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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
Commission File No. 0-8419
SBE, INC.
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(Exact name of Registrant as specified in its charter)
California 94-1517641
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4550 Norris Canyon Road, San Ramon, California 94583
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(Address of principal executive offices and Zip Code)
(510) 355-2000
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(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Common Stock of the
Registrant held by non-affiliates of the Registrant, based on the closing price
for the Registrant's Common Stock on December 29, 1995 as reported on the Nasdaq
National Market, was approximately $17,830,100. Shares of Common Stock held by
each executive officer, director and shareholder whose ownership exceeds five
percent of Common Stock outstanding have been excluded in that such persons may
be deemed to be affiliates of the Registrant. This determination of affiliate
status for purposes of the foregoing calculation is not necessarily a conclusive
determination of affiliate status for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
December 29, 1995, was 2,087,576.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
(1) Proxy statement for Annual Meeting of Shareholders scheduled for April 16,
1996 -- Part III
Exhibit Index on page 23
Total Pages 63
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SBE, INC.
FORM 10-K
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TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for The Registrant's Common Equity
and Related Shareholder Matters 12
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10 Directors and Executive Officers of the Registrant 19
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners
and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement
Schedule, and Reports on Form 8-K. 22
SIGNATURES 25
SCHEDULE 42
EXHIBITS 43
-2-
PART I
ITEM 1. BUSINESS
SBE, Inc. develops, markets, sells and supports remote access internetworking
products and high speed intelligent computer communications controllers that
enable users to exchange data between computer systems. The Company's products
are distributed worldwide through a direct sales force, distributors,
independent manufacturers' representatives, and value-added resellers.
Founded in 1961 as Linear Systems, Inc., the Company evolved from a high-quality
supplier of radio communications equipment to a provider of comprehensive
network communications solutions for original equipment manufacturers and end
users. In September 1995, the Company began shipping a suite of new products
known as netXpand to meet the growing need for remote access data communications
products.
The Company markets, sells and supports a broad range of high-speed intelligent
communications controller products sold primarily to original equipment
manufacturers. These products support applications in a broad spectrum of
industrial and commercial markets. Markets and application areas include data
networking, process control, medical imaging, CAE/automated test equipment,
military defense systems and telecommunications networks.
The initial products for the Company's new suite of netXpand remote access
products are netXpand SoHo and Central; both of these products allow a remote PC
or network to access an existing network as a fully functional network node,
thereby enabling users to access network resources from their remote locations
as if they were directly connected to the enterprise network. These products
include server hardware and software, client software and network management
software. SBE's remote access products allow for single user dial-in to local
area networks (LANs) over analog or digital phone lines, individual dial-out
from LANs to other locations and routed or bridged LAN to LAN dial-up or direct
connections. These products support all major desktop computing platforms,
including IBM-compatible PCs and UNIX workstations.
INDUSTRY BACKGROUND:
Significant changes in computer-based information systems have occurred over the
last decade. Historically, information stored in computer databases could only
be accessed by terminals or personal computers emulating terminals directly
connected to a central or host computer. Remote users wishing to access
information over the public switched telephone network used a modem to dial from
their terminal or computer into another modem which was usually connected
directly to the central or host computer.
Beginning in the late 1980s the following factors changed the nature of, and
increased the demand for, remote network access.
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GROWTH OF THE INTERNET AND ON-LINE SERVICES. The number of users of the
Internet and on-line services such as America Online, CompuServe and Prodigy has
grown rapidly in recent years. It is estimated that the number of users linked
to the Internet has grown from less than 2 million in 1992 to approximately 30
million today. This growth is due to increased use of electronic mail and the
proliferation of databases and other information platforms such as the World
Wide Web.
DEVELOPMENT OF DISTRIBUTED, CLIENT /SERVER COMPUTING. With the development
of LANs it became possible for information to be stored on a number of computers
which were connected to each other and located within a building or campus.
Simultaneously, the advent of new communications products such as hubs, bridges,
and routers allowed multiple LANs to be integrated into distributed, enterprise-
wide computer networks. To take advantage of these distributed computer
networks, products utilizing client/server architecture, including relational
databases, e-mail and file and printer sharing were introduced to collect,
retrieve and distribute information. Distributed computing and client/server-
based software are now being used on a corporate enterprise-wide and
departmental basis to run critical processes and to provide the primary means
for corporate communications.
GROWTH IN MOBILE, REMOTE AND HOME OFFICES. Corporations, government
agencies, universities and other organizations are increasingly looking to
control costs while providing their employees with access to essential
information and resources to perform their jobs efficiently and effectively from
any location. The proliferation of notebooks and home computers is allowing a
newly created remote workforce to work from home or on the road. To remain
productive, these users must be able to access their cooperative distributed
networks from remote locations.
TECHNOLOGICAL ADVANCES. Advances in modem technology such as the V.34
communications standard and switched digital service technology, such as ISDN
and Frame Relay are helping to increase the speed of network communication,
which is a key user requirement for remote network access.
The above factors have created an enormous growth in the number of remote users
seeking to access information on the corporate network or to connect to the
Internet and on-line services through network access providers. As a result,
the need for hardware and software products to support, expand and enhance
remote network access has created a number of rapidly growing markets.
Early remote connectivity solutions have typically followed three principal
computing oriented approaches: host-oriented terminal emulation; PC remote
control software, and application-specific solutions.
Terminal emulation products allow remote workstations to simulate a local "dumb"
terminal session with a mainframe. These products are better suited to a
character-based centralized system and not the graphical client server systems
that are predominant today.
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Remote control software products allow a dial-in user to take control of a PC on
the network and remotely view the networked PC's screen. Like terminal
emulation, remote control software works best with character-based computing.
In addition, remote control solutions present both network security and
management problems as the controlled PC typically has complete access to all
the resources of the network and the network manager is typically unable to
identify an unauthorized remote user.
Application-specific solutions overcome the limitations of terminal emulation by
enabling users to access a single network application as a specialized remote
client. Examples of this type of solution would include electronic mail
programs that offer remote versions. However these application-specific
products provide an incomplete remote access solution for users who require
access to other resources or applications on the enterprise network.
Today's solutions use a communications-oriented approach where the network is
extended to users through the combination of hardware and software that lets
users expand their network using analog, digital or leased circuits. These
solutions have typically used expensive router products to connect branch
offices to networks using leased lines. But more recently introduced products
allow users to establish lower-cost dial-up connections that provide
multiprotocol, multiplatform routing and routing-related communications
technologies and hardware that address performance and security requirements of
remote network access. However, these products are typically designed to
principally provide routing or remote access functions.
PRODUCTS
The Company manufactures data communications products designed to allow the
connection of LANs to external Wide Area Networks (WANs). The Company began
shipping a suite of new products known as netXpand to meet the growing demand
for remote access data communications products in September 1995.
REMOTE ACCESS PRODUCTS. The initial products for the Company's family of
netXpand remote access products are netXpand SoHo and Central. SoHo (Small
office, Home office) is a remote access product which can serve either as an
access server or a branch office router. Central is a larger version of SoHo
with more WAN interfaces. The products have been designed to provide cost-
effective internetworking capabilities to the broadest range of end-users, the
users of UNIX and Novell networking products. Both products allow users to
access remote networks resources as full network clients or as nodes.
Applications appear the same to users as they do when directly connected to the
enterprise network, except that the speed of computing through the remote access
connection may be reduced as a result of the speed limitations of telephone
connections.
The Company's remote access products support up to 10 wide area network
interfaces at speeds up to T1/E1(1.5mbs). The products feature full routing for
Novell IPX and TCP/IP (Transmission Control Protocol, Internet Protocol); other
protocols are transparently bridged with filtering. The products use Windows-
based configuration tools, are SNMP manageable, and support PAP, CHAP and direct
callback security. The
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remote access products list from $899 to $2,499 with various software
configurations available.
