UNITED STATES
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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, 2001
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
2305 Camino Ramon, Suite 200, 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, 2001 as reported on the Nasdaq
National Market, was $1,650,199. Shares of Common Stock held by each executive
officer, director and stockholder whose ownership exceeds five percent of Common
Stock outstanding have been excluded because 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, 2001 was 3,546,141.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's definitive Proxy statement for the Registrant's
Annual Meeting of Stockholders scheduled for March 19, 2002 have been
incorporated by reference into Part III of this Annual Report on Form 10-K.
Exhibit Index on Page 23
Total Pages 47
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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 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 20
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners
and Management 22
Item 13 Certain Relationships and Related Transactions 23
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 23
SIGNATURES 26
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PART I
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
Certain statements set forth in or incorporated by reference in this Annual
Report on Form 10-K constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, without limitation, the
Company's expectations regarding its sales to Compaq Computer in fiscal 2002,
the belief that the market for client server networking products is growing, the
adequacy of anticipated sources of cash, planned capital expenditures, the
effect of interest rate increases, and trends or expectations regarding the
Company's operations. In addition, words such as "believes," "anticipates,"
"expects," "intends," "estimates" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various
risks and uncertainties. Readers are cautioned that the forward-looking
statements reflect management's analysis only as of the date hereof, and the
Company assumes no obligation to update these statements. Actual future
results, events and trends may differ materially from those expressed in or
implied by such statements depending on a variety of factors, including, but not
limited to those set forth under "Risk Factors" and elsewhere in this Form 10-K.
See "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.
On July 14, 2000, the Company acquired LAN Media Corporation, a privately held
wide area networking adapter company headquartered in Sunnyvale, California. In
the acquisition, we issued approximately 316,000 shares of our common stock for
all of LAN Media's outstanding common stock. The acquisition was accounted for
as a pooling of interests under Accounting Principles Board Opinion No. 16.
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 two years, 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
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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 four lines of high-speed intelligent
communications controller products: Highwire, Wan Adapter, 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 that our products serve
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
Company's Wan Adapter products are focused on the need for wide area network
connectivity in customer premise equipment ("CPE") such as routers, firewalls,
virtual private network ("VPN") servers and network switches. The Company's
WanXL products are designed for applications that require high-performance and
high-speed communications capability such as transmission of financial data and
real time video data. 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, except the Wan
Adapter products, are "intelligent," containing their own microprocessors and
memory. This architecture allows these communications controllers to offload
many of the lower-level communications tasks that would typically be performed
by the host platform, improving overall system performance. The Wan Adapter
products are designed to be low cost and high performance connectivity products
that provide developers of CPE equipment with an easy to integrate WAN interface
for their systems. All four product lines are supported by communications
software developed by both the Company and a variety of third party partners.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
NASDAQ NATIONAL MARKET LISTING; RISKS ASSOCIATED WITH DELISTING.
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The Company's Common Stock is currently listed on the Nasdaq National Market.
Nasdaq has requirements that a company must meet in order to remain listed on
the Nasdaq National Market. These requirements include maintaining a minimum bid
price of $1.00 and a minimum market value of its public float of $5.0 million.
The minimum bid price for our Common Stock has been below $1.00 since November
6, 2001. Nasdaq issued a press release on September 27, 2001, stating that, in
response to market conditions following the September 11, 2001 terrorist
attacks, it was implementing an across-the-board moratorium, until January 2,
2002, on the minimum bid requirements for continued listing. On December 12,
2001, the Nasdaq issued a press release stating that it would be reinstating the
minimum bid requirements for continued listing effective January 2, 2002. If the
minimum bid price of our Common Stock continues to trade below $1.00, our Common
Stock could be delisted from the Nasdaq National Market. In addition, even if
our minimum bid price exceeds $1.00, because we have only have 3.5 million
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shares of public float, we may still fail to comply with the $5.0 million market
value of public float requirement and thus, could be delisted from the Nasdaq
National Market.
If the Company fails to maintain the standards necessary to be quoted on the
Nasdaq National Market or alternatively, the Nasdaq SmallCap Market, and our
Common Stock is delisted, trading in our Common Stock could be conducted on the
OTC Bulletin Board or in the over-the-counter market in what is commonly
referred to as the "pink sheets." Such alternatives are generally considered to
be less efficient markets, and our stock price, as well as the liquidity of our
Common Stock, may be adversely impacted as a result.
DEPENDENCE ON A LIMITED NUMBER OF OEM CUSTOMERS. In fiscal 2001, most of the
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Company's sales were derived from a limited number of OEM customers. In fiscal
2001, sales to Compaq Computer accounted for 34% of the Company's net sales.
The Company expects that sales to Compaq Computer will also constitute a
substantial portion of the Company's net sales in fiscal 2002. 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 adverse 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
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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
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highly competitive. The Company competes directly with traditional vendors of
terminal servers, modems, remote control software, terminal emulation software
and application-specific communications solutions. The Company also competes
with suppliers of routers, hubs, network interface cards and other data
communications products. In the future, the Company expects competition from
companies offering client/server access solutions based on emerging technologies
such as switched digital telephone services. In addition, the Company may
encounter increased competition from operating system and network operating
system vendors to the extent such vendors include full communications
capabilities in their products. The Company may also encounter future
competition from telephony service providers (such as AT&T or the regional Bell
operating companies) that may offer communications services through their
telephone networks.
Increased competition with respect to any of the Company's products could result
in price reductions and loss of market share, which would adversely affect the
Company's business, operating results and financial condition. Many of the
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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
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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
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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,
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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
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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.
SUCCESSFUL INTEGRATION OF ACQUISITIONS. In July 2000, the Company acquired LAN
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Media Corporation. We may continue to acquire companies, technologies or
products or to sell or discontinue some of our technologies or products in
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future periods. Our acquisitions involve numerous risks, including the use of
significant amounts of our cash, diversion of the attention of our management
from our core business, loss of our key employees and significant expenses and
write-offs. Incremental acquisition related charges including in-process
research and development and amortization of goodwill and other intangibles or
divestitures of profitable technologies or products could adversely impact our
profitability. The success of these acquisitions depends upon our ability to
timely and successfully develop, manufacture and gain market acceptance for the
products we acquired. If we engage in additional acquisitions or divestitures in
future periods, we may not be able to address these risks and our business may
be harmed.
DEPENDENCE ON KEY SUPPLIERS. The chipsets used in the Company's products are
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currently available only from Motorola. In addition, certain other components
are currently available only from single suppliers. The inability to obtain
sufficient key components as required, or to develop alternative sources if and
as required in the future, could result in delays or reductions in product
shipments which, in turn, would have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURER. The Company and XeTel Corporation
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("XeTel"), a contract manufacturing company headquartered in Austin, Texas, have
entered into an exclusive manufacturing service agreement under which XeTel is
to manufacture all of the Company's products until at least May 2002. 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
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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 on the 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
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subject to wide fluctuations in response to quarter-to-quarter fluctuations in
operating results, the failure to meet analyst estimates, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the computer and communications industries and other
events or factors. In addition, stock markets have experienced extreme price
and trading volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many high technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
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ANTI-TAKEOVER PROVISIONS AND DELAWARE LAW. The Company's Board of Directors has
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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.
OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL. The
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development and marketing of our products is capital intensive. We believe that
our existing cash balances and our anticipated cash flow from operations will
satisfy our financing requirements for the next twelve months. Rapid revenue
growth may require that we seek additional capital to meet our working capital
needs beyond the next 12 months. Likewise, a further decline in future orders
and revenues might have a similar effect should we be unable to reduce our
expenses to the degree necessary to avoid incurring losses. There can be no
assurance that additional financing, if required, will be available on
reasonable terms or at all. To the extent that additional capital is raised
through the sale of additional equity or convertible debt securities, the
issuance of such securities could result in additional dilution to our
stockholders.
PRODUCTS
The Company designs, markets, sells and supports innovative communications
controller and adapter products for the global communications marketplace. The
Company offers four principal lines of products: Highwire, Wan Adapter, WanXL
and VMEbus. All four families offer a variety of intelligent and
non-intelligent communications products 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 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 referred to as Signaling System Seven or "SS7." 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,
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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 one to 128 SS7 signaling channels per controller card
and to integrate easily with the industry's leading applications providers.
