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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-8419
SBE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-1517641
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4550 Norris Canyon Road, San Ramon, California 94583
----------------------------------------------------
(Address of principal executive offices and Zip Code)
(510) 355-2000
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(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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, 1997 as reported on the Nasdaq
National Market, was approximately $23,059,827. Shares of Common Stock held by
each executive officer, director and stockholder whose ownership exceeds five
percent of Common Stock outstanding have been excluded in that such persons may
be deemed to be affiliates of the Registrant. This determination of affiliate
status for purposes of the foregoing calculation is not necessarily a conclusive
determination of affiliate status for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1997 was 2,655,005.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy statement for Annual Meeting of Stockholders scheduled for March 24,
1998 -- Part III
Exhibit Index on Page 26
Total Pages 87
SBE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for The Registrant's Common Equity
and Related Stockholder Matters 17
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 8 Financial Statements and Supplementary Data 22
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
Item 10 Directors and Executive Officers of the Registrant 23
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners
and Management 24
Item 13 Certain Relationships and Related Transactions 24
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 25
SIGNATURES 28
SCHEDULE 44
EXHIBITS 45
-2-
PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION
CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS REPORT, PARTICULARLY IN THE SECTIONS
ENTITLED "BUSINESS--RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ITEM 1. BUSINESS
OVERVIEW
SBE, Inc. (the "Company") develops, markets, sells and supports remote access
internetworking products and high speed intelligent computer communications
controllers that enable users to exchange data between computer systems. The
Company's products are distributed worldwide through a direct sales force,
distributors, independent manufacturers' representatives and value-added
resellers.
Founded in 1961 as Linear Systems, Inc., the Company evolved from a high-quality
supplier of radio communications equipment to a provider of comprehensive
network communications solutions for original equipment manufacturers and end
users. Over the last three years the Company has expanded its product lines to
include a family of remote access router products called netXpand-Registered
Trademark- and a family of wide area networking communications controllers for
PCI (Peripheral Component Interface/Interconnect) based workstations and network
servers called WanXL. Both the netXpand and the WanXL products are targeted to
meet the growing need for high speed communications servers and remote access
data communications products. Both of the markets served by these new product
lines are significantly larger and more competitive then the other markets in
which the Company participates. See "Products" for product mix by percentages.
The Company markets, sells and supports a broad range of high-speed intelligent
communications controller products sold primarily to original equipment
manufacturers. These products are often customized for a specific customer's
application, and they support applications in a broad spectrum of industrial and
commercial markets. Markets and application areas include cellular network data
communication, data networking, process control, medical imaging, CAE/automated
test equipment, military defense systems and telecommunications networks.
The Company's netXpand remote access router products are netXpand SoHo, Central
and Routeman-TM-. These products allow a remote PC or network to access an
existing network as a fully functional network node, thereby enabling users to
access network resources from their remote locations as if they were directly
connected to the enterprise network. These products include server hardware and
software, client software and network management software. SBE's remote access
products allow for single user dial-in to local area networks (LANs) over analog
or digital phone lines, individual dial-out from LANs to other locations and
routed or bridged LAN to LAN dial-up or direct connections. These products
support all major desktop computing platforms, including IBM-compatible PCs and
UNIX and Windows NT workstations.
-3-
The Company's WanXL communications controllers leverage the Company's core
technology strength into a much larger applications market. The Company's WanXL
products are designed for applications that require high performance and high
speed communications capability. All of these products are "intelligent,"
containing their own microprocessors and memory. This architecture allows these
communications controllers to off-load many of the lower-level communications
tasks that would typically be performed by the host platform, greatly improving
overall system performance. The family of WanXL products is supported by
extensive communications software developed by both the Company and a variety of
third party partners.
RISK FACTORS
DEPENDENCE ON A LIMITED NUMBER OF OEM CUSTOMERS. Most of the Company's sales
were attributable to sales of board-level products and have been derived from a
limited number of OEM customers. In the year ended October 31, 1997, sales to
Tandem Computers ("Tandem") and Motorola, Inc. ("Motorola") accounted for 35
percent and 15 percent, respectively, of the Company's net sales. The Company
expects that sales from these two companies will also constitute a substantial
portion of the Company's net sales in fiscal 1998. The Company's OEM customers'
orders are affected by factors such as new product introductions, product life
cycles, inventory levels, manufacturing strategy, contract awards, competitive
conditions and general economic conditions. The Company's agreements with OEM
customers typically do not require minimum purchase quantities. A significant
reduction in orders from any of the Company's OEM customers, particularly Tandem
and Motorola, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's sales to any single
OEM customer are also subject to significant variability from quarter to
quarter. Such fluctuations may have a material adverse effect on the Company's
operating results. In addition, there can be no assurance that the Company will
become a qualified supplier for new OEM customers or that the Company will
remain a qualified supplier with existing OEM customers.
FUTURE SUCCESS DEPENDENT ON NEW PRODUCT LINES. Since early 1995, the Company
has focused a significant portion of its research and development, marketing and
sales efforts on netXpand and WanXL products. The success of these products is
dependent on several factors, including timely completion of new product
designs, achievement of acceptable manufacturing quality and yields,
introduction of competitive products by other companies and market acceptance of
the Company's products. If the netXpand and WanXL products or other new
products developed by the Company do not gain widespread market acceptance, the
Company's business, operating results and financial condition may be materially
adversely affected.
HIGHLY COMPETITIVE ENVIRONMENT. The market for communications products is
highly competitive. The Company competes directly with traditional vendors of
terminal servers, modems, remote control software, terminal emulation software
and application specific communications solutions. The Company also competes
with suppliers of routers, hubs, network interface cards and other data
communications products. In the future, the Company expects competition from
companies offering remote access solutions based on emerging technologies such
as switched digital telephone services. In addition, the Company may encounter
increased competition from operating system and network operating system vendors
to the extent such vendors include full 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.