INTELLIGENT CONTROLLER PRODUCTS. Intelligent controller products are used to
provide connectivity between a system, such as a mini-computer or bridge/router,
and a local or wide area network. Communication controller products enable
computers to exchange data in much the same way as the telephone system allows
people to converse with one another. As computers become more pervasive in all
areas of society, computer users are demanding greater productivity, efficiency,
and lower costs in their computer systems, which has led to the sharing of
databases, software applications, and computer peripheral equipment.
Communications controllers have become a central component to connecting
networks and computers to deliver information more efficiently.
The Company's communications products target all four major protocol
communications technologies for each of the bus architectures: Fiber Distributed
Data Interface (FDDI), Token Ring, Ethernet and high speed serial
communications. The latter is a growing wide-area networking technology that
enables computers to talk to one another using telephone lines. FDDI, Token
Ring and Ethernet are local area networking technologies that offer a wide range
of speed and reliability options.
The Company's strategy for its intelligent controller products is to expand its
offerings to more segments of the market by adding software interfaces, improved
performance and new technologies that will provide lower-cost solutions for high
speed, high volume communications.
SINGLE-BOARD COMPUTER PRODUCTS. The Company supplies high performance single-
board computers (SBC) for Multibus* and VMEbus architectures. An SBC manages
and processes the data that passes between the boards within a computer system.
The Company's SBC products provide a high-speed interface for linking to
peripherals and intelligent I/O controllers that accommodate plug-on modules for
many industrial applications.
CUSTOM PRODUCTS. The Company has developed several products specifically for
single customer applications. These products typically have proprietary
functions that meet specific application needs of the customer. Recently the
Company has not sought new custom relationships unless the products have
significant sales potential.
INTEGRATED CIRCUITS. The Company has designed a number of proprietary
integrated circuits that are used on many SBE products. The Company has a small
group of customers that purchase some of these proprietary chips for their
applications. This line of business is not being actively pursued by the
Company.
SOFTWARE PRODUCTS. The Company supplies software products that operate various
communications protocols for certain communications controller products
including X.25 for serial communications, SMT (Station Management) for FDDI, and
TCP/IP for Ethernet applications. Real-time operating systems for Motorola's
68000 family are also
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*Multibus is a Trademark of Intel Corporation
-6-
supported. The Company's software products are principally bundled with the
hardware platform based upon the customer's application requirement.
The following table shows sales by major product type as a percentage of total
sales for fiscal 1995, 1994, and 1993.
Year Ended October 31,
(percent of annual sales)
1995 1994 1993
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Communication Controllers 72% 62% 59%
Single Board Computer 9 9 14
netXpand Remote Access 3 -- --
Integrated Circuits 3 10 2
Custom 1 11 15
Other 12 8 10
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100% 100% 100%
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DISTRIBUTION, SALES AND MARKETING
The Company markets its netXpand remote access products through multiple
indirect distribution channels worldwide, including distributors, manufacturers'
representatives, value-added resellers, and certain OEM partners. The Company
had relationships with over 40 distributors and value-added resellers as of
October 31, 1995. Approximately half of the Company's distributors and
resellers operate outside the United States.
The Company actively supports its indirect channel marketing partners with its
own sales and marketing organization. SBE's sales staff solicits prospective
customers, provides technical advice with respect to SBE products and works
closely with marketing partners to train and educate their staffs on how to
sell, install and support the netXpand product line.
The Company has focused its sales and marketing efforts principally in the
United States and Asia, including Japan. International sales for the netXpand
product line represented 92 percent of total netXpand sales in fiscal 1995. The
Company expects that, in the future, domestic sales will represent a greater
percentage of total netXpand sales. All of the Company's international sales
are negotiated in U.S. dollars.
The Company provides most of its distributors and resellers with product return
rights for stock balancing or product evaluation. Stock balancing permits
distributors to return products for credit, within specified limits and subject
to purchasing additional products. The Company believes that it has adequate
reserves to cover product returns although there can be no assurance that the
Company will not experience significant returns in the future.
The Company primarily markets its computer controller products to OEMs and
systems integrators. The Company sells its products both domestically and
internationally using a direct sales force as well as through independent
manufactures' representatives. The
-7-
Company also sells certain products directly to end-users. During 1993 the
Company established a channel partnership arrangement with Hewlett Packard (HP).
This arrangement provides the Company's direct sales force access to HP
customers that require VME and EISA communications controllers. The Company
believes that it has successfully positioned itself as a leading supplier of VME
high speed serial and EISA communications controllers to HP workstations. The
Company believes that a direct sales force is well suited to differentiate the
Company's communications controller products from those of its competitors.
The Company conducts its sales and marketing activities from its principal
offices in San Ramon, California. The Company's direct sales force is based in
five locations in the United States and one location in Germany. The Company's
sales offices are located in Greensboro, North Carolina; Damon, Texas; Malden,
Massachusetts; Mountain View, California; Lake Oswego, Oregon; and Munich,
Germany.
The Company's computer controller sales are concentrated among a small number of
customers and consequently, the timing of significant orders from major
customers cause the Company's operating results to fluctuate.
RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused principally on its
strategic businesses, remote internetworking and intelligent communications
controllers. The Company's experience in high-speed data communication creates
opportunities to leverage its engineering investments and develop more
integrated products for simpler, more innovative communications solutions for
customers. The development of new remote internetworking products, high
performance communications controllers, and communications-related software is
critical to attracting new and retaining existing customers
During the past year, the Company has developed communication products based on
PCIbus, VMEbus and EISA architecture. The Company has also redesigned and
upgraded certain communications products to improve the products' performance
and lower the products' manufacturing costs. The Company also acquired or
licensed certain hardware products that have been integrated principally through
the addition of software into the Company's product line.
During fiscal 1995 the Company focused the majority of its development efforts
on the netXpand remote access product line, and it expects to continue this
focus in 1996. These products leverage existing product designs and incorporate
routing software.
The Company has purchased extensive design and testing tools (CAD/CAE) that will
simulate new product designs prior to building prototype boards. These tools
have decreased the time required to develop new designs, thereby allowing the
Company to take advantage of new market demands and meet its customers' product
development schedules. The Company expects to continue to invest in product
design tools to enhance its product development activities.
-8-
Information relating to accounting for research and development costs is
included in Note 1 of the Notes to the Consolidated Financial Statements on Page
32 of this document. Also see the section labeled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing on Pages 13
through 17 of this document.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company does not use raw materials in any of its products or production
activity. Products are constructed from components which are generally
available as needed from a variety of suppliers. The Company believes that it
currently possesses adequate supply channels. An interruption in its existing
supplier relationships or delays by some suppliers could result in production
delays and may have a material adverse effect on the Company's operations.
Certain parts used in the Company's products are purchased from a single
supplier. New state-of-the-art high technology parts are normally available
only from a single supplier when first introduced into the market. These
components generally become available from alternative suppliers over time.
Although the Company has rarely experienced any significant problems in
obtaining sole-source components, the Company has sought to establish a close
relationship with sole-source suppliers and if necessary build up an inventory
of such components.
COMPETITION
The market for remote access products is highly competitive. The Company
competes directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific remote
access solutions, such as Shiva, Ascend Communications, Xylogics, Inc.,
Livingston Enterprises, Inc., Telebit Corporation, and Microcom, Inc.. The
Company also competes with suppliers of routers, hubs, and other data
communications products, such as Cisco and 3Com. In addition the Company may
encounter increased competition from operating system and network operating
system vendors, such as Microsoft and Novell, to the extent that such vendors
include full remote access or routing capabilities in their products. The
Company believes that it can compete successfully in the remote access market by
(1) focusing on the low end of the remote LAN access and internetworking
markets; (2) providing low-cost, fully functional remote access product
solutions; (3) expanding significantly into the Asia-Pacific region; (4)
providing easy-to-use software and hardware; and (v) providing accessible and
local support.
By focusing on the above factors the company believes that it can compete within
the remote access market.
