amended through December 8, 1998 ---
(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 ---
(i) 10.9 Full Recourse Promissory Note executed by William B.
Heye, Jr. in favor of the Company dated November 6, 1998 ---
11.1 Statement re computation of per share earnings 43
23.1 Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants 44
27.1 Financial Data Schedule 45
(d) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the quarter
Ended October 31, 1999.
23
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 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.
(i) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by reference.
24
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 31, 2000 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 31, 2000.
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/ Randall L-W. Caudill
- ------------------------
Randall L-W. Caudill Director
/s/ Ronald J. Ritchie
- ---------------------
Ronald J. Ritchie Director
25
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1999 and 1998
and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1999, 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 state-ments, 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
November 23, 1999
San Francisco, California
26
SBE, INC.
CONSOLIDATED BALANCE SHEETS
October 31 1999 1998
- -------------------------------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,325,741 $ 3,381,021
Trade accounts receivable, net 3,290,216 3,836,916
Inventories 1,517,290 1,753,771
Deferred income taxes 158,000 239,986
Other 298,032 416,576
------------ ------------
Total current assets 8,589,279 9,628,270
Property, plant and equipment, net 1,512,518 1,330,476
Capitalized software costs, net 338,300 185,084
Other 39,450 39,450
------------ ------------
Total assets $10,479,547 $11,183,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 935,393 $ 1,374,569
Accrued payroll and employee benefits 320,353 321,049
Accrued product warranties 101,049 207,444
Other 129,775 115,935
------------ ------------
Total current liabilities 1,486,550 2,018,997
Deferred tax liabilities 158,000 239,986
Deferred rent 344,808 390,747
------------ ------------
Total liabilities 1,989,358 2,649,730
------------ ------------
Commitments and Contingencies (Note 7 and 11).
Stockholders' equity:
Common stock and additional paid-in capital
($0.001 par value); authorized
10,000,000 shares; issued and outstanding
2,894,805 and 2,680,414 shares at
October 31, 1999 and 1998, respectively 10,923,509 10,016,181
Note receivable from stockholder (743,800) ---
Treasury stock (358,312) ---
Accumulated deficit (1,331,208) (1,482,631)
------------ ------------
Total stockholders' equity 8,490,189 8,533,550
------------ ------------
Total liabilities and stockholders' equity $10,479,547 $11,183,280
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
27
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31 1999 1998 1997
- ------------------------------------ ------------ ------------ ------------
Net sales $18,021,512 $18,985,054 $24,970,427
Cost of sales 6,687,975 7,518,068 12,151,883
------------ ------------ ------------
Gross profit 11,333,537 11,466,986 12,818,544
Product research and development 4,633,502 3,591,962 2,807,872
Sales and marketing 3,949,527 4,295,030 3,833,801
General and administrative 2,820,495 3,268,098 3,686,890
------------ ------------ ------------
Total expenses 11,403,524 11,155,090 10,328,563
Operating (loss) income (69,987) 311,896 2,489,981
Gain on sale of assets --- --- 684,502
Interest income 223,363 100,405 101,546
Interest expense (352) (352) (24,858)
------------ ------------ ------------
Income before income taxes 153,023 411,949 3,251,171
Provision (benefit) for income taxes 1,600 31,600 (82,010)
------------ ------------ ------------
Net income $ 151,423 $ 380,349 $ 3,333,181
Basic earnings per common share $ 0.05 $ 0.14 $ 1.33
============ ============ ============
Diluted earnings per common share $ 0.05 $ 0.13 $ 1.23
============ ============ ============
Basic - Shares used in per share
computations 2,849,349 2,666,707 2,501,786
============ ============ ============
Diluted - Shares used in per share
computations 2,908,613 2,890,740 2,703,423
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
28
SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock and
Preferred Stock Additional Paid-in Capital Notes Receivable
Shares Amount Shares Amount from Stockholder
--------- ---------- ----------- ------------ -----------------
Balance, October 31, 1996 113 $ 750,460 2,232,881 $ 8,426,315 ---
Stock retired/issued in connection