-4-
Increased competition with respect to any of the Company's products could result
in price reductions and loss of market share, which would adversely affect the
Company's business, operating results and financial condition. Many of the
Company's current and potential competitors have greater financial, marketing,
technical and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully with its existing competitors
or will be able to compete successfully with new competitors.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating results
have fluctuated significantly in the past and are likely to fluctuate
significantly in the future due to several factors, some of which are outside
the control of the Company, including timing of significant orders from OEM
customers, fluctuating market demand for, and declines in, the average selling
prices of the Company's products, delays in the introduction of the Company's
new products, competitive product introductions, the mix of products sold,
changes in the Company's distribution network, the failure to anticipate
changing customer product requirements, the cost and availability of components
and general economic conditions. The Company generally does not operate with a
significant order backlog and a substantial portion of the Company's revenues in
any quarter is derived from orders booked in that quarter. Accordingly, the
Company's sales expectations are based almost entirely on its internal estimates
of future demand and not on firm customer orders. Based on the foregoing, the
Company believes that quarterly operating results are likely to vary
significantly in the future and that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter the Company's revenues or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock is likely to be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; ONGOING NEW PRODUCT DEVELOPMENT REQUIREMENTS. The
markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its existing products and to introduce new products and features to meet
and adapt to changing customer requirements and emerging technologies such as
ISDN (Integrated Services Digital Network), Frame Relay, ADSL (Assymmetric
Digital Subscriber Line) and ATM (Asynchronous Transfer Mode). There can be no
assurance that the Company will be successful in identifying, developing,
manufacturing and marketing new products or enhancing its existing products. In
addition, there can be no assurance that services, products or technologies
developed by others will not render the Company's products noncompetitive or
obsolete.
DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent on the technical,
management, marketing and sales skills of a limited number of key employees.
The Company does not have employment agreements with, or life insurance on the
lives of, any of its key employees. The loss of the services of any key
employees could adversely affect the Company's business and operating results.
The Company's success also depends on its ability to continue to attract and
retain additional highly talented personnel. Competition for qualified
personnel in the networking industry is intense. There can be no assurance that
the Company will be successful in retaining its key employees or that it can
attract or retain additional skilled personnel as required.
EXPANDED DISTRIBUTION REQUIRED FOR REMOTE ACCESS PRODUCTS. Although to date a
substantial percentage of the Company's sales has been made to OEM customers
through the Company's direct
-5-
sales force, the Company expects that an increasing percentage of its revenues
will be derived from sales of its netXpand and WanXL products to end users. The
Company sells its netXpand and WanXL products through distributors, value added
resellers (VARs) and system integrators and, to date, has signed agreements with
over 200 distributors, VARs and system integrators (collectively, Channel
Partners) worldwide. Channel Partners generally offer products of several
different companies, including products that may compete with the Company's
products. Accordingly, these Channel Partners may give higher priority to
products of other suppliers, thus reducing their efforts to sell the Company's
products.
Agreements with Channel Partners are generally terminable at the Channel
Partner's option. A reduction in sales effort or termination of a Channel
Partner's relationship with the Company may have a material adverse effect on
future operating results. Use of Channel Partners also entails the risk that
Channel Partners will build up inventories in anticipation of substantial growth
in sales. If such growth does not occur as anticipated, these Channel Partners
may substantially decrease the amount of product ordered in subsequent quarters.
Such fluctuations could contribute to significant variations in the Company's
future operating results. In addition, Channel Partners generally have stock
rotation rights and price protection on unsold merchandise, which may adversely
impact the Company's profit margins.
DEPENDENCE ON KEY SUPPLIERS. The chipsets used in the Company's products are
currently available only from Motorola. In addition, certain other components
are currently available only from single suppliers. The inability to obtain
sufficient key components as required, or to develop alternative sources if and
as required in the future, could result in delays or reductions in product
shipments which, in turn, could have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON CONTRACT MANUFACTURER. In December 1996 the Company sold all of
its manufacturing operations to XeTel Corporation (XeTel), a contract
manufacturing company headquartered in Austin, Texas. At the same time the
Company and XeTel entered into an exclusive manufacturing service agreement
under which XeTel is to manufacture all of the Company's products until at least
December 2000. The Company is dependent on XeTel's ability to manufacture the
Company's products according to specifications and in required volumes on a
timely basis. The failure of XeTel to perform its obligations under the
manufacturing service agreement could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Although the Company believes that its
future success will depend primarily on continuing innovation, sales, marketing
and technical expertise, the quality of product support and customer relations,
the Company must also protect the proprietary technology contained in its
products. The Company does not currently hold any patents and relies on a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in its products. There
can be no assurance that steps taken by the Company in this regard will be
adequate to deter misappropriation or independent third-party development of its
technology. Although the Company believes that its products and technology do
not infringe proprietary rights of others, there can be no assurance that third
parties will not assert infringement claims against the Company.
-6-
YEAR 2000 COMPLIANCE; REPLACEMENT OF MANAGEMENT INFORMATION SYSTEMS. The
Company's current products, to the extent they have the capability to process
date-related information, were designed to be Year 2000 compliant; in other
words, the products were designed to manage and manipulate data involving the
transition of dates from 1999 to 2000 without functional or data abnormality and
without inaccurate results relating to such dates. There can be no assurance
that systems operated by third parties that interface with or contain the
Company's products will timely achieve Year 2000 compliance. Any failure of
these third parties' systems to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is currently in the process of updating its internal management
information systems. The updated systems are designed to be Year 2000
compliant. The Company currently projects future, non-recurring expenses of
approximately $50,000 for the replacement of its management information systems,
the majority of which will be expensed in 1998. The Company believes it has
allocated adequate resources to replace such systems and otherwise timely
achieve Year 2000 compliance. However, there can be no assurance to that
effect.
STOCK PRICE VOLATILITY. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to quarter-to-quarter fluctuations
in operating results, the failure to meet analyst estimates, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the computer and communications industries, and other
events or factors. In addition, stock markets have experienced extreme price
and trading volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many high technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS AND DELAWARE LAW. The Company's Board of Directors has
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be materially adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
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.
INDUSTRY BACKGROUND
Significant changes in computer-based information systems have occurred over the
last decade. Historically, information stored in computer databases could only
be accessed by terminals or personal computers emulating terminals directly
connected to a central or host computer. Remote users wishing to access
information over the public switched telephone network used a modem to dial from
their terminal or computer into another modem that was usually connected
directly to the central or host computer.
-7-
Beginning in the late 1980s, the following factors changed the nature of and
increased the demand for WAN (wide area network) communication products.
GROWTH OF THE INTERNET AND ON-LINE SERVICES. The number of users of the
Internet and on-line services such as America Online, CompuServe and Prodigy has
grown rapidly in recent years. According to International Data Corporation
(IDC) it is estimated that the number of users linked to the Internet has grown
from less than 2 million in 1992 to approximately 45 million today. This growth
is due to increased use of electronic mail and the proliferation of databases
and other information platforms such as the World Wide Web.
DEVELOPMENT OF DISTRIBUTED, CLIENT/SERVER COMPUTING. With the development of
LANs it became possible for information to be stored on a number of computers
that were connected to each other and located within a building or campus.