Wan Adapter products. The need for reliable, easy to integrate and low cost
connectivity products for routers, network gateways, VPN servers and other
network appliances has never been greater. All network based products that need
to communicate across switched telephone networks or the internet require a WAN
connection device. Historically many companies have developed these interfaces
to their network equipment themselves. However, as product release cycles
shorten and WAN standards become ubiquitous, many network equipment
manufacturers have chosen to integrate third parties standards based WAN devices
into their systems. SBE's Wan Adapter line of products is focused on this
market using a unique design that is modeled on the successful models deployed
in the Local Area Network ("LAN") adapter markets. The Company has utilized low
cost LAN components and custom firmware and integrated software to provide a low
cost high performance product that is easy for network equipment manufacturers
to integrate into their systems. The Company offers a broad range of WAN
connectivity options in its Wan Adapter product line ranging with interfaces
including T-1/E1, Clear Channel, HSSI, and T-3.
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.
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
computer systems, which has led to the sharing of databases, software
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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.
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.
The following table shows sales by major product type as a percentage of net
sales for fiscal 2001, 2000 and 1999:
Year Ended October 31,
2001 2000 1999
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(percentage of net sales)
VME Communication Controllers 64% 75% 81%
Wan Adapter 25 15 9
WanXL products 6 6 3
Other 5 4 7
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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'
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representatives, value-added resellers and certain OEM partners. The Company
actively supports its indirect channel marketing partners with its own sales and
marketing organization. The Company's sales staff solicits prospective
customers, provides technical advice with respect to its 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 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.
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 2001, 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 2002.
Information relating to accounting for research and development costs is
included in Note 1 of Notes to Consolidated Financial Statements. Also see
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations."
MANUFACTURING
The Company's 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, however 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 that the
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sole-source components supplied by Motorola will become available to the Company
from alternative suppliers in the future. Although the Company has rarely
experienced any significant problems in obtaining sole-source components, the
Company has sought to establish a close relationship with sole-source suppliers
and, if necessary, build up an inventory of such components.
In December 1996, the Company sold all of its manufacturing assets and entered
into a contract manufacturing agreement with XeTel to supply manufacturing
services. The Company believes that XeTel has been able to provide lower prices
and a more efficient and timely product delivery than the Company could produce
with its previous manufacturing resources.
COMPETITION
The market for 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, Interphase, Artesyn, SBS Technology and Adax along with various
other platform and controller product providers. The Company's VMEbus, Wan
Adapter and WanXL communications controller products compete primarily with
products from Digi International, Motorola, Interphase Corp., 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 new 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, 2001, the Company had a backlog of product orders of
approximately $337,000 for shipment within the next 12 months. On December 31,
2000, the Company had a backlog of product orders of approximately $2.7 million
for shipment within the next 12 months. Because recorded sales orders are
-12-
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 December 31, 2001, the Company had 47 employees. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages. The Company believes its employee relations are good.
The Company believes that the Company's future success will depend, in part, on
its ability to attract and retain qualified technical (particularly
engineering), marketing and management personnel. Such experienced personnel
are in great demand, and the Company must compete for their services with other
firms, many of which have greater financial resources than the Company.
ITEM 2. PROPERTIES
In December 2001, the Company relocated its engineering and administrative
headquarters to 15,000 square feet of leased space located in San Ramon,
California. The lease expires in 2004. The Company expects that the facility
will satisfy its anticipated needs through the foreseeable future. In
conjunction with the relocation to the new building, the Company assigned the
lease related to its former 63,000 square foot engineering and administrative
headquarters facility to a third party corporation. The third party corporation
has guaranteed payment of the remaining lease payments though the termination of
the original lease in 2006.
The Company leases 6,100 square feet of office space in Madison, Wisconsin for
various product development activities. The lease expires in 2005 and provides
the Company with the right to renew the lease for two additional five-year
terms. The Company expects that this office space will satisfy the needs of the
Madison development group for the foreseeable future.
Additionally, through the acquisition of LAN Media Corp. in July 2000, the
Company leases approximately 3,650 square feet of office space in Sunnyvale, CA.
The Sunnyvale lease expires in 2003. The Company subleased this office space to
a third party corporation for the remaining term of the lease.
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
Subsequent to our 2001 Annual Meeting of Stockholders, there were no matters
submitted to a vote of our stockholders in the remainder of fiscal 2001. The
voting results from the 2001 Annual Meeting of Stockholders were included in the
Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 2001.
-13-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY &
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol SBEI. The following table presents quarterly information on the price
range of the Company's Common Stock, indicating the high and low bid prices
reported by the Nasdaq National Market. These prices do not include retail
markups, markdowns or commissions. As of December 31, 2001, there were
approximately 419 holders of record of the Company's Common Stock. There are no
restrictions on the Company's ability to pay dividends; however, it is currently
the intention of the Board of Directors to retain all earnings, if any, for use
in the Company's business and the Company does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will depend, among other factors, upon the earnings, capital
requirements, operating results and financial condition of the Company.
Fiscal quarter ended
---------------------------------------------
Fiscal 2001 January 31 April 30 July 31 October 31
----------- ----------- --------- -------- -----------
High $ 8.75 $ 5.50 $ 3.50 $ 1.70
Low 3.38 2.25 1.05 0.80
Fiscal 2000
High $ 11.88 $ 22.25 $ 26.38 $ 22.75
Low 3.94 8.50 14.00 8.56
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Form 10-K.
For years ended October 31,
and at October 31 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------
(in thousands, except for per share amounts and number of employees)
Net sales $ 7,726 $29,178 $19,854 $21,124 $26,695
Net income (loss) $(9,896) $ 3,970 $ (254) $ 184 $ 3,229
Net income (loss) per share - basic $ (2.92) $ 1.24 $ (0.08) $ 0.07 $ 1.25
Product research and development $ 5,652 $ 5,635 $ 5,167 $ 3,864 $ 2,954
Working capital $ 7,595 $11,793 $ 7,191 $ 7,845 $ 7,918
Total assets $10,690 $17,427 $11,264 $11,783 $11,978
Long-term obligations $ 4,870 $ 288 $ 503 $ 631 $ 925
Stockholders' equity $ 4,119 $13,829 $ 8,636 $ 8,846 $ 8,475
Number of employees 47 87 72 68 84
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are subject to many risks
and uncertainties that could cause actual results to differ significantly from
expectations. For more information on forward-looking statements, refer to the
"Special Note on Forward Looking Statements" at the front of this Annual Report
on Form 10K.
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."
On July 14, 2000, the Company acquired LAN Media Corporation, a privately held
wide area networking adapter company headquartered in Sunnyvale, California. In
the acquisition, we issued approximately 316,000 shares of our Common Stock for
all LAN Media's outstanding common stock. The acquisition was accounted for as
a pooling of interests under Accounting Principles Board Opinion No. 16.
During the year ended October 31, 2001, the Company reduced its workforce from
87 to 47 employees or 46% over the prior year. As a result of the reduction in
its workforce, the Company will realize an annual savings related to employee
salaries and benefits of approximately $3.0 million as compared to fiscal 2001.
The Company also entered into an agreement with a third party corporation to
assign the lease of its 63,000 square foot engineering and headquarters facility
located in San Ramon, California. Simultaneously with the lease assignment, the
Company sublet a 15,000 square foot engineering and headquarters facility also
located in San Ramon, California. The total net savings to the Company from the
move of its engineering and headquarters facility will be approximately $800,000
per year or $3.0 million over the term of the lease. The Company expensed
$964,000 in restructuring costs related to the reduction in its workforce and
change in facilities in fiscal 2001.
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, 2001, 2000 and 1999. These operating results are not necessarily indicative
of Company's operating results for any future period.