with conversion to
common stock (113) (750,460) 240,083 750,460 ---
Stock issued in connection
with exercise of stock warrants --- --- 42,539 --- ---
Stock issued in connection
with dividend on converted
preferred shares --- --- 8,836 31,558 ---
Stock issued in connection
with stock option plans --- --- 102,588 570,988 ---
Stock issued in connection
with stock purchase plan --- --- 13,612 49,516 ---
Net income --- --- --- --- ---
--------- ---------- ----------- ------------ -----------------
Balance, October 31, 1997 --- --- 2,640,539 9,828,837 ---
Stock issued in connection
with stock option plans --- --- 20,325 100,908 ---
Stock issued in connection
with stock purchase plan --- --- 19,550 86,436 ---
Net income --- --- --- --- ---
--------- ---------- ----------- ------------ -----------------
Balance, October 31, 1998 --- --- 2,680,414 10,016,181 ---
Stock issued in connection
with stock option plans --- --- 194,750 833,446 ---
Stock issued in connection
with stock purchase plan --- --- 19,641 73,882 ---
Stock repurchase --- --- --- --- ---
Note receivable from stockholder --- --- --- --- $ (743,800)
Net income --- --- --- --- ---
--------- ---------- ----------- ------------ -----------------
Balance, October 31, 1999 --- $ --- 2,894,805 $10,923,509 $ (743,800)
========= ========== =========== ============ =================
Treasury Stock Accumulated
Shares Amount Deficit Total
-------- ---------- ------------ ------------
Balance, October 31, 1996 --- --- $(5,196,161) $ 3,980,614
Stock retired/issued in connection
with conversion to
common stock --- --- --- ---
Stock issued in connection
with exercise of stock warrants --- --- --- ---
Stock issued in connection
with dividend on converted
preferred shares --- --- --- 31,558
Stock issued in connection
with stock option plans --- --- --- 570,988
Stock issued in connection
with stock purchase plan --- --- --- 49,516
Net income --- --- 3,333,181 3,333,181
-------- ---------- ------------ ------------
Balance, October 31, 1997 --- --- (1,862,980) 7,965,857
Stock issued in connection
with stock option plans --- --- --- 100,908
Stock issued in connection
with stock purchase plan --- --- --- 86,436
Net income --- --- 380,349 380,349
-------- ---------- ------------ ------------
Balance, October 31, 1998 --- --- (1,482,631) 8,533,550
Stock issued in connection
with stock option plans --- --- --- 833,446
Stock issued in connection
With stock purchase plan --- --- --- 73,882
Stock repurchase 74,500 $(358,312) --- (358,312)
Note receivable from stockholder --- --- --- (743,800)
Net income --- --- 151,423 151,423
-------- ---------- ------------ ------------
Balance, October 31, 1999 74,500 $(358,312) $(1,331,208) $ 8,490,189
======== ========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
29
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31 1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Cash flows from operating activities:
Net income $ 151,423 $ 380,349 $3,333,181
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 779,821 1,020,708 1,083,274
Gain from sales of property and equipment --- --- (684,502)
Costs and reserves related to sale of property and equipment --- --- (442,585)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 546,700 (1,056,643) (736,314)
Decrease (increase) in inventories 236,481 (902,630) 1,890,215
Decrease (increase) in other assets 118,544 (258,956) (69,262)
(Decrease) increase in trade accounts payable (439,176) 345,459 (55,703)
(Decrease) increase in other current liabilities (93,271) (704,706) 258,099
Decrease in noncurrent liabilities (45,939) (21,134) ---
------------ ------------ -----------
Net cash provided by (used in) operating activities 1,254,583 (1,197,553) 4,576,403
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures:
Purchases of property and equipment (846,829) (970,843) (290,464)
Disposals of property and equipment --- --- 1,600,000
Proceeds from sale of fixed assets --- --- 1,709
Capitalized software costs (268,250) (206,800) ---
------------ ------------ -----------
Net cash (used in) provided by investing activities (1,115,079) (1,177,643) 1,311,245
------------ ------------ -----------
Cash flows from financing activities:
Repayments of borrowing on line of credit --- --- (980,340)
Proceeds from stock plans 163,528 187,344 620,504
Purchase of treasury stock (358,312) --- ---
------------ ------------ -----------
Net cash (used in) provided by financing activities (194,784) 187,344 (359,836)
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents (55,280) (2,187,852) 5,527,812
Cash and cash equivalents at beginning of year 3,381,021 5,568,873 41,061