Simultaneously, the advent of new communications products such as hubs, bridges
and routers allowed multiple LANs to be integrated into distributed,
enterprise-wide computer networks. To take advantage of these distributed
computer networks, products utilizing client/server architecture, including
relational databases, e-mail and file and printer sharing were introduced to
collect, retrieve and distribute information. Distributed computing and
client/server-based software are now being used on a corporate enterprise-wide
and departmental basis to run critical processes and to provide the primary
means for corporate communications.
GROWTH IN MOBILE, REMOTE AND HOME OFFICES. Corporations, government agencies,
universities and other organizations are increasingly looking to control costs
while providing their employees with access to essential information and
resources to perform their jobs efficiently and effectively from any location.
The proliferation of notebook and home computers is allowing a newly created
remote workforce to work from home or on the road. To remain productive, these
users must be able to access their cooperative distributed networks from remote
locations.
TECHNOLOGICAL ADVANCES. Advances in modem technology such as the V.34
communications standard and switched digital service technology, such as ISDN
and Frame Relay, are helping to increase the speed of network communication,
which is a key user requirement for remote network access. Additionally, as
these technologies become more mature, the retail prices for products utilizing
these technologies generally decline, thereby making the products more
economically accessible to a larger portion of computer users.
The above factors have created an enormous growth in the number of remote users
seeking to access information on the corporate network or to connect to the
Internet and on-line services through network access providers. As a result,
the need for hardware and software products to support, expand and enhance
remote network access has created a number of rapidly growing markets.
Early remote connectivity solutions have typically followed three principal
computing oriented approaches: host-oriented terminal emulation, PC remote
control software and application-specific solutions.
Terminal emulation products allow remote workstations to simulate a local "dumb"
terminal session with a mainframe. These products are better suited to a
character-based centralized system and not the graphical client server systems
that are predominant today.
-8-
Remote control software products allow a dial-in user to take control of a PC on
the network and remotely view the networked PC's screen. Like terminal
emulation, remote control software works best with character-based computing.
In addition, remote control solutions present both network security and
management problems as the controlled PC typically has complete access to all
the resources of the network and the network manager is typically unable to
identify an unauthorized remote user.
Application-specific solutions overcome the limitations of terminal emulation by
enabling users to access a single network application as a specialized remote
client. Examples of this type of solution include electronic mail programs that
offer remote versions. However, these application-specific products provide an
incomplete remote access solution for users who require access to other
resources or applications on the enterprise network.
Today's solutions use a communications-oriented approach where the network is
extended to users through the combination of hardware and software that lets
users expand their network using analog, digital or leased circuits. These
solutions have typically used expensive router products to connect branch
offices to networks using leased lines. But more recently introduced products
allow users to establish lower-cost dial-up connections that provide
multiprotocol, multiplatform routing and routing-related communications
technologies and hardware that address performance and security requirements of
remote network access. However, these products are typically designed to
principally provide either routing or remote access functions.
PRODUCTS
The Company designs and markets data communications products designed to allow
the connection of LANs to external WANs. In 1995 the Company began shipping its
netXpand products to meet the growing demand for remote access data
communications products. In 1996 the Company began shipping its WanXL products
to meet the growing demand for client/server networking products.
INTELLIGENT COMMUNICATIONS CONTROLLER PRODUCTS. Intelligent communications
controller products are used to provide connectivity between a system such as a
mini-computer or bridge/router and a local or wide area network. Communication
controller products enable computers to exchange data in much the same way as
the telephone system allows people to converse with one another. As computers
become more pervasive in all areas of society, computer users are demanding
greater productivity, efficiency and lower costs in their computer systems,
which has led to the sharing of databases, software applications and computer
peripheral equipment. Communications controllers have become a central
component to connecting networks and computers to deliver information more
efficiently.
The Company's communications products target all four major protocol
communications technologies for each of the bus architectures: Fiber Distributed
Data Interface (FDDI), Token Ring, Ethernet and high speed serial
communications. The latter is a growing wide-area networking technology that
enables computers to talk to one another using telephone lines. FDDI, Token
Ring and Ethernet are local area networking technologies that offer a wide range
of speed and reliability options.
-9-
The Company's strategy for its intelligent controller products is to expand its
offerings to more segments of the market by adding software interfaces, improved
performance and new technologies that will provide lower-cost solutions for high
speed, high volume communication applications.
CLIENT/SERVER WAN PRODUCTS. The need to collect, store, analyze and distribute
information in a secure, timely and efficient manner has become an integral part
of operating a successful organization. Developments in computer technology
have resulted in less reliance on centralized mainframes and greater reliance on
distributed computing, which has led to the computer software architecture
concept of "client/server" computing systems. Client/server computing systems
typically provide for a large number of desktop computers, or clients,
interconnected with one, or often more than one, file server. The server
provides central resources to all remote computer users and provides common
services such as printing, communications and data backup and information
gateways to other local or distant client/server systems. The fundamental
premise of this architecture relies heavily on computer networking for both LAN
interconnections for desktop-to-server communications and WAN interconnections
for server-to-server communications.
As a result of the growing installed base of client/server computing systems,
the market opportunity for client/server networking products is rapidly
expanding. According to a recent industry study, there were approximately 91
million computers with network interface connections installed worldwide in
1995, and the number of those connections is expected to grow to over 249
million by the year 2000. This growth, combined with other market trends, is
expected to cause the computer networking equipment industry to continue to
experience substantial growth.
The Company's WanXL products are specifically targeted to meet the
interconnectivity needs of client/server systems. The Company offers a family
of products with one to four ports per controller with various physical
connection options and software features.
REMOTE ACCESS PRODUCTS. The Company's family of netXpand remote access products
includes SoHo, Central and Routeman. SoHo (Small office, Home office) is a
remote access product which can serve as either an access server or a branch
office router. Central is a larger version of SoHo with more WAN interfaces and
Routeman is a smaller, less expensive version of SoHo. The products have been
designed to provide cost-effective internetworking capabilities to the broadest
range of end users, the users of UNIX and Novell, Artisoft and Windows NT
networking products. These products allow users to access remote networks'
resources as full network clients or nodes. Applications appear the same to
users as they do when directly connected to the enterprise network, except that
the speed of computing through the remote access connection may be reduced as a
result of the speed limitations of telephone connections.
The Company's remote access products support up to 10 wide area network
interfaces at speeds up to T1/E1(1.5mbs). The products feature full routing for
Novell IPX and TCP/IP (Transmission Control Protocol, Internet Protocol); other
protocols are transparently bridged with filtering. The products use
Windows-based configuration tools, are SNMP manageable and support PAP, CHAP and
direct callback security. The remote access products list from $599 to $2,499
with various software configurations available.