-15-
YEAR ENDED OCTOBER 31,
----------------------------
2001 2000 1999
-------- -------- --------
Net sales 100% 100% 100%
Cost of sales 63 36 38
-------- -------- --------
Gross profit 37 64 62
Operating expenses:
Product research and development 73 19 26
Sales and marketing 40 16 23
General and administrative 42 16
Restructuring costs 13 --- ---
-------- -------- --------
Total operating expenses (168) 51 64
-------- -------- --------
Operating income (loss) (131) 13 (2)
Interest income 3 1 1
-------- -------- --------
Income (loss) before income taxes (128) 14 (1)
Provision for income taxes --- --- ---
-------- -------- --------
Net income (loss) (128)% 14% (1)%
======== ======== ========
NET SALES
Net sales for fiscal 2001 were $7.7 million, a 74% decrease from fiscal 2000.
Net sales for fiscal 2000 were $29.2 million, a 47% increase from fiscal 1999.
The decrease from fiscal 2000 to fiscal 2001 was primarily attributable to a
general slowdown in demand from telecommunications customer and to lower sales
of custom integrated circuit products to Compaq. The increase from fiscal 1999
to fiscal 2000 was primarily attributable to increased sales of VMEbus products
to Compaq along with an overall increase in sales of WAN Adapter products. Sales
to individual customers in excess of 10% of net sales of the Company included
net sales to Compaq of $2.6 million in 2001, $19.4 million in fiscal 2000 and
$12.6 million in fiscal 1999, respectively. Net sales to Lockheed Martin were
$1.5 million, $1.0 million and $500,000 in fiscal 2001, 2000 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 9%, 4% and 4% of net sales in fiscal 2001,
fiscal 2000 and fiscal 1999, respectively. International sales are executed in
US dollars and are principally transacted in Europe.
GROSS PROFIT
Gross profit as a percentage of net sales was 37%, 64% and 62% in fiscal 2001,
2000 and 1999, respectively. During 2001, the Company increased its inventory
valuation reserves for obsolete and slow moving inventory by $1.0 million.
Excluding the inventory write-downs, the gross margin for fiscal 2001 was 50%.
Gross profit as a percentage of sales decreased in fiscal 2001 as a result of
inventory valuation write-downs and lower production volumes. Gross profit as a
percentage of net sales increased in fiscal 2000 as a result of lower costs for
products due to increased volume.
-16-
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $5.7 million in fiscal 2001, $5.6
million in fiscal 2000 and $5.2 million in fiscal 1999, representing 73%, 19%
and 26% of net sales, respectively. The increase in research and development
spending as a percentage of revenue from fiscal 2000 to fiscal 2001 was due to
lower revenue without a corresponding reduction in research and development
spending. During fiscal 2001, the Company emphasized completion of the
development programs for the HighWire product line and software development for
the SS7 and WAN product lines. The increase in research and development
spending from fiscal 1999 to fiscal 2000 was a result of higher spending on the
development of new telecommunications products. Due to staffing reductions and
other cost containment measures during the later part of fiscal 2001, the
Company expects a reduction in overall spending for its product research and
development in absolute dollars and as a percentage of sales from fiscal 2001.
See "Item 1-Business-Risk Factors-Future Success Dependent on New Product Lines;
- -Rapid Technological Change; Ongoing Product Development Requirements."
The Company did not capitalize any internal software development costs in fiscal
2001, 2000 or 1999, respectively.
SALES AND MARKETING
Sales and marketing expenses for fiscal 2001 were $3.1 million, a 33% decrease
over fiscal 2000. This decrease is primarily related to lower headcount in the
sales and marketing departments plus a decrease in commissions due to lower
sales volume. Fiscal 2000 expense was $4.6 million, essentially the same as
fiscal 1999. Sales and marketing programs are focused on new customer
development and therefore as new customer sales increase, sales and marketing
expenses will increase. Customer new product sales cycles may span over periods
as long as twenty-four months. Due to staffing reductions and cost containment
measures during the latter part of 2001, the Company expects sales and marketing
expense will decrease in absolute dollars and as a percentage of total sales
from fiscal 2001 levels.
In the latter part of fiscal 2001, the Company reorganized its sales and
marketing groups enhancing the industry and product expertise of the groups. The
sales department is now organized around and the members of our sales team are
compensated for meeting certain objectives referred to as "Design Wins." A
Design Win is defined as a program with an OEM customer which will generate at
least $400,000 in annual revenue within 12 to 18 months after the customer
accepts and confirms the use of the Company's product in their platform. The
Company had three Design Wins in the fourth quarter of 2001 and expects to close
at least 20 Design Wins in fiscal 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 2001 decreased to $3.3 million, a
28% decrease over fiscal 2000. The decrease was due to headcount and expense
containment measures plus reduced profit sharing and bonus contributions which
are tied to the Company's profitability. Fiscal 2000 expense increased to $4.6
million from 3.0 million in fiscal 1999 or, 52%, as a result of increased profit
sharing and bonus programs due to increased profitability and costs related to
the acquisition of LAN Media Corporation.
-17-
RESTRUCTURING COSTS
In response to the continued economic slowdown, the Company implemented a
restructuring plan in fiscal 2001 and recorded a restructuring charge of
$964,000. Restructuring costs are comprised of severance costs associated with
staff reductions totaling $52,000, leasehold improvements and equipment
write-downs related to the relocation of the Company's headquarters of $337,000
and losses related to its sublease of $575,000. The Company reduced its
headcount from 87 employees to 47 employees during fiscal 2001. The reduction in
headcount plus the relocation of the XeTel manufacturing facility from the
Company's engineering and headquarters facility in San Ramon, California to
Texas left the Company with excess facility space. The Company was able to enter
into an agreement with a third party corporation to assign the lease for its
63,000 square foot facility located at 4550 Norris Canyon Rd, San Ramon,
California and simultaneously sublease a 15,000 square foot facility also
located in San Ramon, California. The Company abandoned the leasehold
improvements and certain of its equipment in conjunction with the relocation. As
a result of this transaction, a non-cash $337,000 write down of leasehold
improvements and equipment was expensed in fiscal 2001. Real estate commissions
and building expenses totaling $442,000 were accrued in fiscal 2001 and will be
paid in fiscal 2002. An additional amount totaling $133,000 was accrued related
to a loss associated with facilities acquired with the purchase of LAN Media
Corporation in fiscal 2000 and subleased to a third party corporation in fiscal
2001. This amount will be paid over 36 months beginning May 2001. As of October
31, 2001, $590,000 of the restructuring costs was included in other current
liabilities.
INTEREST INCOME
Interest income in fiscal 2001 increased slightly from 2000 due to higher
average cash balances in fiscal 2001. Fiscal 2000 income decreased slightly from
fiscal 1999 due to lower average cash balances in fiscal 2000 as compared to
fiscal 1999.
INCOME TAXES
The Company recorded tax provisions of $1,000, $126,000 and $3,000 in fiscal
2001, 2000 and fiscal 1999, respectively. The Company's effective tax rate was
0%, 3% and 1% in fiscal 2001, 2000 and 1999, respectively. The Company has
recorded a valuation allowance in fiscal 2001, 2000, and 1999 for certain
deferred tax assets due to the uncertainty of realization. This valuation
allowance decreased from approximately $4.0 million in fiscal 2000 to $8.1
million in fiscal 2001. In the event of future taxable income, the Company's
effective income tax rate in future periods could be lower than the statutory
rate as such tax assets are realized.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company recorded a net loss of
$9.9 million in fiscal 2001, net income of $4 million in fiscal 2000 and a net
loss of $254,000 in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $3.6 million and $5.3 million on
October 31, 2001 and October 31, 2000, respectively. In fiscal 2001, $1.5
million of cash was used by operating activities, principally as a result of net
losses of $9.9 million and a $1.6 million decrease in other liabilities and
-18-
accounts payable. The decrease in liabilities and accounts payable was the
result of controlled spending during this period of lower sales volume. The
decreases in cash were partially offset by $1,077,000 of non-cash depreciation
and amortization charges, a $337,000 non-cash charge related to write-offs of
fixed assets and leasehold improvements included in the restructuring costs, a
$490,000 decrease in inventories, a $3.5 million decrease in trade accounts
receivable and a $4.6 million increase in non-current liabilities. The decrease
in inventories is primarily related to a $1.0 million write down for slow moving
and obsolete inventory and was partially offset by purchases of certain
end-of-life components to be used in future production of VME and LMC adapter
products. We believe that we have acquired sufficient components to meet backlog
and forecasted customer demand and are actively working with the applicable
customers to transition them to new product platforms. The decrease in the trade
accounts receivable is the result of lower sales volumes. The increase in
non-current liabilities was primarily the result of a $4.9 million deposit from
Compaq which was part of a four year end-of-life supply agreement that was
initiated during the second quarter of fiscal 2001. Working capital at October
31, 2001 was $7.6 million, as compared to $11.6 million at October 31, 2000.