------------ ------------ -----------
Cash and cash equivalents at end of year $ 3,325,741 $ 3,381,021 $5,568,873
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 352 $ 352 $ 24,858
============ ============ ===========
Income taxes $ 36,524 $ 121,197 $ 2,540
============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Conversion of preferred stock into common stock $ --- $ --- $ 750,460
============ ============ ===========
Issuance of common stock in lieu of dividend on
converted preferred stock $ --- $ --- $ 31,558
============ ============ ===========
Exercise of stock options in exchange for note receivable $ 743,800 $ --- $ ---
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
30
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 reserves 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
31
write off the costs of the assets over their estimated useful lives of three to
eight years, on a straight-line basis. Leasehold improvements are amortized
over the lesser of their useful lives or the remaining term of the related
leases.
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the recognized in operations accounts and any gain
or loss on such sale or disposal is recognized in operations accounts.
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 estimated 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, 1999, 1998 and 1997, direct costs incurred under R&D contracts
were $6,000, $1,032 and $172,895, respectively, and reimbursements earned were
$43,750, $7,250 and $338,470 , 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
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 Earnings Per Common Share:
In fiscal 1999, 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, 1999, 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, 1999, 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
59,264, 224,033, and 201,637 shares for the years ended October 31, 1999, 1998
and 1997 respectively.
Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Management does not
believe this will have a material effect on the Company's operations.
Implementation of this standard has recently been delayed by the FASB for a
12-month period. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001.
Reclassifications:
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation with no effect on net income as
previously reported.
2. INVENTORIES
Inventories at October 31, 1999 and 1998 are comprised of the following:
1999 1998
- ------------------------ ---------- ----------
Finished goods $ 773,616 $1,656,650
Parts and materials 743,674 97,121
---------- ----------
$1,517,290 $1,753,771
========== ==========
33
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1999 and 1998 are comprised of the
following:
1999 1998
- --------------------------------- ---------- ----------
Machinery and equipment $6,536,207 $5,753,540
Furniture and fixtures 1,062,264 1,015,905
Leasehold improvements 320,276 320,276
---------- ----------
7,918,748 7,089,721
Less accumulated depreciation
and amortization 6,406,230 5,759,245
---------- ----------
$1,512,518 $1,330,476
========== ==========
Depreciation and amortization expense totaled $664,787, $723,404 and $807,694
for the years ended October 31, 1999, 1998 and 1997, respectively.
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs at October 31, 1999 and 1998 are comprised of the
following:
1999 1998
- ----------------------------- ---------- ----------
Purchased software $ 584,166 $ 315,916
Internally developed software 805,333 805,333
---------- ----------
1,389,499 1,121,249
Less accumulated amortization 1,051,199 936,165
---------- ----------
$ 338,300 $ 185,084
========== ==========
The Company capitalized $268,250 and $206,800 of purchased software costs in
1999 and 1998, respectively. No software costs were capitalized in 1997.
Amortization of capitalized software costs totaled $115,034, $297,304 and
$275,580 for the years ended October 31, 1999, 1998 and 1997, respectively.
5. 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. 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. All the warrants had expired in July 1999.
34
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 this event, the Company increased the number of 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.
On November 6, 1998 the Company made a loan to an officer and stockholder in the
amount of $622,800 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. The loan was used to pay for the exercise of 139,400 shares of Company
stock options and related taxes. On April 16, 1999 the loan was increased to
$743,800.