-10-
SINGLE-BOARD COMPUTER PRODUCTS. The Company supplies high performance
single-board computers (SBC) for Multibus* and VMEbus architectures. An SBC
manages and processes the data that passes between the boards within a computer
system. The Company's SBC products provide a high-speed interface for linking
to peripherals and intelligent I/O controllers that accommodate plug-on modules
for many industrial applications.
INTEGRATED CIRCUITS. The Company has designed a number of proprietary
integrated circuits that are used on many SBE products. The Company has a small
group of customers that purchase some of these proprietary chips for their
applications. This line of business is not being actively pursued by the
Company.
CUSTOM PRODUCTS. The Company has developed several products specifically for
single customer applications. These products typically have proprietary
functions that meet specific application needs of the customer. The Company
does not seek new custom relationships unless the products have significant
sales potential.
SOFTWARE PRODUCTS. The Company supplies software products that operate various
communications protocols for certain communications controller products
including X.25 for serial communications, SMT (Station Management) for FDDI and
TCP/IP for Ethernet applications. Real-time operating systems for Motorola's
68000 family are also supported. The Company's software products are
principally bundled with the hardware platform based upon the customer's
application requirement.
The following table shows sales by major product type as a percentage of net
sales for fiscal 1997, 1996 and 1995.
Year Ended October 31,
1997 1996 1995
------------------------------------
(percentage of net sales)
Communication Controllers 72% 73% 72%
WanXL products 14 1 --
netXpand Remote Access 7 15 3
Single Board Computer 3 4 9
Integrated Circuits 1 1 3
Custom -- -- 1
Other 3 6 12
------------------------------------
100% 100% 100%
------------------------------------
------------------------------------
DISTRIBUTION, SALES AND MARKETING
The Company markets its WanXL and netXpand remote access products through
multiple indirect distribution channels worldwide, including distributors,
manufacturers' representatives, value-added resellers and certain OEM partners.
The Company had relationships with over 200 distributors and value-added
resellers as of October 31, 1997. Approximately one quarter of the Company's
distributors and resellers operate outside the United States.
- ---------------------------
* Multibus is a Trademark of Intel Corporation
-11-
The Company actively supports its indirect channel marketing partners with its
own sales and marketing organization. SBE's sales staff solicits prospective
customers, provides technical advice with respect to SBE products and works
closely with marketing partners to train and educate their staffs on how to
sell, install and support the WanXL and netXpand product lines.
The Company has focused its sales and marketing efforts principally in the
United States, Asia and Europe. International sales for the netXpand product
line represented 79 percent of total netXpand sales in fiscal 1997, 70 percent
in fiscal 1996 and 92 percent in fiscal 1995. The Company expects that, in the
future, domestic sales will represent a greater percentage of total netXpand
sales. All of the Company's international sales are negotiated in U.S. dollars.
The Company provides most of its distributors and resellers with product return
rights for stock balancing or product evaluation. Stock balancing permits
distributors to return products for credit, within specified limits and subject
to purchasing additional products. The Company believes that it has adequate
reserves to cover product returns although there can be no assurance that the
Company will not experience significant returns in the future.
The Company primarily markets its intelligent communications controller products
to OEMs and systems integrators. The Company sells its products both
domestically and internationally using a direct sales force as well as through
independent manufacturers' representatives. The Company also sells certain
products directly to end users. The Company believes that its direct sales
force is well suited to differentiate the Company's communications controller
products from those of its competitors.
The Company's intelligent communications controller sales are concentrated among
a small number of customers and, consequently, the timing of significant orders
from major customers has caused and is likely to continue to cause the Company's
operating results to fluctuate. See "Risk Factors--Dependence on a Limited
Number of OEM Customers."
The Company conducts its sales and marketing activities from its principal
offices in San Ramon, California. The Company's direct sales force is based in
five locations in the United States.
RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused principally on its
strategic businesses, remote internetworking and intelligent communications
controllers. The Company's experience in high-speed data communication creates
opportunities to leverage its engineering investments and develop additional
integrated products for simpler, more innovative communications solutions for
customers. The development of new remote internetworking products, high
performance communications controllers and communications-related software is
critical to attracting new and retaining existing customers.
During the past three years, the Company has developed communications products
based on PCIbus, VMEbus and EISA architecture. The Company has also redesigned
and upgraded certain communications products to improve the products'
performance and lower the products' manufacturing costs. In addition, the
Company has acquired or licensed certain hardware
-12-
products that have been integrated principally through the addition of software
into the Company's product line.
During fiscal 1997 the Company focused the majority of its development efforts
on the WanXL and netXpand remote access product lines, and it expects to
continue this focus in 1998. The Company expects its remote internetworking
products will leverage existing product designs and incorporate more
sophisticated software.
Information relating to accounting for research and development costs is
included in Note 1 of Notes to Consolidated Financial Statements. Also see the
section labeled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company does not use raw materials in any of its products or production
activity. Products are constructed from components which are generally
available as needed from a variety of suppliers. The Company believes that it
currently possesses adequate supply channels. An interruption in its existing
supplier relationships or delays by some suppliers could result in production
delays and may have a material adverse effect on the Company's operations.
Certain parts used in the Company's products are purchased from a single
supplier (see "Risk Factors--Dependence on Key Suppliers"). New
state-of-the-art high technology parts are normally available only from a single
supplier when first introduced into the market. These components generally
become available from alternative suppliers over time. Although the Company has
rarely experienced any significant problems in obtaining sole-source components,
the Company has sought to establish a close relationship with sole-source
suppliers and if necessary build up an inventory of such components.
The Company in December 1996 sold all of its manufacturing assets and entered
into an contract manufacturing agreement with XeTel Corporation to supply
manufacturing services. The Company believes that XeTel 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 remote access products is highly competitive. Many of the
Company's competitors have greater financial resources and are more established
than the Company. The Company competes directly with traditional vendors of
terminal servers, modems, remote control software, terminal emulation software
and application-specific remote access solutions, such as Shiva, Ascend
Communications, Bay Networks, Livingston Enterprises, Inc. and Netopia, Inc.
The Company also competes with suppliers of routers, hubs and other data
communications products, such as Cisco and 3Com. In addition, the Company may
encounter increased competition from operating system and network operating
system vendors, such as Microsoft and Novell, to the extent that such vendors
include full remote access or routing capabilities in their products. The
Company believes it can compete successfully in the remote access market by (1)
providing low-cost hardware and easy-to-use software, suited specifically to the
needs of the non-sophisticated user; (2) developing distribution channels that
provide close sales and support
-13-
to end users; (3) providing economical, accessible support services; and (4)
directing sales channel development to niche vertical market segments. By
focusing on the above factors the Company believes that it can successfully
compete within the remote access market, although there can be no assurance to
that effect.