Competition within the intelligent communications controller market is
fragmented principally by application segment. The Company's VMEbus
communications controllers compete primarily with products from Motorola,
Interphase Corp., CMC, a Rockwell Company, Themis Computers, Network
Peripherals, Performance Technologies, and various other companies on a product-
by-product basis. To compete
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in this market the Company emphasizes the functionality, support, quality and
price of its product in relation to its competitors as well as the Company's
ability to customize the product or software to exactly meet the customer needs.
Competition within the EISAbus communications controller market is also
fragmented among various companies providing different applications. The
Company's EISAbus-based products are targeted to potential customers using
Hewlett Packard (HP) 9000 and HP Apollo workstations. Currently, the Company's
EISAbus products face nominal competition in this market.
Additionally, the Company competes with the internal engineering resources of
its customers. As its customers become successful with their products they
examine methods to reduce costs and integrate functions. To compete with the
internal engineering resources of its customers, the Company works jointly with
their engineering staff to understand its customers system requirements and
anticipate product needs.
INTELLECTUAL PROPERTY
The Company believes that its future success will depend principally on its
continuing product innovation, sales, marketing, technical expertise, product
support and customer relations. The Company also believes that it needs to
protect the proprietary technology contained in its products. The Company does
not currently hold any patents and relies on a combination of copyright,
trademark, trade secret laws and contractual provisions to establish and protect
proprietary rights in its products. The Company typically enters into
confidentiality agreements with its employees, strategic partners, indirect
channel marketing partners and suppliers and limits access to the distribution
of its proprietary information.
BACKLOG
On January 2, 1996, the Company had a backlog of orders of approximately
$2,429,000 for shipment within the next twelve months. At December 31, 1994,
the Company had a backlog of orders of approximately $3,026,000. Since recorded
sales orders are subject to changes in customer delivery schedules,
cancellation, or price changes, the Company's backlog as of any particular date
may not be representative of actual sales for any succeeding fiscal period and
is not considered firm.
EMPLOYEES
On January 2, 1996, the Company had 162 employees. None of the Company's
employees is represented by a labor union and the Company has experienced no
work stoppages. The Company's management believes its employee relations are
good.
The Company's management believes that the Company's future success will depend,
in part, on its ability to attract and retain qualified technical, marketing,
and management personnel. Such experienced personnel are in great demand, and
the Company must compete for their services with other firms, many of which have
greater financial resources than the Company.
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ITEM 2. PROPERTIES
In April 1993 the Company relocated its engineering, manufacturing, and
administrative headquarters to 63,000 square feet of leased space in a building
located in San Ramon, California. The lease was amended in June 1995 to extend
its term from seven years to thirteen years. The lease contains an option to
increase the leased space by 10,000 square feet. The Company expects that the
facility will satisfy its anticipated needs through the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY &
RELATED SHAREHOLDER MATTERS.
Fiscal quarter ended
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1995 January 31 April 30 July 31 October 31
- - --------------------------------------------------------------------------------
High $10.50 $15.75 $14.25 $16.00
Low 7.00 8.75 10.75 10.75
1994
High $11.25 $11.25 $8.75 $7.75
Low 8.00 7.75 6.75 5.50
SBE, Inc. common stock is quoted on the Nasdaq National Market under the symbol
SBEI. The above table sets forth the high and low closing sales prices for 1995
and 1994 for the quarters indicated. The Company has not paid cash dividends on
its common stock and is prohibited from doing so by its credit line agreement.
As of December 29, 1995, SBE, Inc. had approximately 808 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except for per share
amounts and number of employees)
For years ended October 31 1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------
Net sales $19,368 $22,337 $26,732 $28,057 $20,279
Net (loss) income (4,568) 1,336 2,461 2,565 1,333
Net (loss) income per share ($2.22) $0.63 $1.18 $1.24 $0.73
Product research and development 6,900 4,769 4,739 4,455 3,628
Working capital 7,644 7,436 6,608 4,563 6,647
Total assets 14,978 17,665 16,563 14,325 10,939
Long-term obligations 1,218 410 44 39 211
Shareholders' equity 12,108 15,864 14,889 12,001 9,088
Shares outstanding 2,074 2,035 2,005 1,922 1,817
Number of employees 173 165 148 147 145
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the last decade, the Company has specialized in the development of
computer board data communications products and industrial computer equipment.
In the early 1990s, the Company determined that a large opportunity existed in
the emerging remote LAN market for affordable remote access router products. To
seize that opportunity, the Company has invested significant resources in
developing netXpand, its new line of standalone remote LAN access server/router
products. In addition, the Company began and is continuing to restructure its
existing sales and marketing channels and adding new sales channels to access
customers for its netXpand products. The Company also has added certain key
management personnel to better serve this emerging market. Primarily as a
result of this investment and of decreased sales of computer board
communications products attributable to the decline in business with Cisco
Systems, the Company incurred substantial operating losses in fiscal 1995.
Prior to fiscal 1995, the Company reported profitable quarterly operations for
over ten years.
The Company began shipping its netXpand products in September 1995. Sales
of these products constituted over 11 percent of net sales for the fourth
quarter of fiscal 1995, and the Company expects them to constitute an increasing
percentage of net sales in future periods. netXpand is targeted at the high-
growth, price-sensitive sectors of the internetworking market. The Company
expects these segments to grow at a compounded annual rate of over 50 percent in
the United States and at a greater rate in international markets. However,
there can be no assurance that the market will grow at this rate, if at all, or
that the Company will be successful in achieving widespread market acceptance of
its netXpand products.
The Company intends to continue to support its existing computer board
controller business by developing new products for strategic customer accounts
and by focusing on emerging technologies that can be leveraged into the sales
channels the Company is developing for its netXpand remote LAN access products.
The Company introduced a line of PCI-bus based products in late 1995 that it
expects to help to expand its computer board controller business. The computer
board portion of the Company's business is characterized by a concentration of
sales to a small number of customers, and consequently the timing of significant
orders from major customers and their product cycles may cause fluctuations in
the Company's operating results.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the fiscal years ended October
31, 1995, 1994 and 1993. These operating results are not necessarily indicative
of Company's operating results for any future period.
-13-
YEAR ENDED OCTOBER 31,
----------------------
1995 1994 1993
Net sales 100% 100% 100%
Cost of sales 49 44 45
--- --- ---
Gross profit 51 56 55
Operating expenses:
Product research and development 36 21 18
Sales and marketing 26 12 11
General and administrative 20 16 14
--- --- ---
Total operating expenses 82 50 43
--- --- ---
Operating (loss) income (31) 6 12
Interest and other (expense) income, net (1) 2 1
---- --- ---
Income (loss) before taxes (32) 8 13
(Benefit) provision for income taxes (8) 2 5
---- --- ---
Net (loss) income (24)% 6% 8%
---- --- ---
---- --- ---
NET SALES
Net sales for fiscal 1995 were $19.4 million, a 13 percent decrease from
fiscal 1994. Net sales for fiscal 1994 were $22.3 million, a 16 percent
decrease from fiscal 1993. These decreases were primarily attributable to lower
sales of the Company's board-level products to certain large customers. Sales
to Cisco represented 21 percent and 36 percent of net sales in fiscal 1994 and
fiscal 1993, respectively. There were no sales to Cisco in fiscal 1995. Sales
to America Online and Tandem Computers represented 16 percent and 14 percent of
net sales, respectively, in fiscal 1995, and sales to G.E. Capital Spacenet
Services represented 11 percent and 16 percent of net sales in fiscal 1994 and
1993, respectively. The Company expects to experience fluctuation in computer
board product sales as large customers needs change. Partially offsetting the
lower sales to these large customers, sales of VMEbus-based communications
products and interface chips increased by $5.1 million, or 60 percent, from
fiscal 1994 to fiscal 1995, and by $3.1 million, or 34 percent, from fiscal 1993
to fiscal 1994. In addition, approximately $575,000 of net sales in fiscal 1995
were attributable to sales of the new netXpand products.