In fiscal 2001, the Company purchased $299,000 of fixed assets, consisting
primarily of computers and engineering equipment. Software costs amounting to
$10,000 were capitalized in fiscal 2001. The Company expects significantly
lower levels of capital expenditures during fiscal 2002.
The Company received $160,000 in fiscal 2001 from employee stock option
exercises and stock purchase plan purchases.
The Company will realize significant reductions in its operating expenses due to
management's implementation of a program of controlled spending that encompasses
every aspect of the Company. In addition, the headcount reductions will
translate to an estimated $3.0 million decrease in salaries and benefits and
other employee related expenses combined with an estimated $800,000 annual
decrease in facility expenses related to the relocation of the Company's
engineering and headquarters facility. Based on the current operating plan, the
Company anticipates that its current cash balances and cash flow from operations
will be sufficient to meet its working capital needs in fiscal 2002. After that
time, we cannot be certain that additional funding will be available on
acceptable terms, or at all. If we require additional capital resource to grow
our business, execute our operating plans or acquire complimentary technologies
or businesses at any time in the future, we may seek to sell additional equity
or debt securities or secure lines of credit, which may result in additional
dilution to our stockholders. In addition, we cannot be assured that additional
financing, if needed, will be available on favorable terms, or at all.
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, 2001 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
-19-
constant. If interest rates increased by 10%, the expected effect on net income
(loss) 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.
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors; Section 16(a) Beneficial Ownership Reporting
- --------------------------------------------------------------------------------
Compliance
- ----------
The information required 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 to be filed
with the Securities and Exchange Commission for the Annual Meeting of
Stockholders scheduled for March 19, 2002 (the "2002 Proxy Statement"). The
information required 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
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934"
appearing in the 2002 Proxy Statement.
Identification of Executive Officers
- ---------------------------------------
The executive officers of the Company and their respective ages and positions
with the Company as December 31, 2001 are set forth in the following table.
Executive officers serve at the discretion of the Board of Directors. There are
no familial relationships between a director or executive officer and any other
director or executive officer of the Company.
Name Age Position
- ------------------------------------ --- ----------------------------------------
William B. Heye, Jr. 63 President and Chief Executive Officer
David W. Brunton 51 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Daniel Grey 46 Vice President of Sales
Richard M. Strang 56 Vice President, Technology
Kirk Anderson 42 Vice President, Operations
Mr. Heye joined the Company in November 1991 as President, Chief Executive
Officer and member of the Board of Directors. 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.
-21-
Mr. Brunton joined the Company in November 2001 as Vice President, Finance,
Chief Financial Officer, Secretary and Treasurer. From 2000 to 2001 he was the
Chief Financial Officer for NetStream, Inc., a telephony broadband network
service provider. From 1997 to 2000, Mr. Brunton was the Chief Financial
Officer and Senior Vice President - Operations for ReSourcePhoenix.com, a
financial services outsource provider. From 1987 to 1997, Mr. Brunton was the
Corporate Controller for the Phoenix American Companies, an equipment leasing,
cable TV, telecommunications and software development company. Mr. Brunton is a
CPA who prior to 1987 was with Arthur Andersen & Co. (now Andersen LLP), an
international professional services firm.
Mr. Grey has served as Senior Vice President of Sales since May 2001. He is a
former member of the SBE sales staff who rejoined SBE in May 2001. From 1989 to
1996, as the Director of Western Sales for SBE, he drove sales to record levels
through the initiation of relationships with industry leaders such as Cisco
Systems, Sun Microsystems, and Tandem Computers. In addition, Grey has
experienced 20 years of success propelling sales for well known companies
including Force Computers, Mizar, Performance Technologies, and most recently as
senior vice president of sales with SBS Technologies.
Mr. Strang has served as Vice President of Technology since 1997. and has been
the company's chief architect and technologist. He originated many of the
company's ASIC and board design concepts, including its current HighWire(TM)
product family, and has been instrumental in enabling SBE to identify and
respond to specific needs of key OEM customers who require the most advanced
technology. Prior to founding SBE, Mr. Strang developed communications products
at Adaptive Science Corporation, becoming their Vice President of Engineering in
1980. Previously, he developed data acquisition and display systems for nuclear
physics programs at Lawrence Berkeley Laboratory. Mr. Strang holds BA degrees in
Physics and Mathematics.
Mr. Anderson has served as Vice President, Operations since October 2001. He
joined the Company as Manager, Operations in 1997 and was promoted to Director,
Operations in 1999. Prior to joining the Company he held various management
positions in operations, finance and marketing for several high-tech companies
in Silicon Valley, including Vitalink Communications, a pioneer in
internetworking products.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information in the section entitled "Executive Compensation" appearing in the
2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required 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 2002 Proxy Statement.
-22-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information in the sections entitled "Certain Transactions" and "Executive
Compensation" appearing in the 2002 Proxy Statement.
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)(1) Financial Statements
--------------------
Page
----
Report of Independent Accountants 27
Consolidated Balance Sheets at October 31, 2001 and 2000 28
Consolidated Statements of Operations for fiscal years 2001,
2000 and 1999 29
Consolidated Statements of Stockholders' Equity for fiscal
years 2001, 2000 and 1999 30
Consolidated Statements of Cash Flows for fiscal years 2001,
2000 and 1999 31
Notes to Consolidated Financial Statements 32
(a)(2) Financial Statement Schedule
------------------------------
Schedule II - Valuation and Qualifying Accounts 45
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.
(a)(3) List of Exhibits
-23-
Exhibit
Number Description
------ -----------
3.1(1) Certificate of Incorporation, as amended through
December 15, 1997.
3.2(2) Bylaws, as amended through December 8, 1998.
10.1(3)* 1996 Stock Option Plan, as amended.
10.2(4)* 1991 Non-Employee Directors' Stock Option Plan, as
amended.
10.3(5) 1992 Employee Stock Purchase Plan, as amended.
10.4(6) 1998 Non-Officer Stock Option Plan.
10.5(7) Lease for 4550 Norris Canyon Road, San Ramon, California
dated November 2, 1992 between the Company and PacTel
Properties.
10.6(8) 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).
10.7(9) Asset Purchase Agreement between XeTel Corporation and the
Company dated as of December 6, 1996.
10.8(1) Letter of agreement to provide credit facilities between the
Company and Comerica Bank - California, dated August 26,
1997.
10.9(2)* Full Recourse Promissory Note executed by William B. Heye,
Jr. in favor of the Company dated November 6, 1998, as
amended.
10.10(10)+ Amendment No. S/M018-4 dated April 3, 2001, to the Purchase
Agreement dated May 6, 1991, between SBE, Inc. and Compaq
Computer Corporation.
* Indicates management contract or compensation plans or arrangements filed
pursuant to Item 601(5)(10) of Regulation SK.
+ Certain confidential information has been deleted from this exhibit pursuant
to a confidential treatment order that has been granted.
11.1 Statement re computation of per share earnings 46
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants 47
-24-
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the quarter ended
October 31, 2001.
(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1997 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Form S-8 dated September 15, 1998 and
incorporated herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1991 and incorporated herein by reference.
(5) Filed as an exhibit to Form S-8 dated November 24, 1998 and
incorporated herein by reference.
(6) Filed as an exhibit to Form S-8 dated October 16, 1998 and
incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1993 and incorporated herein by reference.
(8) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to the report on Form 8-K dated December 6, 1996
and incorporated herein by reference.
(10) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended April 30, 2001 and incorporated herein by reference.