Competition within the intelligent communications controller market is
fragmented principally by application segment. The Company's VMEbus
communications controllers compete primarily with products from Motorola,
Interphase Corp., CMC, a Rockwell Company, Themis Computers, Network
Peripherals, Performance Technologies and various other companies on a
product-by-product basis. To compete in this market the Company emphasizes the
functionality, support, quality and price of its product in relation to its
competitors as well as the Company's ability to customize the product or
software to exactly meet the customer's needs. Competition within the EISAbus
communications controller market is also fragmented among various companies
providing different applications. The Company's EISAbus-based products are
targeted to potential customers using Hewlett Packard (HP) 9000 workstations.
Currently, the Company's EISAbus products face nominal competition in this
market.
Additionally, the Company competes with the internal engineering resources of
its customers. As its customers become successful with their products, they
examine methods to reduce costs and integrate functions. To compete with the
internal engineering resources of its customers, the Company works jointly with
their engineering staffs to understand its customers' system requirements and to
anticipate product needs.
INTELLECTUAL PROPERTY
The Company believes that its future success will depend principally on its
continuing product innovation, sales, marketing and technical expertise, product
support and customer relations. The Company also believes that it needs to
protect the proprietary technology contained in its products. The Company does
not currently hold any patents and relies on a combination of copyright,
trademark, trade secret laws and contractual provisions to establish and protect
proprietary rights in its products. The Company typically enters into
confidentiality agreements with its employees, strategic partners, Channel
Partners and suppliers and limits access to the distribution of its proprietary
information.
BACKLOG
On January 5, 1998, the Company had a backlog of orders of approximately $2.4
million for shipment within the next twelve months. On January 1, 1997, the
Company had a backlog of orders of approximately $3.6 million for shipment
within the next twelve months. Since recorded sales orders are subject to
changes in customer delivery schedules, cancellation, or price changes, the
Company's backlog as of any particular date may not be representative of actual
sales for any succeeding fiscal period and is not considered firm.
EMPLOYEES
On January 5, 1998, the Company had 91 employees. None of the Company's
employees is represented by a labor union and the Company has experienced no
work stoppages. The Company's management believes its employee relations are
good.
-14-
The Company's management believes that the Company's future success will depend,
in part, on its ability to attract and retain qualified technical (particularly
engineering), marketing and management personnel. Such experienced personnel
are in great demand and the Company must compete for their services with other
firms, many of which have greater financial resources than the Company.
ITEM 2. PROPERTIES
The Company's engineering, manufacturing and administrative headquarters are
located in 63,000 square feet of leased space in a building located in San
Ramon, California. The lease expires in 2006. The Company expects that the
facility will satisfy its anticipated needs through the foreseeable future. In
December 1996, in conjunction with the sale of all of the Company's
manufacturing assets, the Company subleased approximately 24,000 square feet of
this office and manufacturing space to XeTel for a four year term with an option
to renew for an additional five years.
-15-
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders of the Company was held on Friday,
October 31, 1997, at the Company's corporate offices located at 4550 Norris
Canyon Road, San Ramon, California.
The shareholders approved the following item:
(i) Reincorporation of the Company in Delaware. (For - 1,374,046; Against
- 270,144; Abstain - 15,921)
-16-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
MATTERS
Fiscal Quarter Ended
--------------------------------------------------
1997 January 31 April 30 July 31 October 31
- ----------------------------------------------------------------------
High $4.50 $6.50 $9.75 $19.50
Low 3.38 3.63 4.88 8.00
1996
High $14.25 $12.50 $12.25 $6.63
Low 11.00 5.75 5.75 3.88
SBE common stock is quoted on the Nasdaq National Market under the symbol SBEI.
The above table sets forth the high and low closing sales prices for 1997 and
1996 for the quarters indicated. The Company has not paid cash dividends on its
common stock and anticipates that for the foreseeable future it would retain
earnings for use in its business. Additionally, the Company is currently
prohibited from paying dividends by its credit line agreement. As of December
31, 1997 SBE had approximately 1,000 stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except for per share
amounts and number of employees)
For Years Ended October 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Net sales $24,970 $13,350 $19,368 $22,337 $26,732
Net income (loss) 3,333 (9,625) (4,568) 1,336 2,461
Net income (loss) per share $1.20 ($4.51) ($2.22) $0.63 $1.18
Product research and development 2,808 5,084 6,900 4,769 4,739
Working capital 7,492 2,049 7,644 7,436 6,608
Total assets 11,269 7,894 14,978 17,665 16,563
Long-term obligations 925 757 1,218 410 44
Stockholders' equity 7,966 3,981 12,108 15,864 14,889
Shares outstanding 2,641 2,233 2,074 2,035 2,005
Number of employees 80 92 173 165 148
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION
CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS SECTION AND THE SECTION ENTITLED "BUSINESS"
(PARTICULARLY "BUSINESS-RISK FACTORS").
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. The Company is attempting to diversify its sales with the
introduction of new products that are targeted at large growing markets. The
Company's WanXL products are focused on the client/server market and the
significant increases in communications activity that are driven by applications
such as email, electronic commerce, geographically diverse corporate networks
and general computer communications. Additionally, the Company's netXpand
products are targeted at the growing need for small businesses to connect their
computers together and to provide remote access for traveling employees. While
the Company believes the markets for the WanXL and netXpand products are large,
there can be no assurance that the Company will be able to succeed in
penetrating these markets and diversifying its sales.
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, 1997, 1996 and 1995. These operating results are not necessarily indicative
of Company's operating results for any future period.