International sales constituted 11 percent, 4 percent and 9 percent of net
sales in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. The increase
in international sales is primarily attributable to increased sales of VME
computer board products to a large customer in Germany and sales of netXpand
products in Japan and Korea. Sales of VMEbus-based communications products
through the Company's Channel Partner relationship with Hewlett Packard
constituted 27, 13 and 4 percent of net sales in fiscal 1995, fiscal 1994 and
fiscal 1993, respectively. No customer within this channel, other than America
Online, represented more than 5% of total sales. The Company expects that
future sales through the HP channel will continue, however sales to this channel
will be subject to significant variability from quarter to quarter.
-14-
GROSS PROFIT
Gross profit as a percentage of sales was 51 percent, 56 percent and 55
percent in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. The decrease
from fiscal 1994 to fiscal 1995 was primarily attributable to higher
manufacturing overhead costs incurred in connection with expanding manufacturing
capacity for the new netXpand products. These costs included the cost of
leasing additional high speed placement and testing equipment. The Company
believes this equipment will significantly increase manufacturing capacity and
reduce production cycle time, leading to lower cost of sales as a percentage of
net sales, as production volumes increase for the netXpand product line.
However, there can be no assurance that the Company will be successful in
increasing volume sufficiently to offset the increased overhead costs. The
increase in gross profit from fiscal 1993 to fiscal 1994 was primarily
attributable to a change in the Company's mix of products.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses net of capitalized software costs
were $6.9 million in fiscal 1995, $4.8 million in fiscal 1994, and $4.7 million
in fiscal 1993, representing 36, 21, and 18 percent of sales respectively. The
Company capitalized software development costs of $1.5 million, $230,000 and
$108,000 in fiscal 1995, fiscal 1994 and fiscal 1993 respectively, in accordance
with Statement of Financial Accounting Standards No. 86. The amounts
capitalized represented 22, 5 and 2 percent, respectively, in fiscal 1995,
fiscal 1994 and fiscal 1993 of gross product research and development
expenditures. The increase in software costs capitalized in fiscal 1995 was due
to software development related to the new netXpand product line. Those costs
will be amortized over a three year period. The increases in net research and
development expenses as a percent of sales were primarily attributable to
additional staff, consulting costs and contract professional expenses relating
to development of the netXpand product line. Contractual reimbursements under
joint development contracts are accounted for as a reduction of product research
and development expenses. The Company received $221,000, $439,000 and $80,000
of such reimbursements in fiscal 1995, fiscal 1994 and fiscal 1993,
respectively. The Company does not expect any significant reimbursements in the
future. The Company expects that product research and development expenses will
continue to increase in absolute dollars as it continues to expand and improve
its remote LAN access product line and enhance its traditional board-level
product lines.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1995 were $5.0 million, an 87
percent increase from fiscal 1994. Sales and marketing expenses for fiscal 1994
were $2.7 million, a 7 percent decrease from fiscal 1993 in absolute dollars,
but representing a greater percentage of net sales in fiscal 1994 as a result of
decreased sales in fiscal 1994. These increases were primarily attributable to
expansion of the Company's worldwide sales operations to support the netXpand
product line. The expansion included hiring additional sales and marketing and
technical support personnel and implementing new advertising programs. The
Company expects sales and marketing expenses to increase in absolute dollars as
sales of the netXpand products increase.
-15-
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1995 were $3.9 million, a 7
percent increase from fiscal 1994. General and administrative expenses for
fiscal 1994 were $3.7 million, a 3 percent decrease from fiscal 1993 in absolute
dollars, but representing a greater percentage of net sales in fiscal 1994 as a
result of decreased sales in fiscal 1994. The increase from fiscal 1994 to
fiscal 1995 was primarily attributable to recruiting costs and consulting
expenses related to the transition of the Company into the emerging remote
access markets. The decrease in absolute dollars from fiscal 1993 to fiscal
1994 was primarily attributable to non-recurring charges incurred in fiscal 1993
related to the Company's relocation to its San Ramon, California facility, as
well as decreased incentive payments to employees in fiscal 1994 due to reduced
profitability.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income, net, decreased in fiscal 1995 from fiscal 1994 and 1993
due to lower investment balances. Additionally, non recurring charges were
taken in fiscal 1995 to write off an equity investment in a strategic software
partner and to report realized losses on the liquidation of investments.
INCOME TAXES
The Company's effective tax rate was (27), 26 and 34 percent in fiscal
1995, fiscal 1994 and fiscal 1993, respectively. The Company's operating losses
in fiscal 1995 enabled it to realize a $1.7 million tax benefit, all of which
the Company expects to realize as a carryback against prior taxes paid. The
Company has recorded a valuation allowance in fiscal 1995 and 1994 for certain
deferred tax assets due to the uncertainty of realization. This valuation
allowance increased from approximately $179,000 in fiscal 1994 to $948,000 in
fiscal 1995. In the event of future taxable income, the Company's effective
income tax rate in future periods could be lower as such tax assets could be
realized. The decrease in the effective tax rate from fiscal 1993 to fiscal
1994 was primarily attributable to the utilization of research and development
tax credits, which resulted in the amendment of prior years' tax returns to
adjust research and development tax credits claimed. As a result, the Company's
fiscal 1994 fourth quarter results reflected a $153,000 tax benefit. The
Company's adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in fiscal 1994 did not have a material impact on
the Company's financial statements.
NET (LOSS) INCOME
As a result of the factors discussed above, the Company recorded a net loss
of $4.6 million in fiscal 1995, and net income of $1.3 million and $2.5 million
in fiscal 1994 and fiscal 1993, respectively.
-16-
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1995, the Company had cash and cash equivalents of $900,000,
as compared to $2.6 million at October 31, 1994. During fiscal 1995, $4.4
million of cash was used in operating activities, primarily to fund operating
losses. Working capital at October 31, 1995 was $7.6 million, as compared to
$7.4 million at October 31, 1994.
In fiscal 1995 the Company purchased $1.8 million of fixed assets,
consisting primarily of computer and manufacturing equipment. In addition, the
Company entered into operating leases for approximately $900,000 of
manufacturing equipment for its new netXpand product line. The Company expects
capital expenditures during fiscal 1996 to decrease from fiscal 1995 levels
because the Company's current facilities have been expanded to meet production
levels anticipated through fiscal 1996. Additionally, the Company capitalized
$1.5 million of software costs related to the netXpand product line. These
costs will be amortized over three years.
In fiscal 1995 the Company liquidated all of its long term investments and
as a result recorded a realized loss of $294,000. Additionally, the Company
recorded a writeoff of an equity investment in a software technology partner of
$330,000 due to management's evaluation that the carrying value of this
investment will not be recoverable.
The Company received $287,000 of proceeds from employee stock option and
stock purchase plans, an increase of 76 percent from 1994 amounts.
On May 23, 1995, the Company signed a loan agreement for a $4.0 million
revolving line of credit for working capital purposes that expires on April 30,
1996. The agreement was modified on January 17, 1996. Borrowings under the
credit line agreement bear interest at the bank's prime rate plus one percent
and are collateralized by accounts receivable and other assets. Borrowings are
limited to 70 percent of adjusted accounts receivable balances, and the Company
is subject to certain financial covenants, including the maintenance of minimum
tangible net worth of $7.0 million and minimum debt ratio of 0.7:1.0. On
October 31, 1995, the Company had no balance outstanding under its revolving
line of credit.