-25-
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 25, 2002 By: /s/ David W. Brunton
----------------------------------
David W. Brunton
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 25, 2002.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- ----------------------------
William B. Heye Jr. Chief Executive Officer and President
(Principal Executive Officer)
/s/ David W. Brunton
- ----------------------------
David W. Brunton 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
-26-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SBE, Inc.
and Subsidiaries:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of SBE, Inc. and its subsidiaries at October 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) 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 statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
November 30, 2001, except for Note 14 as to which the date is December 14, 2001.
-27-
SBE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
October 31 2001 2000
- ----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,644 $ 5,311
Trade accounts receivable, net 760 4,296
Inventories, net 4,428 4,918
Deferred income taxes --- 7
Other 464 420
-------- --------
Total current assets 9,296 14,952
Property and equipment, net 1,236 2,143
Capitalized software costs, net 86 293
Other 72 39
-------- --------
Total assets $10,690 $17,427
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 545 $ 1,094
Accrued payroll and employee benefits 343 1,304
Accrued product warranties 56 145
Other 757 767
-------- --------
Total current liabilities 1,701 3,310
Deferred tax liabilities --- 7
Deferred rent --- 281
Refundable deposit 4,870 ---
-------- --------
Total liabilities 6,571 3,598
-------- --------
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Convertible preferred stock: no par value;
Authorized 167,339 shares; issued 163,344 in fiscal 1999;
none outstanding at October 31, 2001 and 2000 --- ---
Common stock and additional paid-in capital
($0.001 par value); authorized
10,000,000 shares; issued
3,521,037 and 3,389,338 shares at
October 31, 2001 and 2000, respectively (including
Treasury shares: 79,500 at October 31, 2001 and 2000) 13,877 13,855
Note receivable from stockholder (744) (744)
Treasury stock (409) (409)
Deferred stock-based compensation --- (164)
Retained earnings (accumulated deficit) (8,605) 1,291
-------- --------
Total stockholders' equity 4,119 13,829
-------- --------
Total liabilities and stockholders' equity $10,690 $17,427
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
For the years ended October 31 2001 2000 1999
- -----------------------------------------------------------------------
Net sales $ 7,726 $29,178 $19,854
Cost of sales 4,860 10,418 7,622
--------- ------- --------
Gross profit 2,866 18,760 12,232
Product research and development 5,652 5,635 5,167
Sales and marketing 3,105 4,612 4,505
General and administrative 3,265 4,602 3,037
Restructuring costs 964 --- ---
--------- ------- --------
Total operating expenses 12,986 14,849 12,709
Operating income (loss) (10,120) 3,911 (477)
Interest income 225 185 226
--------- ------- --------
Income (loss) before income taxes (9,895) 4,096 (251)
Provision for income taxes 1 126 3
--------- ------- --------
Net income (loss) $ (9,896) $ 3,970 $ (254)
========= ======= ========
Basic earnings (loss) per common share $ (2.92) $ 1.24 $ (0.08)
========= ======= ========
Diluted earnings (loss) per common share $ (2.92) $ 1.04 $ (0.08)
========= ======= ========
Basic - Shares used in per share
computations 3,390 3,208 3,097
========= ======= ========
Diluted - Shares used in per share
computations 3,390 3,814 3,097
========= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
Common Stock
Convertible and Additional Note Receivable
Preferred Stock Paid-in Capital from stockholder
Shares Amount Shares Amount
Balance, October 31, 1998 147,364 $ 1,229 2,768,701 $10,044 $ -
Issuance Series B convertible Preferred Stock 15,980 200 - - -
Stock issued in connection with stock option plans - - 195,987 834 -
Stock issued in connection with stock purchase plan - - 19,641 74 -
Stock repurchase - - - - -
Note receivable from stockholder - - - - (744)
Deferred stock-based compensation - - - 158 -
Amortization of deferred stock compensation - - - - -
Net loss
--------- -------- --------- -------- ------------------
Balance, October 31, 1999 163,344 1,429 2,984,329 11,110 (744)
Stock issued in connection with stock option plans - - 222,334 1,081 -
Stock retired/issued in connection with conversion to common stock (163,344) (1,429) 163,344 1,429 -
Stock issued in connection with stock purchase plan - - 19,331 104 -
Stock repurchase - - - - -
Note receivable from stockholder - - - - -
Deferred stock-based compensation - - - 131 -
Amortization of deferred stock compensation - - - - -
Net income - - - - -
--------- -------- --------- -------- ------------------
Balance, October 31, 2000 - - 3,389,338 13,855 (744)
Stock issued in connection with stock option plans 99,054 51 -
Stock issued in connection with stock purchase plan - - 32,645 109 -
Stock repurchase - - - - -
Forfeiture of unvested stock options - - - (138) -
Amortization of deferred stock compensation - - - - -
Net loss - - - - -
Balance, October 31, 2001 - $ - 3,521,037 $13,877 $ (744)
========= ======== ========= ======== ==================
Retained
Deferred Earnings
Treasury Stock Stock-Based (Accumulated
Shares Amount Compensation deficit) Total
Balance, October 31, 1998 - $ - $ - $ (2,425) $ 8,848
Issuance Series B convertible Preferred Stock - - - - 200
Stock issued in connection with stock option plans - - - - 834
Stock issued in connection with stock purchase plan - - - - 74
Stock repurchase 74,500 (358) - (358)
Note receivable from stockholder - - - (744)
Deferred stock-based compensation - - (158) - -
Amortization of deferred stock compensation - - 36 - 36
Net loss (254) (254)
------ -------- -------------- ------------ --------
Balance, October 31, 1999 74,500 (358) (122) (2,679) 8,636
Stock issued in connection with stock option plans - - - - 1,081
Stock retired/issued in connection with conversion to common stock - - - - -
Stock issued in connection with stock purchase plan - - - - 104
Stock repurchase 5,000 (51) - (51)
Note receivable from stockholder - - - -
Deferred stock-based compensation - - (131) - -
Amortization of deferred stock compensation - - 89 - 89
Net income - - - 3,970 3,970
------ -------- -------------- ------------ --------
Balance, October 31, 2000 79,500 (409) (164) 1,291 13,829
Stock issued in connection with stock option plans - - - - 51
Stock issued in connection with stock purchase plan - - - - 109
Stock repurchase - - - - -
Forfeiture of unvested stock options - - 138 - -
Amortization of deferred stock compensation - - 26 - 26
Net loss - - - (9,896) (9,896)
------ -------- -------------- ------------ --------
Balance, October 31, 2001 79,500 $ (409) $ - $ (8,605) $ 4,119
====== ======== ============== ============ ========
The accompanying notes are an integral part of these consolidated financial statements.
-30-
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended October 31 2001 2000 1999
- ------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(9,896) $ 3,970 $ (254)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,077 962 818
Non-cash restructuring costs 337 --- ---
Stock-based compensation expense 26 89 36
Loss on sale of assets 5 --- ---
Changes in operating assets and liabilities:
Trade accounts receivable 3,536 (808) 378
Inventories 490 (2,951) 65
Other assets (70) (89) 144
Trade accounts payable (549) (26) (468)
Other current liabilities (1,060) 1,211 290
Non-current liabilities 4,582 (64) (47)
-------- -------- --------
Net cash provided by (used in) operating activities (1,522) 2,294 962
-------- -------- --------
Cash flows from investing activities:
:
Purchases of property and equipment (299) (1,320) (870)
Proceeds from sale of assets 4 --- ---
Capitalized software costs (10) (182) (268)
-------- -------- --------
Net cash used in investing activities (305) (1,502) (1,138)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock plans 160 1,185 164
Proceeds from issuance of preferred stock --- --- 200
Purchase of treasury stock --- (51) (358)
-------- -------- --------
Net cash provided by financing activities 160 1,134 6
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,667) 1,926 (170)
Cash and cash equivalents at beginning of year 5,311 3,385 3,555
-------- -------- --------
Cash and cash equivalents at end of year $ 3,644 $ 5,311 $ 3,385
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ --- $ 24 $ ---
======== ======== ========
Income taxes $ --- $ 126 $ 37
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Conversion of preferred stock into common stock $ --- $ 1,429 $ ---
======== ======== ========
Issuance of stock in exchange for note receivable $ --- $ --- $ 744
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Segment and Basis of Presentation:
SBE, Inc. and subsidiaries (the "Company") designs and manufactures
high-performance communications controllers and equipment used primarily in
carrier-grade computer systems and signaling, switching and routing networks.