YEAR ENDED OCTOBER 31,
----------------------
1997 1996 1995
Net sales 100% 100% 100%
Cost of sales 49 62 49
----- ----- -----
Gross profit 51 38 51
Operating expenses:
Product research and development 11 38 36
Sales and marketing 15 34 26
General and administrative 15 24 20
Restructuring and other -- 14 --
----- ----- -----
Total operating expenses 41 110 82
----- ----- -----
Operating income (loss) 10 (72) (31)
Gain on sale of assets 3 -- --
Interest and other expense, net -- -- (1)
----- ----- -----
Income (loss) before taxes 13 (72) (32)
Income tax benefit -- -- (8)
----- ----- -----
Net income (loss) 13% (72)% (24)%
----- ----- -----
----- ----- -----
-18-
NET SALES
Net sales for fiscal 1997 were $25.0 million, an 87 percent increase from fiscal
1996. Net sales for fiscal 1996 were $13.4 million, a 31 percent decrease from
fiscal 1995. The increase from fiscal 1996 to fiscal 1997 was primarily
attributable to increased sales of controller products and, to a lesser extent,
WanXL products. The decrease from fiscal 1995 to fiscal 1996 was primarily
attributable to lower sales of the Company's controller products to certain
large customers. Sales to individual customers in excess of 10 percent of net
sales of the Company included sales to Tandem Computers, Motorola, and Silicon
Graphics of $8.8 million, $3.8 million, and $3.0 million, respectively, in 1997,
sales to Tandem Computers of $2.7 million in fiscal 1996 and sales to America
Online and Tandem Computers of $3.1 million and $2.8 million, respectively, in
fiscal 1995. Sales to Motorola were $700,000 in fiscal 1996 and $761,000 in
fiscal 1995. There were no sales to Silicon Graphics in fiscal 1996 or fiscal
1995 and no sales to America Online in fiscal 1997 or fiscal 1996. Partially
offsetting the lower sales of board level products in fiscal 1996, sales of
netXpand remote access products increased by $1.5 million from fiscal 1995 to
fiscal 1996 to approximately 15 percent of total sales in fiscal 1996. Sales of
netXpand products remained unchanged from fiscal 1996 to fiscal 1997. The
Company expects to continue to experience fluctuation in communication
controller product sales as large customers' needs change. See "Risk
Factors--Dependence on a Limited Number of OEM Customers."
International sales constituted 12 percent, 26 percent and 11 percent of net
sales in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The decrease
in international sales from fiscal 1996 to fiscal 1997 is primarily attributable
to lower sales to certain Korean customers. The increase from fiscal 1995 to
fiscal 1996 is primarily attributable to increased sales of VME communication
controller products to a large customer in Korea and sales of netXpand products
in Taiwan and Japan. Sales of VMEbus-based communications products through the
Company's Channel Partner relationship with Hewlett Packard constituted 2
percent, 11 percent and 27 percent of net sales in fiscal 1997, fiscal 1996 and
fiscal 1995, respectively. No customer within this channel, other than America
Online during fiscal 1995, represented more than 5% of total sales. The Company
expects that future sales through the HP channel will continue at current
levels; however, sales through this channel will be subject to significant
variability from quarter to quarter.
GROSS PROFIT
Gross profit as a percentage of sales was 51 percent, 38 percent and 51 percent
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The increase from
fiscal 1996 to fiscal 1997 was primarily attributable to lower component costs
and favorable pricing with XeTel. The decrease from fiscal 1995 to fiscal 1996
was primarily attributable to lower sales and increased fixed manufacturing
costs. The Company in fiscal 1995 added significant manufacturing capacity in
anticipation of netXpand sales increases. The costs for the additional capacity
included the cost of leasing high speed placement and testing equipment,
facility lease costs and depreciation. In late fiscal 1996 the Company
concluded that it would not be able to maintain a production facility that would
allow it to be competitive with the production costs of its competitors;
therefore, in December 1996 the Company sold its manufacturing assets and
operations to XeTel. The Company also entered into a contract to purchase
manufacturing services from XeTel, which has and may continue to decrease the
volatility of the quarterly cost of sales as a percentage of sales.
-19-
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses net of capitalized software costs were
$2.8 million in fiscal 1997, $5.1 million in fiscal 1996 and $6.9 million in
fiscal 1995, representing 11 percent, 38 percent and 36 percent of sales,
respectively. The decreases in research and development spending were a result
of the completion of the base netXpand product line and a corresponding decrease
in third party consulting costs associated with the launch of the netXpand
products. The Company expects that product research and development expenses
will decrease as a percentage of sales as the Company focuses its resources on
improving its netXpand product line and enhancing its traditional board-level
products.
The Company capitalized software development costs of $1.5 million in fiscal
1995 in accordance with Statement of Financial Accounting Standards No. 86.
There were no such costs capitalized in fiscal 1996 or fiscal 1997. The amount
capitalized in fiscal 1995 represented 22 percent of gross product research and
development expenditures. The software costs capitalized in fiscal 1995 were
due to software development related to the netXpand product line. Those costs
are being amortized over a three year period.
SALES AND MARKETING
Sales and marketing expenses for fiscal 1997 were $3.8 million, down from $4.6
million in fiscal 1996. Sales and marketing expenses decreased due to lower
sales and commission expenses and the completion of one time costs associated
with product launch of the netXpand product line. Sales and marketing expenses
for fiscal 1995 were $5.0 million. The Company expects sales and marketing
expenses to increase slightly as a percentage of total sales from 1997 levels
for the foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 1997 increased 18 percent from
fiscal 1996 to $3.7 million. General and administrative expenses for fiscal
1996 were $3.1 million, a 20 percent decrease from fiscal 1995. The increase
from fiscal 1996 to fiscal 1997 represents increased variable compensation
expense due to additional executive compensation and the Company's employee
profit sharing plan. The decrease from fiscal 1995 to fiscal 1996 represents
decreases in consulting, accounting and other administrative costs.
RESTRUCTURING COSTS AND OTHER
The Company incurred nonrecurring charges in fiscal 1996 for severance costs,
disposition of certain assets related to a reorganization of the Company and
writedown of capitalized software costs. Additionally, in fiscal 1995 the
Company recorded a nonrecurring charge to write off an equity investment in a
strategic software partner and to record realized losses on the liquidation of
investments.
GAIN ON SALE OF ASSETS
In December 1996 the Company sold all the assets of its manufacturing operation
to XeTel for $1.6 million. Additionally, the Company entered into a four-year
exclusive agreement to purchase manufacturing services from XeTel and subleased
a portion of its San Ramon facility to
-20-
XeTel. Further, a director of SBE, Inc. is also a director of XeTel. The
Company reported a gain of $685,000 net of expenses on the sale of these assets
in fiscal 1997.
INTEREST AND OTHER EXPENSE, NET
Interest income increased in fiscal 1997 from fiscal 1996 due to higher cash
balances. Interest income decreased in fiscal 1996 from fiscal 1995 due to
lower investment balances. Interest expense for fiscal 1997 decreased from
fiscal 1996 due to the repayment of borrowings. Interest expense increased in
fiscal 1996 from fiscal 1995 due to interest on outstanding borrowings.