Based on the current operating plan, the Company anticipates that
existing cash balances, credit facilities, income tax refunds and lease lines
will be sufficient to meet short-term operating requirements. In late 1995,
in connection with the review of its 1996 operating plan, the Company decided
it must obtain additional working capital in 1996 to support its expansion of
the netXpand product lines. Additional working capital would be used to
support accounts receivable and inventory growth, research and development
activities, geographic sales expansion and licensing of technology. The
Company expects to seek additional capital in 1996 through the sale of equity
securities. If the Company is unsuccessful in the sale of equity securities,
it will initially scale back its efforts to gain additional market
penetration for its netXpand product and reduce its development of new
netXpand and communications controller products. The Company also may need
to seek alternative sources of financing, including debt. There can be no
assurance that the Company will be successful in obtaining additional working
capital or in expanding its netXpand business.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under Item 8 are
provided under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-18-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
Information concerning the Company's directors is incorporated by reference to
the information in the section captioned "Nominees" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 16, 1996.
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are set forth in the following table. Executive officers serve
at the discretion of the Board of Directors. There are no family relationships
between a director or executive officer and any other director or executive
officer of the Company.
Name Age Position
- - --------------------------------------------------------------------------------
William R. Gage 53 Chairman of the Board
William B. Heye, Jr. 57 President and Chief Executive Officer
Timothy J. Repp 36 Vice President, Finance, and Chief
Financial Officer
Belton E. Allen 48 Vice President, Sales
Anthony Spielman 47 Vice President, Network Systems Marketing
Gene Buechele 49 Vice President, Engineering
and Secretary
Norman E. O'Shea 47 Vice President, Manufacturing
Mr. Gage has been Chairman of the Board since January of 1990. From 1986 until
March 1989 he was President of the Company, from March 1989 until January 1990
he served as Senior Vice President of the Company and from January 1990 until
November 1991 he was Chief Executive Officer of the Company. From 1982 to 1986,
Mr. Gage also served at various times as Chief Operating Officer, Senior Vice
President, Vice president of Programming and Treasurer of the Company.
-19-
Mr. Heye has been President and Chief Executive Officer of the Company since
November, 1991. From 1989 to November 1991, he served as Executive Vice
President of Ampex Corporation, a manufacturer of high-performance scanning
recording systems, and President of Ampex Video Systems Corporation, a wholly-
owned subsidiary of Ampex Corporation and a manufacturer of professional video
recorders and editing systems for the television industry. From 1986 to 1989,
Mr. Heye served as Executive Vice President of Airborn, Inc., a manufacturer of
connectors for the aerospace and military markets.
Mr. Repp has served as Vice President of Finance and Chief Financial Officer
since January of 1992. He joined the Company in January 1991 as Controller.
From 1987 until 1990 he was assistant controller at Grubb and Ellis, a national
real estate firm, and prior to 1987 he was an audit manager at Coopers and
Lybrand, an international accounting firm.
Mr. Allen has been Vice President, Sales since March 1990. He joined the
Company in December of 1987 as Vice President, Software Products after the
acquisition of Alcyon by the Company. From February of 1980 until the
acquisition he was Vice President, Software Products for Alcyon.
Mr. Spielman has served as Vice President, Network Systems Marketing since May
1994. Prior to joining the Company Mr. Spielman was Director of Product
Marketing at Asante Technologies, Inc., a networking equipment company,
responsible for various product lines. He was at Asante Technologies, Inc. from
1993 to 1994. From 1992 to 1993 Mr. Spielman was Director of Product Marketing
for the Internetworking division of Network Systems Corp., a networking
equipment company. From 1990 to 1992, Mr. Spielman was Manager of Business
Strategy at 3Com Corporation, an internetworking equipment company, and from
1989 to 1990 Mr. Spielman was a Product Manager at Ungermann-Bass, a wholly
owned subsidiary of Tandem Computers, Inc. and a computer equipment company,
responsible for developing the strategic plan for Ungermann-Bass's Access/One
Token Ring product line.
Mr. Buechele has been Vice President of Engineering since December 1993. From
October 1992 until joining the Company, Mr. Buechele was Managing Partner of the
Prosper Group, located in San Francisco, California. The Prosper Group is a
consulting organization focused on strategic and management projects combining
networking with multimedia. From July 1988 to September 1992, Mr. Buechele was
Vice President Engineering for the Network Systems Division of 3Com Corporation,
San Jose, California, a manufacturer and developer of networking systems.
Mr. O'Shea joined the Company in February 1995. From March 1993 until joining
the Company, Mr. O'Shea was Director of Operations for Berkeley Process Control,
a motion control systems company located in Point Richmond, California. From
January 1987 to February 1993 Mr. O'Shea served in various operational and
engineering management positions at NeXT Computer Inc., a manufacturer of
computer workstations and software.
-20-
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" appearing in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-21-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) Financial Statements (see Item 8).
---------------------------------
Page
----
Report of Independent Accountants 27
Consolidated Balance Sheets at October 31, 1995 and 1994 28
Consolidated Statements of Operations for fiscal years 1995, 1994,
and 1993 29
Consolidated Statements of Shareholders' Equity for fiscal years 1995,
1994, and 1993 30
Consolidated Statements of Cash Flows for fiscal years 1995, 1994,
and 1993 31
Notes to Consolidated Financial Statements 32
(b) Financial Statement Schedule
----------------------------
Schedule II - Valuations and Qualifying Accounts 42
All other schedules are omitted as the required information is not
applicable or has been included in the consolidated financial
statements or the notes thereto.
-22-
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------- ----------- --------
(a) 10.1 1984 Incentive Stock Option Plan, as amended.
(a) 10.2 1987 Supplemental Stock Option Plan.
(b) 10.3 1991 Non-Employee Directors' Stock Option Plan
(c) 10.4 Lease for 4550 Norris Canyon Road, San Ramon,
California dated November 2, 1992 between the
Company and PacTel Properties
10.5 Amendment dated June 6, 1996 to lease for 4550
Norris Canyon Road, San Ramon, California, between
the Company and CalProp L.P. (assignee of PacTel
Properties) 43
10.6 Letter of agreement to provide credit facilities
between the Company and Comerica Bank - California,
dated May 23, 1995 44
10.7 Modification of letter of agreement between the
Company and Comerica Bank - California, dated
January 17, 1996 59
11.1 Statement re computation of per share earnings 62
24.1 Consent of Coopers & Lybrand, Independent Public
Accountants 63
27.1 Financial Data Schedule 64
(d) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the quarter ended
October 31, 1995.
Explanations for letter footnotes are on the following page.
-23-
Explanations for letter footnotes:
- - --------------------------------------------------------------------------------
(a) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1986, and incorporated herein by reference.
(b) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1991, and incorporated herein by reference.
(c) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1993, and incorporated herein by reference.
-24-
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SBE, Inc.
(Registrant)
Dated: January 26, 1996 By: /s/ Timothy J. Repp
--------------------------
Timothy J. Repp
Chief Financial Officer
and Vice President of Finance
Pursuant to the requirements for the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated, as of January 26, 1996.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- - ------------------------
William B. Heye Jr. Chief Executive Officer, President, and
Director (Principal Executive Officer)
/s/ Timothy J. Repp
- - -------------------
Timothy J. Repp Chief Financial Officer, Vice President
of Finance (Principal Financial and
Accounting Officer)
-25-
Signature
- - ---------
Title
/s/ William R. Gage
- - -------------------
Chairman of the Board
William R. Gage
/s/ Edward H. Laird
- - -------------------
Director
Edward H. Laird
/s/ Harold T. Hahn
- - ------------------
Director
Harold T. Hahn
/s/ Ramon L. Conlisk
- - --------------------
Director
Raimon L. Conlisk
/s/ George E. Grega
- - -------------------
Director
George E. Grega
-26-
Report of Independent Accountants
To the Board of Directors and Shareholders
SBE, Inc.
San Ramon, California
We have audited the consolidated financial statements of SBE, Inc. and
subsidiary as of October 31, 1995 and 1994, and for each of the three years in
the period ended October 31, 1995. We have also audited the financial statement
schedule listed in Item 14(b) of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SBE, Inc. and
subsidiary as of October 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended October 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Oakland, California
December 14, 1995
-27-
SBE, INC.