The Company's products are sold worldwide. The Company's business falls
exclusively within one industry segment.
The consolidated financial statements of the Company include the financial
position and results of operations of LAN Media Corporation, ("LMC"), which the
Company acquired on July 14, 2000. The merger was accounted for as a pooling of
interests and accordingly, financial statements presented for all periods have
been restated to reflect combined operations and financial position. As
consideration for all outstanding shares of LMC, the Company issued 316,101
shares of its common stock. In addition, the Company assumed all outstanding
options held by LMC option holders.
The Company has incurred substantial losses and negative cash flows from
operations during the year ended October 31, 2001. Management has implemented a
cost containment program to reduce the Company's headcount, real estate needs
and certain non-essential spending. The Company anticipates that its current
cash balances and cash flow from operations will be sufficient to meet its
working capital needs in fiscal 2002. After that time, the Company cannot be
certain that additional funding will be available on acceptable terms, or at
all.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
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.
Fair Value of Financial Instruments:
The fair value of the Company's cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their carrying value due to
the short-term maturity rate structure of those instruments.
-32-
Cash and 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. The Company's inventories include high-technology
parts that may be subject to rapid technological obsolescence. The Company
considers technological obsolescence in estimating required reserves to reduce
recorded amounts to market values. Such estimates could change in the future and
have a material adverse impact on the Company's financial position and results
of operations.
Property and Equipment:
Property and equipment are carried at cost. The Company records depreciation
charges over the assets' 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 accounts and any gain or loss on sale or
disposal is recognized in operations. 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. 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 any, would be
calculated based on the excess of the carrying amount of the asset over its fair
value. During the year ended October 31, 2001, the Company committed to
relocating its engineering and administrative headquarters located in San Ramon,
California and as a consequence wrote off $337,000 in leasehold improvements and
property and equipment associated with the former headquarters location. This
write off is included in restructuring costs.
Capitalized Software Costs:
Capitalized software costs consist of costs to purchase software and costs 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 two-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.
-33-
Revenue Recognition and Warranty Costs:
The Company records product sales at the time of product shipment. The Company
provides a reserve for estimated warranty costs, which have not been
significant, at the time of sale and periodically adjusts such amounts to
reflect actual expenses. The Company's sales transactions are negotiated in
U.S. dollars.
Product Research and Development Expenditures:
Product research and development ("R&D") expenditures, other than 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, 2001, 2000 and 1999, direct costs incurred under R&D contracts
were $7,000, $203,000 and $6,000, respectively, and reimbursements earned were
$22,913, $290,413 and $43,750 , respectively.
Refundable Deposit:
A refundable deposit associated with a multi-year supply agreement with Compaq
Computer Corporation of $4.9 million was received in April 2001. This deposit
is refundable as the Company delivers certain quantities of products to Compaq
over the next four years. The entire deposit has been classified as non current
as the first refund is not expected to be made within the next twelve months.
Stock-based Compensation:
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". Under APB 25, compensation expense
is based on the difference, if any, on the date of the grant between the fair
value of the Company's stock and the exercise price of the option. The Company
accounts for equity instruments issued to non-employees in accordance with SFAS
No. 123 and EITF 96-18, "Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods, or
Services", which require that such equity instruments be recorded at their fair
value.
Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of items
that have been included in the consolidated financial statements or tax returns.
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.
-34-
Net Earnings Per Common Share:
Basic earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
per common share is 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 605,803 shares of
common stock for the year ended October 31, 2000. Common stock equivalents are
excluded from the diluted earnings per share calculation for fiscal 2001 and
1999 due to their anti-dilutive effect.
Comprehensive Results:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through October 31, 2001, the Company has not had any
transactions that were required to be reported in other comprehensive income.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," In June
1999, the FASB issued SFAS No. 137, which requires the Company to adopt SFAS 133
in the first quarter of fiscal 2001. The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The Company adopted SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001 with no material impact on its consolidated
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101, as amended, summarizes the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company adopted SAB 101 in the fourth quarter of fiscal 2001 with no
material impact on its consolidated financial statements.
In July 2001, the FASB issued ("SFAS No. 141") Statement No. 141, Business
Combinations and ("SFAS No. 142") Statement No. 142, Goodwill and Other
Intangibles Assets. SFAS No. 141 revises the accounting treatment for business
combinations, requiring the use of purchase accounting and prohibiting the use
of pooling-of-interests method for all business combinations initiated after
June 30, 2001, and broadens the criteria for recording intangible assets
separate from goodwill for all business combinations completed after June 30,
2001. SFAS No. 142 revises the accounting for goodwill and other intangibles
assets by not allowing the amortization of goodwill and establishing accounting
for the impairment of goodwill and other intangible assets. SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001. The Company
will adopt the pronouncements as of November 1, 2002. The Company does not
expect the adoption of the above pronouncements will have a material effect on
its consolidated financial statements.
-35-
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the years ended Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 is effective for
financial statements issued for years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS 144 will have a material impact on
its consolidated financial position or results of operations.
Reclassifications:
Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to the 2001 presentation with no effect on net income
(loss) as previously reported.
2. INVENTORIES
Inventories at October 31, 2001 and 2000 comprise the following:
2001 2000
- ------------------------------------------------------
Finished goods $ 3,220 $ 2,380
Parts and materials 2,500 3,717
-------- ---------
Total gross inventory 5,720 6,097
Less reserve for obsolescence (1,292) (1,179)
-------- ---------
Total net inventory $ 4,428 $ 4,918
======== =========
3. PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2001 and 2000 are comprised of the
following:
2001 2000
- -----------------------------------------------------
Machinery and equipment $ 7,548 $ 7,655
Furniture and fixtures 1,146 1,236
Leasehold improvements 536 529
-------- --------
9,230 9,420
Less accumulated depreciation
and amortization (7,994) (7,277)
-------- --------
$ 1,236 $ 2,143
======== ========
Depreciation and amortization expense totaled $860,000, $863,000 and
$703,000 for the years ended October 31, 2001, 2000 and 1999,
-36-
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs at October 31, 2001 and 2000 comprise the following:
2001 2000
- -------------------------------------------------
Purchased software $ 776 $ 766
Internally developed software 805 805
-------- --------
1,581 1,571
Less accumulated amortization (1,495) (1,278)
-------- --------
$ 86 $ 293
======== ========
The Company capitalized $10,000, $182,000 and $268,000 of purchased software
costs in 2001, 2000, and 1999 respectively. Amortization of capitalized
software costs totaled $217,000, $227,000, and $115,000 for the years ended
October 31, 2001, 2000, and 1999, respectively.
5. STOCKHOLDERS' EQUITY
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 per share for both its common and preferred stock.
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. During
fiscal 1999 and 2000, the Company repurchased 79,500 shares of its Common Stock
in the open market for an aggregate purchase price of approximately $409,000.
The Company acquired LMC on July 14, 2000. As consideration for all outstanding
shares of LMC, the Company issued 316,101 shares of its common stock. In
addition, the Company assumed all outstanding options held by LMC option
holders.
6. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
2001, 2000 and 1999, comprise the following:
2001 2000 1999
- -------------------------------------- ----- ----- -----
Federal:
Current $ --- $ 109 $ ---
Deferred --- --- ---
State:
Current 1 17 3
Deferred --- --- ---
----- ----- -----
Total provision for income taxes $ 1 $ 126 $ 3
===== ===== =====
-37-
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
2001 2000 1999
- ------------------------------------- ------ ------ ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Change in valuation allowance (34.0) (30.9) (32.9)
------ ------ ------
0% 3.1% 1.1%
====== ====== ======
Significant components of the Company's deferred tax balances as of October 31,
2001 and 2000 are as follows:
2001 2000
- ---------------------------------------- -------- --------
Deferred tax assets:
Current
Accrued employee benefits $ 57 $ 69
Inventory allowances 498 450
Allowance for doubtful accounts 90 60
Warranty accruals 22 58
Noncurrent
Deferred rent --- 137
R&D credit carryforward 2,546 1,736
Alternative minimum tax carryforward 193 143
Net operating loss carryforwards 2,310 384
Refundable deposit 1,940 ---
Depreciation 55 58
Restructuring costs 369 ---
-------- --------
Total deferred tax assets 8,080 3,095
-------- --------
Deferred tax liabilities:
Noncurrent
Capitalized software costs --- 7
-------- --------
Total deferred tax liabilities --- 7
-------- --------
Deferred tax asset valuation allowance (8,080) (3,088)
-------- --------
Net deferred tax assets $ --- $ ---
======== ========
A valuation allowance is recorded to offset certain deferred tax assets due to
management's uncertainty of realizing the benefit of these items. The valuation
allowance increased by $4,992,000 in fiscal 2001 primarily as a result of an
increase in the R&D credit carryforward, an increase in the net operating loss
carryforwards, restructuring costs and advance receipts from a refundable
deposit associated with a multi-year supply agreement with Compaq Computer
Corporation The valuation allowance decreased in fiscal 2000 by $899,000 as a
result of utilizing net operating loss carryforwards. The Company has research
and experimentation tax credit carryforwards of $2.5 million for federal and
state tax purposes. These carryforwards expire in the periods ending 2008
through 2016. The Company has net operating loss carryforwards for federal and
state income tax purposes of approximately $6,223,000 and $3,310,000,
respectively, which expire in periods ending 2002 through 2021.
-38-
7. COMMITMENTS
The Company leases its buildings under noncancelable operating leases which
expire at various dates through the year 2006. Future minimum lease payments
under noncancelable operating leases, including lease commitments entered into
subsequent to October 31, 2001, are as follows:
Year ending October 31:
2002 $ 1,228
2003 1,208
2004 1,096
2005 806
2006 265
--------
4,603
Less: Total reimbursements from subleases (2,998)
--------
Total minimum lease payments $ 1,605
========
In November 2001, the Company entered into a new facilities lease for its
engineering and administrative headquarters located in San Ramon, California.
The lease expires in 2004. The Company expects that the new facility will
satisfy its anticipated needs through the foreseeable future. Additionally the
Company assigned the lease related to its current 63,000 square foot engineering
and administrative headquarters facility to a third-party corporation. The
third-party corporation has guaranteed payment of the remaining lease payments
though the termination of the original lease in 2006.
The Company leases 6,100 square feet of office space in Madison, Wisconsin for
various product development activities. The lease expires in 2005 and contains
two renewal options of five years each. The Company expects that this office
space will satisfy the needs of the Madison development group for the
foreseeable future.
Additionally, through the acquisition of LAN Media Corp. in July 2000, the
Company leases approximately 3,650 square feet of office space in Sunnyvale, CA.
The Sunnyvale lease expires in 2003. In fiscal 2001, the Company subleased this
office space to a third party corporation for the remaining term of the lease.
The Company's rent expense under all operating leases for the years ended
October 31, 2001, 2000 and 1999 totaled $843,587 (net of sublease proceeds of
$260,590), $753,397 (net of sublease proceeds of $389,666), and $588,734 (net of
sublease proceeds of $360,000), respectively.
8. STOCK OPTION AND STOCK PURCHASE PLANS
The Company sponsors 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 renamed the 1996 Stock Option Plan.
A total of 1,580,000 shares of Common Stock were reserved under the 1996 Plan at
October 31, 2001. The Company's Board of Directors adopted the 1998 Plan on
June 15, 1998. A total of 800,000 shares of Common Stock are reserved under the
-39-
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 a one to four-year period and have exercise prices reflecting
the market value of the shares of Common Stock on the date of grant.
Additionally, in 1991, stockholders approved a Non-Employee Director Stock
Option Plan (the "Director Plan"). A total of 140,000 shares of Common Stock
are reserved for issuance under the Director Plan. Options granted under the
Director Plan vest over a one to four-year period, expire five to seven years
after the date of grant and have exercise prices reflecting market value at the
date of grant.
At October 31, 2001 and 2000, 191,536 and 286,245 shares of Common Stock,
respectively, were available for grant under the 1996 Plan. A total of 103,768
and 64,200 shares of Common Stock were available for grant under the 1998 Plan
at October 31, 2001 and 2000, respectively. A total of 40,750 and 65,750 shares
of Common Stock were available for grant under the Director Plan at October 31,
2001 and 2000, respectively. Additionally, options to purchase 5,136 shares of
Common Stock were outstanding as of October 31, 2001 under the LAN Media stock
option plan. The Company discontinued new grants under the LAN Media stock
option plan in fiscal 2000.
A summary of the combined activity under all of the stock option plans is set
forth below:
Weighted
Average
Number of Price Per Aggregate Exercise
Shares Share Price Price
- ------------------------------------------------------------------------
Outstanding at
October 31, 1998 998,675 $ 0.51 - 13.00 $ 4,382 $ 4.39
Granted 432,083 $ 1.25 - 8.63 $ 2,821 $ 6.53
Terminated (258,558) $ 1.25 - 9.50 $ (1,387) $ 5.37
Exercised (195,987) $ 1.25 - 5.13 $ (834) $ 4.26
---------- -------------- ----------- ---------
Outstanding at
October 31, 1999 976,213 $0.51 - $13.00 $ 4,982 $ 5.10
Granted 617,995 $ 1.27 - 24.81 $ 7,238 $ 11.71
Terminated (124,995) $ 0.51 - 21.56 $ (861) $ 6.89
Exercised (222,334) $ 0.51 - 13.00 $ (1,081) $ 4.86
---------- -------------- ----------- ---------
Outstanding at
October 31, 2000 1,246,879 $0.51 - $24.81 $ 10,278 $ 8.24
Granted 791,000 $ 0.98--$8.63 $ 2,278 $ 2.88
Terminated (403,023) $ 0.51--$24.81 $ (3,353) $ 8.32
Exercised (99,054) $ 0.51--$1.27 $ (51) $ 0.52
---------- -------------- ----------- ---------
Outstanding at
October 31, 2001 1,419,003 $ 0.51--$23.50 $ 9,152 $ 6.18
========== ===========
Exercisable at
October 31, 2001 475,690 $ 0.51--$23.50 $ 4,024 $ 8.46
========== ===========
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The following table summarizes information with respect to all options to
purchase shares of Common Stock outstanding under the 1996 Plan, the 1998 Plan,
the Director Plan and the LAN Media Plan at October 31, 2001:
Options Outstanding Options Exercisable
=================================================================================
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 10/31/01 (years) Price at 10/31/01 Price
- ---------------- ----------- ---------------- --------- ----------- --------
$ 0.00 - 2.48 226,636 5.9 $ 1.72 5,136 $ 0.86
$ 2.48 - 4.96 487,180 4.9 $ 3.47 56,752 $ 4.44
$ 4.96 - 7.44 314,905 4.0 $ 5.28 184,937 $ 5.23
$ 7.44 - 9.93 160,513 3.6 $ 8.12 98,627 $ 8.05
$ 9.93 $12.41 22,500 0.8 $ 10.50 22,500 $ 10.50
$12.41 - 14.89 106,250 2.1 $ 13.64 64,999 $ 13.39
$14.89 $17.37 35,395 1.1 $ 16.63 10,902 $ 16.59
$17.37 $19.85 20,000 5.6 $ 18.81 6,839 $ 18.74
$19.85 $24.81 45,624 0.3 $ 23.50 24,998 $ 23.50
----------- -----------
1,419,003 475,690
=========== ===========
The Company sponsors an Employee Stock Purchase Plan (the "Purchase Plan") under
which 200,000 shares of Common Stock were reserved for issuance at October 31,
2001. The Purchase Plan allows participating employees to purchase, through
payroll deductions, shares of the Company's Common Stock at 85 percent of the
fair market value of the shares at specified dates. At October 31, 2001, 48
employees were eligible to participate in the Purchase Plan and 19,699 shares
were available for issuance. In fiscal year 2001, 2000 and 1999, 32,645, 19,331
and 19,641 shares of Common Stock were issued under the Purchase Plan,
respectively.