INCOME TAXES
The Company recorded a tax benefit of $82,000 in fiscal 1997 due to carryback of
certain credits to prior year returns. The Company did not record any
significant tax expense in fiscal 1996 as a result of not being able to realize
any benefit from its net operating losses and unused tax credits. The Company's
effective tax rate was (3) percent and (27) percent in fiscal 1997 and 1995,
respectively. The Company's operating losses in fiscal 1995 enabled it to
realize a $1.7 million tax benefit, all of which was realized as a carryback
against prior taxes paid. The Company has recorded a valuation allowance in
fiscal 1997, 1996 and 1995 for certain deferred tax assets due to the
uncertainty of realization. This valuation allowance decreased from
approximately $4.3 million in fiscal 1996 to $3.3 million in fiscal 1997. In
the event of future taxable income, the Company's effective income tax rate in
future periods could be lower than the statutory rate as such tax assets are
realized.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company recorded net income of
$3.3 million in fiscal 1997 and net losses of $9.6 million and $4.6 million in
fiscal 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company had cash and cash equivalents of $5.6
million, as compared to $41,061 at October 31, 1996. In fiscal 1997, $4.6
million of cash was provided by operating activities, principally as a result
of $3.3 million in net income, a $1.9 million reduction in inventory and $1.1
million in depreciation and amortization charges. These increases in cash
were offset by a $736,000 increase in accounts receivable, a $685,000 gain
from the sale of assets and $309,000 in other non-cash credits. Working
capital at October 31, 1997 was $7.5 million, as compared to $2.0 million at
October 31, 1996.
In fiscal 1997 the Company purchased $290,000 of fixed assets, consisting
primarily of computer and design testing equipment. The Company expects capital
expenditures during fiscal 1998 to be greater than fiscal 1997 levels.
The Company received $621,000 in fiscal 1997 from employee stock option
exercises and stock purchase plan purchases, an increase of 68 percent from
fiscal 1996 amounts.
-21-
In August 1997 the Company entered into a revolving working capital line of
credit agreement. The agreement allows for a $2,000,000 line of credit and
expires on September 1, 1998. Borrowings under the line of credit bear interest
at the bank's prime rate plus one half percent and are collateralized by
accounts receivable and other assets. Borrowings are limited to 75 percent of
adjusted accounts receivable balances, and the Company is required to maintain a
minimum tangible net worth of $4.5 million, a quick ratio of cash, investments,
and receivables to current liabilities of not less than 1.30:1.00, and minimum
profitability levels. The line of credit agreement also prohibits the payment
of cash dividends without consent of the bank.
As of January 5, 1998, there were no borrowings outstanding under the line of
credit.
Based on the current operating plan, the Company anticipates that its current
cash balances, cash flow from operations and credit facilities will be
sufficient to meet its working capital needs in the foreseeable future.
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.
-22-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
Information concerning the Company's directors is incorporated by reference to
the information in the section captioned "Election of Directors" appearing in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on March 24, 1998 (the "1998 Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are set forth in the following table. Executive officers serve
at the discretion of the Board of Directors. There are no family relationships
between a director or executive officer and any other director or executive
officer of the Company.
Name Age Position
- -----------------------------------------------------------------------------
William B. Heye, Jr. 59 President and Chief Executive Officer
Timothy J. Repp 37 Vice President, Finance, Chief
Financial Officer, Treasurer and Secretary
Michael R. Coker 44 Vice President, Sales and Marketing
Samuel J. Penny 60 Vice President, Engineering
Mr. Heye has been President, Chief Executive Officer, and a director of the
Company since November 1991. From 1989 to November 1991, he served as Executive
Vice President of Ampex Corporation, a manufacturer of high-performance scanning
recording systems and President of Ampex Video Systems Corporation, a
wholly-owned subsidiary of Ampex Corporation and a manufacturer of professional
video recorders and editing systems for the television industry. From 1986 to
1989 Mr. Heye was Executive Vice President of Airborn, Inc., a manufacturer of
components for the aerospace and military markets. Prior to 1986 Mr. Heye
served in various senior management positions at Texas Instruments, Inc. in the
U.S. and overseas, including Vice President and General Manager of Consumer
Products and President of Texas Instruments Asia, Ltd. headquartered in Tokyo,
Japan.
Mr. Repp has served as Secretary of the Company since December 1996 and as Vice
President, Finance, Chief Financial Officer and Treasurer since January 1992.
He joined the Company in January 1991 as Controller. From 1987 until 1990, he
was assistant controller at Grubb and
-23-
Ellis, a national real estate firm, and prior to 1987 he was an audit manager at
Coopers & Lybrand, an international accounting firm.
Mr. Coker has been Vice President, Sales and Marketing since October 1996. He
joined the Company as Vice President, Sales in March 1996. From January 1993
until February 1996, he was President and Chief Executive Officer of Syskonnect,
a provider of networking communication equipment. From October 1983 to December
of 1993, Mr. Coker served in various senior management positions, including Vice
President of International Sales, Vice President, Marketing and Director of
Marketing at Vitalink, a provider of routers, bridges and networking products.
Mr. Penny has been Vice President, Engineering since March 1997. Mr. Penny is a
founder of the Company and has served in various capacities since 1984,
including Director of Engineering and Director of Marketing.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" appearing in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-24-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) FINANCIAL STATEMENTS (SEE ITEM 8).
PAGE
Report of Independent Accountants 29
Consolidated Balance Sheets at October 31, 1997 and 1996 30
Consolidated Statements of Operations for fiscal years
1997, 1996 and 1995 31
Consolidated Statements of Stockholders' Equity for fiscal
years 1997, 1996 and 1995 32
Consolidated Statements of Cash Flows for fiscal years
1997, 1996 and 1995 33
Notes to Consolidated Financial Statements 34
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts 44
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.
-25-
(c) Exhibits
Exhibit Sequential
Number Description Page No.
------- ----------- ----------
3.1 Certificate of Incorporation, as amended through
December 15, 1997 45
3.2 Bylaws 49
(f)10.1 1996 Stock Option Plan, as amended ---
(a)10.2 1991 Non-Employee Directors' Stock Option Plan,
as amended ---
(d)10.3 1992 Employee Stock Purchase Plan, as amended ---
(b)10.4 Lease for 4550 Norris Canyon Road, San Ramon,
California dated November 2, 1992 between
the Company and PacTel Properties ---
(c)10.5 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) ---
(e)10.6 Asset Purchase Agreement between XeTel Corporation and
SBE, Inc. dated as of December 6, 1996 ---
10.7 Letter of agreement to provide credit facilities
between the Company and Comerica Bank - California,
dated August 26, 1997 69
11.1 Statement re computation of per share earnings 85
23.1 Consent of Coopers & Lybrand, L.L.P., Independent
Public Accountants 86
27.1 Financial Data Schedule 87
(d) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the
quarter ended October 31, 1997.