CONSOLIDATED BALANCE SHEETS
October 31 1995 1994
- - -------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 857,206 2,566,067
Trade accounts receivable, net 3,387,732 3,444,197
Inventories 2,611,413 2,047,792
Income tax recoverable 1,836,315 59,830
Deferred income taxes 224,681 300,221
Other 377,733 408,238
------------ ------------
Total current assets 9,295,080 8,826,345
Property, plant and equipment, net 3,329,913 2,782,284
Investments --- 5,454,258
Deferred income taxes 654,319 ---
Capitalized software costs, net 1,656,419 230,000
Other 41,968 371,818
------------ ------------
Total assets $ 14,977,699 $ 17,664,705
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 940,888 $ 802,275
Accrued payroll and employee benefits 593,106 480,759
Other 117,410 107,583
------------ ------------
Total current liabilities 1,651,404 1,390,617
Deferred tax liabilities 879,000 290,043
Deferred rent 339,134 120,409
------------ ------------
Total liabilities 2,869,538 1,801,069
------------ ------------
Commitments (Note 8).
Shareholders' equity:
Preferred stock (no par value); authorized
50,000 shares; none issued
Common stock (no par value); authorized
6,000,000 shares; issued and outstanding
2,074,254 and 2,034,842 shares at October 31,
1995 and 1994, respectively 7,679,819 7,392,693
Unrealized loss on investments --- (525,370)
Retained earnings 4,428,342 8,996,313
------------ ------------
Total shareholders' equity 12,108,161 15,863,636
------------ ------------
Total liabilities and shareholders'
equity $ 14,977,699 $ 17,664,705
------------ ------------
------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31
1995 1994 1993
- - -----------------------------------------------------------------------------------------------
Net sales $ 19,367,776 $ 22,336,777 $ 26,731,821
Cost of sales 9,566,784 9,838,663 11,998,750
------------ ------------ ------------
Gross profit 9,800,992 12,498,114 14,733,071
Product research and development 6,900,420 4,769,306 4,739,348
Sales and marketing 4,961,438 2,656,240 2,862,860
General and administrative 3,929,544 3,683,237 3,790,220
------------ ------------ ------------
Total expenses 15,791,402 11,108,783 11,392,428
Operating (loss) income (5,990,410) 1,389,331 3,340,643
Interest income 342,463 407,937 402,334
Interest expense (14,783) (1,217) (13,809)
Writeoff of equity investment (330,000) --- ---
Loss on sale of investments (293,797) --- ---
------------ ------------ ------------
(Loss) income before income taxes (6,286,527) 1,796,051 3,729,168
(Benefit) provision for income taxes (1,718,556) 459,743 1,267,918
------------ ------------ ------------
Net (loss) income $ (4,567,971) $ 1,336,308 $ 2,461,250
------------ ------------ ------------
------------ ------------ ------------
Net (loss) income per common share $ (2.22) $ 0.63 $ 1.18
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares 2,054,570 2,107,582 2,089,904
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
SBE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Unrealized Losses Retained
Shares Amount on Investments Earnings Total
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1992 1,921,930 $ 6,802,722 --- $ 5,198,755 $ 12,001,477
Stock issued in connection
with stock option plan 70,456 306,387 --- --- 306,387
Stock issued in connection
with stock purchase plan 12,745 120,300 --- --- 120,300
Net income --- --- --- 2,461,250 2,461,250
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1993 2,005,131 7,229,409 --- 7,660,005 14,889,414
Stock issued in connection
with stock option plan 18,209 86,221 --- --- 86,221
Stock issued in connection
with stock purchase plan 11,502 77,063 --- --- 77,063
Unrealized losses on investments --- --- (525,370) --- (525,370)
Net income --- --- --- 1,336,308 1,336,308
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1994 2,034,842 7,392,693 (525,370) 8,996,313 15,863,636
Stock issued in connection
with stock option plan 21,543 166,454 --- --- 166,454
Stock issued in connection
with stock purchase plan 17,869 120,672 --- --- 120,672
Unrealized losses on investments --- --- 525,370 --- 525,370
Net loss --- --- --- (4,567,971) (4,567,971)
--------- ----------- -------------- ----------- ------------
Balances, October 31, 1995 2,074,254 $ 7,679,819 --- $ 4,428,342 $ 12,108,161
--------- ----------- -------------- ----------- ------------
--------- ----------- -------------- ----------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31 1995 1994 1993
------------ ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (4,567,971) $ 1,336,308 $ 2,461,250
Adjustments to reconcile net (loss) income to net cash (used)
provided by operating activities:
Depreciation and amortization 1,312,061 1,115,173 1,099,578
Writeoff of equity investment 330,000 --- ---
Loss on sale of investments 293,797 7,730 ---
Deferred taxes 10,178 199,822 57,005
Other 955 9,010 33,695
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable 56,465 (8,392) (137,502)
(Increase) decrease in inventories (563,621) 92,316 721,132
(Increase) in income tax recoverable (1,776,485) --- ---
Decrease (increase) in other assets 30,355 (160,880) (110,035)
Increase (decrease) in trade accounts payable 138,613 256,782 (71,438)
Decrease in income taxes payable --- (26,201) (271,297)
Increase (decrease) in other current liabilities 122,174 (502,289) (188,168)
Increase in noncurrent liabilities 218,725 76,048 44,361
------------ ----------- -----------
Net cash (used) provided by operating activities (4,394,754) 2,395,427 3,638,581
------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,802,826) (772,899) (1,573,515)
Proceeds from sale of fixed assets 2,729 2,000 30,880
Capitalized software costs (1,486,967) (230,000) (108,250)
Proceeds from sale of investments 5,936,416 974,522 1,500,000
Purchase of investments (250,585) (2,163,595) (1,838,227)
------------ ----------- -----------
Net cash provided (used) by investing activities 2,398,767 (2,189,972) (1,989,112)
------------ ----------- -----------
Cash flows from financing activities:
Repayments on bank facilities --- --- (88,750)
Principal payments on capital lease obligations --- (26,466) (75,310)
Proceeds from stock plans 287,126 163,284 426,687
------------ ----------- -----------
Net cash provided by financing activities 287,126 136,818 262,627
------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,708,861) 342,273 1,912,096
Cash and cash equivalents at beginning of year 2,566,067 2,223,794 311,698
------------ ----------- -----------
Cash and cash equivalents at end of year $ 857,206 $ 2,566,067 $ 2,223,794
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 14,783 $ 1,217 $ 13,809
------------ ----------- -----------
------------ ----------- -----------
Income taxes $ 33,824 $ 447,590 $ 1,482,210
------------ ----------- -----------
------------ ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SEGMENT:
SBE, Inc. and subsidiary (the Company) designs and manufactures high-performance
network systems and products for world-wide distribution. During 1995 the
Company invested significant resources in developing netXpand, its new line of
standalone remote LAN access server/router products. As a result of this
investment and decreased sales attributable to the shift in product focus, the
Company incurred substantial operating losses in fiscal 1995. The Company's
business falls exclusively within one industry segment.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary.
CASH EQUIVALENTS:
The Company considers all highly liquid investments readily convertible into
cash with an original maturity of three months or less upon acquisition by the
Company to be cash equivalents. Substantially all of its cash and cash
equivalents are held in two large financial institutions.
INVESTMENTS:
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." This statement requires that securities be classified
as "held to maturity," "available for sale," or "trading," and the securities in
each classification be accounted for at either amortized cost or fair market
value, depending upon their classification. The Company classifies its
investments as "available for sale," and therefore records the investment at
fair market value with any unrealized losses or gains reflected as a separate
component of shareholders' equity. The Company had no investments as of October
31, 1995. During fiscal 1995, the Company sold all of its investments for
proceeds of $5,936,416 and realized losses of $293,797. For purposes of
determining realized losses, the cost of investments is based upon the specific
identification method.
INVENTORIES:
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value.