During the fiscal year ended October 31, 1999, the Company granted options under
the LAN Media stock option plan to purchase 23,970 shares of the Company's
Common Stock to consultants in conjunction with services performed. The Company
calculated the fair value of the options on the date of grant and recorded
deferred compensation expense of $26,000 and $89,000 in the fiscal years ended
October 31, 2001 and 2000, respectively.
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 2001 2000 1999
- -----------------------------------------------------------------------------
(in thousands except per share amount)
Pro forma net income (loss) $(11,831) $2,146 $(2,327)
Pro forma net income (loss) per share -basic $ (3.49) $ 0.67 $ (0.75)
Pro forma net income (loss) per share - diluted $ (3.49) $ 0.56 $ (0.75)
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:
-41-
Options granted in years ended October 31 2001 2000 1999
- --------------------------------------------------------------------
Expected life (in years) 5.00 5.00 5.00
Risk-free interest rate 6.00% 6.00% 4.50%
Volatility 114.00% 104.00% 91.00%
Dividend yield 0.00% 0.00% 0.00%
The weighted average estimated fair value of each option granted during fiscal
2001, 2000 and 1999 was $1.78, $11.79 and $6.53, respectively.
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 employed by the
Company at least one year. Additionally, the Company makes matching payments to
the employee savings and investment plan of 50% of each employee's contribution
up to three percent of employees' earnings.
For the years ended October 31, 2001, 2000 and 1999, total expense under the
employee savings and investment plan was $148,974, $391,066 and $121,530,
respectively.
10. CONCENTRATION OF CREDIT AND BUSINESS RISKS
The Company's trade accounts receivable are concentrated among a small number of
customers, principally located in the United States. One customer accounted for
10% of total accounts receivable at October 31, 2001. Four customers accounted
for 32%, 18%, 13% and 10%, respectively, of total accounts receivable at October
31, 2000. 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. 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
$225,000 and $252,000 at October 31, 2001 and 2000, respectively.
Sales to individual customers in excess of 10% of net sales of the Company
included sales to Compaq Computer of $2.6 million and Lockheed of $1.5 million
in 2001; Compaq Computer of $19.4 million in 2000; and Compaq Computer of $12.6
million in 1999. International sales accounted for 9% and 4% of total sales
during fiscal 2001 and fiscal 2000, respectively.
The Company has depended on a limited number of customers for substantially all
revenue to date. Failure by the Company to anticipate or to respond adequately
to technological developments in its industry, changes in customer or supplier
requirements or changes in regulatory requirements or industry standards, or any
significant delays in the development or introduction of products or services,
could have a material adverse effect on the Company's business and operating
results.
Substantially all of the Company's manufacturing process is subcontracted to one
independent company.
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11. ACQUISITION OF LAN MEDIA CORPORATION
On July 14, 2000, the Company completed the acquisition of LAN Media Corporation
("LMC"), a privately held wide area network communications company headquartered
in Sunnyvale, California. As a result, the outstanding LMC common stock was
converted into approximately 316,000 shares of SBE, Inc. common stock, based on
an exchange ratio of approximately 7.99 shares of LMC common stock for each
share of the Company's common stock. The merger was accounted for as a
pooling-of-interests under Accounting Principles Board Opinion No. 16, and
accordingly, financial statements presented for all periods have been restated
to reflect combined operations and financial position. All intercompany
transactions have been eliminated.
The following reconciles revenue and net income (loss) previously reported to
the restated information presented in the consolidated financial statements:
Six Months Ended Year Ended
April 30, 2000 October 31, 1999
- ---------------------------------------------------------------
Net Sales
Previously Reported $ 14,433 $ 18,022
LAN Media Corporation 1,480 1,832
----------------- ------------------
Restated $ 15,913 $ 19,854
================= ==================
Net income (loss)
Previously Reported 2,743 151
LAN Media Corporation 202 (405)
----------------- ------------------
Restated $ 2,945 $ (254)
================= ==================
In connection with the acquisition, the Company recorded a charge to
operating expenses of approximately $383,000 for acquisition related costs
during the third quarter of 2000.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
2001: Net sales $ 3,418 $ 1,813 $ 1,449 $ 1,046
Gross profit 2,039 290 534 3
Net loss (1,313) (3,212) (2,244) (3,127)
Basic loss per common share $ (0.39) $ (0.95) $ (0.66) $ (0.91)
Diluted loss per common share $ (0.39) $ (0.95) $ (0.66) $ (0.91)
2000: Net sales $ 6,967 $ 8,945 $ 7,835 $ 5,431
Gross profit 4,746 5,834 4,889 3,291
Net income 960 1,984 842 184
Basic earnings per common share $ 0.31 $ 0.64 $ 0.25 $ 0.06
Diluted earnings per common share $ 0.30 $ 0.53 $ 0.21 $ 0.05
-43-
13. RESTRUCTURING COSTS
In response to the continued economic slowdown, the Company implemented a
restructuring plan in fiscal 2001 and recorded a restructuring charge of
$964,000. Restructuring costs are comprised of severance costs associated with
staff reductions totaling $52,000, leasehold improvements and equipment
write-downs related to the relocation of the Company's headquarters of $337,000
and losses related to its sublease of $575,000, net of the reversal of a
$281,000 liability associated with deferred rent. The Company reduced its
headcount from 87 employees to 47 employees during fiscal 2001. The reduction in
headcount plus the relocation of the XeTel manufacturing facility from the
Company's engineering and headquarters facility to Texas left the Company with
excess facility space. The Company was able to enter into an agreement with a
third party corporation to assign the lease for its 63,000 square foot facility
located at 4550 Norris Canyon Rd, San Ramon, California and simultaneously
sublease a 15,000 square foot facility also located in San Ramon, California.
The Company abandoned the leasehold improvements and certain of its equipment in
conjunction with the relocation. As a result of this transaction, a non-cash
$337,000 write down of leasehold improvements and equipment was expensed in
fiscal 2001. Real estate commissions and building expenses totaling $442,000
were accrued in fiscal 2001 and will be paid in fiscal 2002. An additional
amount totaling $133,000 was accrued related to a loss associated with
facilities acquired with the purchase of LAN Media Corporation in fiscal 2000
and subleased to a third party corporation in fiscal 2001. This amount will be
paid over 36 months beginning May 2001. As of October 31, 2001, $590,000 of the
restructuring costs was included in other current liabilities.
The following table sets forth an analysis of the components of the
restructuring reserve and the payments made against it through October 31, 2001:
Restructuring reserve
Severance and benefits $ 52
Accrued lease costs 856
------
Total restructuring reserve $ 908
Less: Cash paid for severance and benefits
and accrued lease costs (318)
------
Total restructuring costs included in other liabilities $ 590
======
14. SUBSEQUENT EVENT
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% and collateralized by 145,313 shares of Common Stock of
the Company. The loan was used to pay for the exercise of an option to purchase
139,400 shares of the Company's Common Stock and related taxes. On April 16,
1999 the loan was increased to $743,800. The loan was extended for a one-year
term under the same terms and conditions on November 6, 2000. On December 14,
2001, the note was amended, restated and consolidated to extend the term to
December 2003 and to require certain mandatory repayments of principal of up to
$100,000 a year while the note is outstanding. The loan bears interest at a rate
of 2.48% per annum, with interest due annually and the entire amount of the
principal due in December 2003.
-44-
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 2001 AND 2000
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, 2001
Allowance for Doubtful Accounts $ 251,620 --- (26,620) $ 225,000
Allowance for Obsolete Inventory 1,179,000 1,033,869 (920,869) 1,292,000
Allowance for Warranty Claims 144,676 --- (89,049) 55,627
Allowance for Deferred Tax Assets 3,088,000 4,992,000 --- 8,080,000
YEAR ENDED OCTOBER 31, 2000
Allowance for Doubtful Accounts $ 251,620 --- --- $ 251,620
Allowance for Obsolete Inventory 1,381,370 151,983 (354,353) 1,179,000
Allowance for Warranty Claims 101,049 54,952 (11,325) 144,676
Allowance for Deferred Tax Assets 3,987,000 (899,000) 3,088,000
-45-