In May 1999, the Board of Directors authorized the Company to repurchase up to
100,000 shares of the Company's issued and outstanding common stock. In fiscal
1999, the Company repurchased 74,500 shares of its common stock in the open
market for an aggregate purchase price of approximately $358,312.
6. INCOME TAXES
The components of the provision for (benefit from) income taxes for the years
Ended October 31, 1999, 1998 and 1997, are as follows:
1999 1998 1997
------ ------- ---------
Federal:
Current $ --- $18,000 $(83,610)
Deferred --- --- ---
State:
Current 1,600 13,600 1,600
Deferred --- --- ---
------ ------- ---------
Total provision (benefit) for income taxes $1,600 $31,600 $(82,010)
====== ======= =========
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1999 1998 1997
------ ------ ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit --- --- ---
Change in valuation allowance (32.9) (26.3) (30.0)
Refund of prior year taxes --- --- (5.5)
Tax credits --- --- ---
Nontaxable interest income --- --- ---
Other, net --- --- (1.0)
------ ------ ------
1.1% 7.7% (2.5)%
====== ====== ======
35
Significant components of the Company's deferred tax balances as of October 31,
1999 and 1998 are as follows:
1999 1998
------------ ------------
Deferred tax assets:
Current
Accrued employee benefits $ 59,000 $ 62,000
Inventory allowances 550,000 558,000
Allowance for doubtful accounts 60,000 80,000
Warranty accruals 40,000 83,000
Noncurrent
Deferred rent 156,000 164,000
R&D credit carryforward 1,358,000 1,115,000
Alternative minimum tax carryforward 143,000 143,000
Operating loss carryforward 1,413,000 1,252,000
Investments 130,000 130,000
Capital loss carryforward 74,000 74,000
------------ ------------
Total deferred tax assets 3,274,000 3,661,000
------------ ------------
Deferred tax liabilities:
Noncurrent
Depreciation 9,000 48,000
Capitalized software costs 149,000 192,000
------------ ------------
Total deferred tax liabilities 158,000 240,000
------------ ------------
Deferred tax asset valuation allowance (4,141,000) (3,901,000)
------------ ------------
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
valuation allowance increased by $240,000 and $524,000 for the years ended
October 31, 1999 and 1998, respectively. The Company has research and
experimentation tax credit carryforwards of $1,358,000 for federal and state tax
purposes. These carryforwards expire in the periods ending 2007 through 2014.
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $3.6 million and $3.3 million, respectively, which
expire in periods ending 2000 through 2019.
7. 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, 1999 are as
follows:
Year ending October 31:
2000 $ 424,333
2001 658,596
2002 677,717
2003 638,796
2004 638,796
Thereafter 904,961
----------
Total minimum lease payments $3,943,199
==========
36
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,
1999, 1998 and 1997 was $588,734 (net of sublease proceeds of $360,000),
$657,142 (net of sublease proceeds of $363,750) and $664,409 (net of sublease
proceeds of $328,911), respectively.
The Company is committed to purchase $2.7 million of electronics components from
a vendor before February, 2000. As of October 31, 1999, the Company had
purchased $469,000 of components from the vendor.
8. 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 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, 1999 and 1998, 286,245 and 326,470 shares, respectively, were
available for stock option grants under the 1996 Plan. A total of 64,200 and
100,300 shares were available for grant under the 1998 Plan at October 31, 1999
and 1998, respectively. A total of 65,750 and 52,000 shares were available for
grant under the Non-Employee Director Plan at October 31, 1999 and 1998,
respectively.