-32-
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost. The Company provides for
depreciation by charges to expense, which are sufficient to write off the costs
of the assets over their estimated useful lives of three to eight years, on a
straight-line basis. Leasehold improvements are amortized over the lesser of
their useful lives or the remaining term of the related leases.
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the asset and allowance for depreciation accounts,
and any gain or loss on such sale or disposal is credited or charged to income.
Maintenance, repairs, and minor renewals are charged to expense as
incurred. Expenditures which substantially increase an asset's useful life are
capitalized.
CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of costs to purchase software and to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized over related sales on a per-unit basis with a minimum amortization
based on a straight-line method over a three-year useful life. The Company
evaluates the estimated net realizable value of each software product and
records provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
REVENUE RECOGNITION AND WARRANTY COSTS:
The Company records product sales at the time of product shipment. Warranty
costs are not significant; however, the Company provides a reserve for estimated
warranty costs at the time of sale and periodically adjusts such amounts to
reflect actual expenses. The Company's sales transactions are negotiated
principally in U.S. dollars.
PRODUCT RESEARCH AND DEVELOPMENT EXPENDITURES:
Product research and development (R&D) expenditures, except certain software
development costs, are charged to expense as incurred. Contractual
reimbursements for R&D expenditures under joint R&D contracts with customers are
accounted for as a reduction of related expenses as incurred. For the years
ended October 31, 1995, 1994, and 1993, direct costs incurred under R&D
contracts were $112,868, $382,397, and $102,183, respectively, and
reimbursements earned were $221,120, $439,000, and $80,000, respectively.
INCOME TAXES:
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Previously,
the Company used SFAS No. 96 in accounting for income taxes. SFAS No. 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the consolidated
financial statements or tax returns. Under SFAS No. 109 the Company provides a
deferred tax expense or benefit equal to the change in
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the deferred tax asset or liability during the year. Deferred income taxes
represent future net tax effects resulting from temporary differences between
the financial statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are recorded against net deferred tax assets,
where in the opinion of management realization is uncertain. SFAS No. 109 was
applied on a prospective basis, and the amounts presented for prior years have
not been restated. The adoption of SFAS No. 109 did not have a material impact
on net income, and did not require the recording of a cumulative effect of
change in accounting principle.
NET INCOME (NET LOSS) PER COMMON SHARE:
Net income per common share for the years ended October 31, 1994 and 1993 was
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
relate to stock options. Common stock equivalents are excluded from the net
loss per common share (LPS) calculation for the year ended October 31, 1995, as
they have the effect of decreasing LPS. The difference between primary and
fully diluted net income per share was not significant in any year.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued and is
effective for the Company's 1997 fiscal year. The Company intends to continue
to account for employee stock options in accordance with APB Opinion No. 25 and,
accordingly, will comply with the pro forma disclosure required by SFAS 123.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation with no effect on net income as
previously reported.
2. INVENTORIES
Inventories at October 31, 1995 and 1994 are comprised of the following :
1995 1994
- - -------------------------------------------------------------------------------
Finished goods $ 841,453 $ 558,840
Subassemblies 299,315 217,382
Parts and materials 1,470,645 1,271,570
--------------------------------
$ 2,611,413 $ 2,047,792
------------- ------------
------------- ------------
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3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1995 and 1994 are comprised of the
following:
1995 1994
- - -------------------------------------------------------------------------------
Machinery and equipment $ 7,462,268 $ 5,913,380
Furniture and fixtures 1,091,935 953,188
Leasehold improvements 519,309 447,238
------------ ------------
9,073,512 7,313,806
Less accumulated depreciation
and amortization 5,743,599 4,531,522
------------ ------------
$ 3,329,913 $ 2,782,284
------------ ------------
------------ ------------
Depreciation and amortization expense totaled $1,251,513, $979,430 and $929,455
for the years ending October 31, 1995, 1994 and 1993, respectively.
4. LINE OF CREDIT
The Company had a line of credit for $1,000,000 which expired on February 28,
1995. On May 23, 1995, the Company entered into a $4,000,000 revolving working
capital line of credit agreement which expires on April 30, 1996. The agreement
was modified on January 17, 1996. Borrowings under the new line of credit, as
modified, bear interest at the bank's prime rate plus one percent and are
collateralized by accounts receivable and other assets. Borrowings are limited
to 70 percent of adjusted accounts receivable balances, and the Company is
required to maintain minimum tangible net worth of $7.0 million, a minimum debt
ratio of 0.7:1.0, a quick ratio of cash, investments, and receivables to current
liabilities of not less than 1.0:1.0, and minimum profitability levels. The
line of credit agreement also prohibits the payment of cash dividends without
the consent of the bank.
As of October 31, 1995 and 1994, there were no borrowings under either
credit line.
5. OTHER CURRENT LIABILITIES
Other current liabilities at October 31, 1995 and 1994 are comprised of the
following:
1995 1994
- - -------------------------------------------------------------------------------
Accrued product warranties $ 78,302 $ 96,016
Other 39,108 11,567
------------ -----------
$ 117,410 $ 107,583
------------ -----------
------------ -----------
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6. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
1995, 1994, and 1993 are as follows:
1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------
Federal:
Current $ (1,731,734) $ 196,270 $ 912,579
Deferred 10,178 199,822 57,005
State:
Current 3,000 63,651 298,334
Deferred --- --- ---
------------- ---------- ------------
Total (benefit) provision for income taxes $ (1,718,556) $ 459,743 $ 1,267,918
------------- ---------- ------------
------------- ---------- ------------
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
Statutory federal income tax rate (34.0)% 34.0% 34.0%
State taxes, net of federal income tax
benefit --- 4.3 6.1
Change in valuation allowance 12.2 --- ---
Tax credits (5.0) (8.9) (2.8)
Nontaxable interest income (0.7) (3.5) (1.4)
Other, net 0.2 (0.3) (1.9)
------ ------ -----
(27.3)% 25.6% 34.0%
------ ------ -----
------ ------ -----
Significant components of the Company's deferred tax balances as of
October 31, 1995 and 1994 are as follows:
1995 1994
- - ----------------------------------------------------------------------------------------------------
Deferred tax assets:
Current
Accrued employee benefits $ 103,000 $ 99,620
Inventory allowances 278,000 85,000
Allowance for doubtful accounts 51,000 34,000
Warranty accruals 31,000 32,640
Other reserves not currently deductible 4,000 48,961
Noncurrent
Deferred rent 134,000 ---
R&D credit carryforward 695,000 ---
Alternative minimum tax carryforward 143,000 ---
Operating loss carryforward 184,000 ---
Investments 130,000 178,626
Capital loss carryforward 74,000 ---
---------- ----------
Total deferred tax assets 1,827,000 478,847
---------- ----------
Deferred tax liabilities:
Noncurrent
Depreciation (234,000) (220,003)
Capitalized software costs (645,000) (70,040)
---------- ----------
Total deferred tax liabilities (879,000) (290,043)
---------- ----------
Deferred tax asset valuation allowance (948,000) (178,626)
---------- ----------
Net deferred tax assets $ --- $ 10,178
---------- ----------
---------- ----------
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A valuation allowance was established to offset certain deferred tax assets due
to management's uncertainty of realizing the benefit of these items. The net
increase in the valuation allowance was $769,374 and $178,626 for the years
ended October 31, 1995 and 1994, respectively.
The Company has research and experimentation tax credit carryforwards of
$536,000 and $158,000 for federal and state tax purposes respectively. These
carryforwards expire in the periods ending 2007 through 2010. The Company has a
net operating loss carryforward for state income tax purposes of approximately
$3,000,000 which expires in 1999.
7. CAPITALIZED SOFTWARE COSTS
Software costs at October 31, 1995 and 1994 comprise the following:
1995 1994
- - -------------------------------------------------------------------------------
Purchased software $ 195,000 $ 165,409
Internally developed software 1,521,967 200,334
------------ -----------
1,716,967 365,743
Less accumulated amortization 60,548 135,743
------------ -----------
$ 1,656,419 $ 230,000
------------ -----------
------------ -----------
The Company capitalized $120,000 and $75,000 of purchased software costs in 1995
and 1994, respectively. Additionally, $1,366,967 and $155,000 of internally
developed software costs were capitalized in 1995 and 1994, respectively.
Amortization of capitalized software costs totaled $60,548, $135,743 and $91,878
for the years ended October 31, 1995, 1994 and 1993, respectively.
8. COMMITMENTS
The Company leases all its buildings under noncancelable operating leases which
expire at various dates through the year 2006. Future minimum lease payments
under all operating leases with initial or remaining noncancelable lease terms
in excess of one year at October 31, 1995 are as follows:
Year ending October 31:
1996 $ 849,749
1997 776,870
1998 765,503
1999 756,092
2000 728,804
Thereafter 3,460,166
------------
Total minimum lease payments $ 7,337,184
------------
------------
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Under the terms of the San Ramon, California building lease, rent includes the
lessor's operating costs. The building lease also includes two five-year
renewal options at market rates as defined by the lease.
Rent expense under all operating leases for the years ended October 31, 1995,
1994 and 1993 was $794,700, $786,513 and $840,676, respectively.
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has two employee stock option plans: a 1987 nonqualified plan and a
1984 incentive plan. Shares of common stock reserved under the plans are pooled
and aggregated to 930,000 shares (830,000 shares as of October 31, 1994). Stock
options granted under employee plans are exercisable over a maximum term of ten
years from the date of grant, vest in various installments over this period and
have exercise prices reflecting market value at the date of grant.
Additionally, in 1991, shareholders approved a "Non-Employee Director Stock
Option Plan" (the Plan). Common stock reserved for issuance under the Plan, as
amended in fiscal 1994, allows for the issuance of 140,000 shares of stock to
nonemployee directors. Options granted under the plan vest over a four-year
period and expire five years after the date of grant and have exercise prices
reflecting market value at the date of grant.
At October 31, 1995 and 1994, 94,928 and 233,333 shares, respectively, were
available for stock option grants under the employee plans, and 74,000 and
94,000 shares, respectively, were available for grant under the Non-Employee
Director Plan.
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A summary of the activity under the stock option plans is set forth below:
1992 Non-Employee
1987 Nonqualified 1984 Incentive Directors
Stock Option Plan Stock Option Plan Stock Option Plan
---------------------------------------------------------------------------------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1992 203,864 $2.97 - 13.75 60,258 $2.50 - 5.00 20,000 $5.25 - 11.88
Granted 75,382 9.25 - 17.25 --- --- 4,000 13.00
Terminated (2,501) 3.75 - 10.50 --- --- --- ---
Exercised (20,756) 2.97 - 6.50 (49,700) 2.50 - 5.00 --- ---
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1993 255,989 3.75 - 17.25 10,558 2.50 - 5.00 24,000 5.25 - 13.00
Granted 78,931 5.50 - 12.50 --- --- 20,000 8.50
Terminated (15,093) 7.13 - 10.50 --- --- --- ---
Exercised (3,901) 4.53 - 5.50 (10,558) 3.75 - 5.00 (3,750) 5.25
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1994 315,926 3.75 - 17.25 --- --- 40,250 5.25 - 13.00
Granted 275,907 7.50 - 14.50 --- --- 20,000 9.50
Terminated (37,502) 7.00 - 14.50 --- --- --- ---
Exercised (21,543) 3.75 - 13.25 --- --- --- ---
---------------------------------------------------------------------------------------------------
Outstanding at
October 31, 1995 532,788 $4.13 - 17.25 --- --- 60,250 $5.25 - 13.00
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Exercisable at
October 31, 1995 147,339 $4.13 - 17.25 --- --- 22,250 $5.25 - 13.00
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under
which 100,000 shares of common stock have been reserved for issuance. The
Purchase Plan allows participating employees to purchase, through payroll
deductions, shares of the Company's common stock at 85 percent of the stock's
fair market value at specified dates. At October 31, 1995, 156 employees were
eligible to participate in the Purchase Plan and 51,851 common shares were
available for issuance. In fiscal year 1995, 1994 and 1993, 17,869, 11,502 and
12,745 shares were issued under the Purchase Plan, respectively.
10. EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company contributes a percentage of income before income taxes into an
employee savings and investment plan. The percentage is determined annually by
the board of directors. The Company makes matching payments of 50 percent of
each employee's contribution up to three percent of employees' earnings.
Additional contributions to the savings and investment plan are payable
annually, vest over five years and cover substantially all employees who have
been with the Company at least one year.
For the years ended October 31, 1995, 1994 and 1993, total expense under
the above program and plan was $202,228, $169,116 and $442,796, respectively.
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11. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's trade accounts receivable are concentrated among a small number of
customers, principally located in the United States. Ongoing credit evaluations
of customers' financial condition are performed and, generally, no collateral is
required. The Company maintains an allowance for doubtful accounts for
potential credit losses, and actual bad debt losses have not been material and
have not exceeded management's expectations. Trade accounts receivable are
recorded net of allowance for doubtful accounts of $130,000 and $100,000, at
October 31, 1995 and 1994, respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to America Online and Tandem Computers of $3,062,000 and
$2,785,000, respectively, in fiscal 1995. Sales to Cisco Systems and G.E.
Capital Spacenet Services, respectively, accounted for $4,635,000 and $2,526,000
of revenues in fiscal 1994 and $9,586,000 and $4,083,000 in fiscal 1993.
International sales accounted for 11% of total revenues during fiscal 1995.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company has amended its financial statements for the three months ended
April 30, 1995 to reflect a $650,000 writedown of capitalized software costs.
This adjustment resulted from the capitalization of products that either did not
achieve technological feasibility or were subsequently discontinued. The effect
of this adjustment was to increase the second quarter net loss by $474,000, or
$.23 per share.
The Company's fiscal 1994 fourth quarter reflects a $153,000 tax benefit as
a result of the Company's amendment of its prior years' tax filings to adjust
its research and development tax credits claimed.
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------
1995:
Net sales $5,115 $4,768 $4,584 $4,901
Gross profit 2,910 2,418 2,174 2,299
Net loss (250) (1,583) (1,245) (1,490)
Net loss per share $(.12) $(.77) $(.60) $(.72)
1994:
Net sales $5,067 $5,627 $6,086 $5,556
Gross profit 2,784 3,222 3,468 3,024
Net income 288 544 411 93
Net income per share $.14 $.26 $.20 $.04
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13. SUBSEQUENT EVENT
In November 1995, the Company's Board of Directors approved an amendment to
the Company's Articles of Incorporation to increase the Company's authorized
shares of common and preferred stock to 10,000,000 and 2,000,000 shares,
respectively.
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SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993
Column A Column B Column C Column D Column E
--------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to costs End of
Description of Period and expenses Deductions (a) Period
- - ---------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1995
Allowance for Doubtful Accounts 100,000 32,590 (2,590) 130,000
Allowance for Obsolete Inventory 272,677 486,991 (228,654) 531,014
Allowance for Warranty Claims 96,016 52,608 (43,730) 104,894
Allowance for the deferred tax asset 178,626 769,374 0 948,000
YEAR ENDED OCTOBER 31, 1994
Allowance for Doubtful Accounts 150,986 0 (50,986) 100,000
Allowance for Obsolete Inventory 277,735 311,816 (316,874) 272,677
Allowance for Warranty Claims 123,042 65,392 (92,418) 96,016
Allowance for the deferred tax asset 0 178,626 0 178,626
YEAR ENDED OCTOBER 31, 1993
Allowance for Doubtful Accounts 124,030 30,000 (3,044) 150,986
Allowance for Obsolete Inventory 296,183 598,838 (617,286) 277,735
Allowance for Warranty Claims 95,404 149,053 (121,415) 123,042
(a) Deductions represent activity charged to related asset or liability account.
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