37
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
--------------- -------------- ------------ ---------
[S] [C] [C] [C] [C]
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
Granted 418,500 3.50 - 8.63 2,808,974 6.71
Terminated (255,925) 3.44 - 9.50 (1,386,797) 5.42
Exercised (194,750) 3.69 - 5.13 (833,446) 4.28
--------------- -------------- ------------ ---------
Outstanding at
October 31, 1999 792,825 3.50 - 13.00 5,405,272 6.82
=============== ============
Exercisable at
October 31, 1999 266,233 $3.63 - $13.00 $ 1,669,993 $ 6.27
=============== ============
38
The following table summarizes information with respect to stock options
outstanding at October 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 10/31/99 (years) Price at 10/31/999 Price
- -------------- ----------- ----------------- -------- ------------ --------
[S] [C] [C] [C] [C] [C]
$3.45 - $5.18 369,475 4.6 $4.72 171,433 $ 4.67
5.18 - 6.90 77,750 5.5 5.60 21,675 5.37
6.90 - 8.63 238,100 5.5 7.99 27,500 7.97
8.63 - 10.35 5,000 0.4 9.50 5,000 9.50
10.35 - 12.08 22,500 3.1 10.50 16,875 10.50
12.08 - 13.00 80,000 5.1 13.00 23,750 13.00
----------- --------
792,825 266,233
=========== ========
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, 1999, 68 employees were eligible to
participate in the Purchase Plan and 80,446 shares were available for issuance.
In fiscal year 1999, 1998 and 1997, 19,641, 19,550 and 13,612 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 (loss) would have been as
follows:
Years ended October 31 1999 1998 1997
------------ ---------- ----------
Pro forma net (loss) income $(1,241,358) $(983,566) $2,516,518
Pro forma net (loss) income per share $ (0.43) $ (0.37) $ 0.93
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 1999 1998 1997
------ ------ ------
Expected life (in years) 5.00 5.00 6.45
Risk-free interest rate 6.00% 4.50% 7.00%
Volatility 92.00% 91.00% 93.41%
Dividend yield 0.00% 0.00% 0.00%
The weighted average estimated fair value of each option granted during fiscal
1999, 1998 and 1997 was $4.99, $7.53 and $5.32, respectively.
39
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.
9. 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, 1999, 1998 and 1997, total expense under the
above plan was $121,530, $173,847 and $279,899, respectively.
10. 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. Two customers accounted
for 52 and 16 percent, respectively, of total accounts receivable at October 31,
1999, and one customer accounted for 80 percent of total accounts receivable at
October 31, 1998. 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 $150,000 and $200,000 at October 31, 1999 and 1998,
respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to Compaq Computer of $12.6 million in 1999; sales to
Compaq Computer and Motorola of $9.4 million and $2.8 million, respectively, in
1998 and sales to Tandem Computers, Motorola, and Silicon Graphics of $8.8
million, $3.8 million and $3.0 million, respectively, in 1997. International
sales accounted for 4 percent and 5 percent of total sales during fiscal 1999
and fiscal 1998, respectively.
40
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ------------------------------------------- ----------- --------- --------- ---------
1999: Net sales $ 6,518 $ 3,760 $ 3,533 $ 4,211
Gross profit 4,267 2,483 2,067 2,517
Net income (loss) 1,230 (172) (436) (471)
Basic earnings (loss) per share $ 0.44 $ (0.06) $ (0.15) $ (0.17)
Diluted earnings (loss) per share $ 0.41 $ (0.06) $ (0.15) $ (0.17)
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
41
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
Column A Column B Column C Column D Column E
------------ -------------- --------------- --------------- -------------
Balance at Additions Balance at
Beginning charged to costs End of
Description of Period and expenses Deductions (a) Period
- ----------------------------------- -------------- ---------------- --------------- -------------
YEAR ENDED OCTOBER 31, 1999
Allowance for Doubtful Accounts $ 200,000 --- (50,000) $ 150,000
Allowance for Obsolete Inventory 1,400,000 100,802 (119,432) 1,381,370
Allowance for Warranty Claims 207,445 (33,233) (73,164) 101,049
Allowance for the Deferred Tax asset 3,901,000 240,000 --- 4,141,000
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 251,957 47,410 (91,922) 207,445
Allowance for the Deferred Tax asset 3,377,000 524,000 --- 3,901,000
42