-26-
Explanations for letter footnotes:
- ----------------------------------------------------------------------------
(a) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1991 and incorporated herein by reference.
(b) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1993 and incorporated herein by reference.
(c) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1995 and incorporated herein by reference.
(d) Filed as an exhibit to Form S-8 dated February 26, 1992 and
incorporated herein by reference.
(e) Filed as an exhibit to the current report on Form 8-K dated December
6, 1996 and incorporated herein by reference.
(f) Filed as an exhibit to Annual Report on Form 10-K for the year ended
October 31, 1996 and incorporated herein by reference.
-27-
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SBE, Inc.
(Registrant)
Dated: January 28, 1998 By: /s/ Timothy J. Repp
-------------------------
Timothy J. Repp
Chief Financial Officer
and Vice President, Finance
Pursuant to the requirements for the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated, as of January 28, 1998.
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- ------------------------------
William B. Heye Jr. Chief Executive Officer and President
(Principal Executive Officer)
/s/ Timothy J. Repp
- ------------------------------
Timothy J. Repp Chief Financial Officer, Vice President,
Finance, Secretary (Principal Financial and
Accounting Officer)
/s/ Raimon L. Conlisk
- ------------------------------
Raimon L. Conlisk Director, Chairman of the Board
/s/ George E. Grega
- ------------------------------
George E. Grega Director
/s/ Randall L-W Caudill
- ------------------------------
Randall L-W Caudill Director
/s/ Ronald J. Ritchie
- ------------------------------
Ronald J. Ritchie Director
-28-
Report of Independent Accountants
To the Board of Directors and Stockholders
SBE, Inc.
San Ramon, California
We have audited the consolidated financial statements of SBE, Inc. and
subsidiary as of October 31, 1997 and 1996 and for each of the three years in
the period ended October 31, 1997. We have also audited the financial
statement schedule listed in Item 14(b) of this Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SBE, Inc. and
subsidiary as of October 31, 1997 and 1996 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
November 20, 1997, except for
Note 13, as to which the date is December 15, 1997
-29-
SBE, INC.
CONSOLIDATED BALANCE SHEETS
October 31 1997 1996
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,568,873 $ 41,061
Trade accounts receivable, net 2,780,273 2,043,959
Inventories 851,141 2,741,356
Income tax recoverable --- 8,990
Deferred income taxes 513,237 291,275
Other 156,370 78,118
------------ -----------
Total current assets 9,869,894 5,204,759
Property, plant and equipment, net 1,083,037 2,070,389
Deferred income taxes --- 27,083
Capitalized software costs, net 275,588 551,168
Other 40,700 40,700
------------ -----------
Total assets $ 11,269,219 $ 7,894,099
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ --- $ 980,340
Trade accounts payable 1,029,110 1,084,813
Accrued payroll and employee benefits 949,739 261,726
Customer advances --- 617,453
Accrued product warranties 251,956 90,447
Other 147,439 121,409
------------ -----------
Total current liabilities 2,378,244 3,156,188
Deferred tax liabilities 513,237 318,358
Deferred rent 411,881 438,939
------------ -----------
Total liabilities 3,303,362 3,913,485
------------ -----------
Commitments (Note 8).
Stockholders' equity:
Preferred stock (no par value); authorized
2,000 shares; issued 167 shares;
outstanding zero and 113 shares at
October 31, 1997 and 1996, respectively --- 750,460
Common stock (no par value); authorized
10,000,000 shares; issued and outstanding
2,640,516 and 2,232,858 at October 31,
1997 and 1996, respectively 9,828,837 8,426,315
Accumulated deficit (1,862,980) (5,196,161)
------------ -----------
Total stockholders' equity 7,965,857 3,980,614
------------ -----------
Total liabilities and stockholders'
equity $ 11,269,219 $ 7,894,099
------------ -----------
------------ -----------
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31
1997 1996 1995
- ------------------------------------------------------------------------------
Net sales $24,970,427 $13,350,228 $19,367,776
Cost of sales 12,151,883 8,277,879 9,566,784
----------- ----------- -----------
Gross profit 12,818,544 5,072,349 9,800,992
Product research and development 2,807,872 5,083,707 6,900,420
Sales and marketing 3,833,801 4,605,275 4,961,438
General and administrative 3,686,890 3,137,132 3,929,544
Restructuring costs --- 960,747 ---
Write-off of prepaid offering costs --- 105,000 ---
Writedown of software costs --- 794,018 ---
----------- ----------- -----------
Total expenses 10,328,563 14,685,879 15,791,402
Operating income (loss) 2,489,981 (9,613,530) (5,990,410)
Gain on sale of assets 684,502 --- ---
Interest income 101,546 34,486 342,463
Interest expense (24,858) (43,859) (14,783)
Write-off of equity investment --- --- (330,000)
Loss on sale of investments --- --- (293,797)
----------- ----------- -----------
Income (loss) before
income taxes 3,251,171 (9,622,903) (6,286,527)
(Benefit) provision for income
taxes (82,010) 1,600 (1,718,556)
----------- ----------- -----------
Net income (loss) $ 3,333,181 $(9,624,503) $(4,567,971)
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per common share $ 1.20 $ (4.51) $ (2.22)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares 2,780,713 2,131,593 2,054,570
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Unrealized Losses Retained
Shares Amount Shares Amount on Investments Earnings (Deficit) Total
--------- -------- ---------- ----------- ----------------- ------------------ -----------
Balances, October 31, 1994 --- --- 2,034,842 $ 7,392,693 $(525,370) $ 8,996,313 $15,863,636
Stock issued in connection
with stock option plan --- --- 21,543 166,454 --- --- 166,454
Stock issued in connection
with stock purchase
plan --- --- 17,869 120,672 --- --- 120,672
Unrealized losses on
investments --- --- --- --- 525,370 --- 525,370
Net loss --- --- --- --- --- (4,567,971) (4,567,971)
----- -------- --------- ----------- ----------- ----------- -----------
Balances, October 31, 1995 --- --- 2,074,254 7,679,819 --- 4,428,342 12,108,161
Stock issued in connection
with preferred stock
offering 167 $ 1,109,087 --- --- --- --- 1,109,087
Stock retired/issued in
connection with
conversion to
common stock (54) (358,627) 104,719 358,627 --- --- ---
Stock issued in connection
with stock option
plans --- --- 35,283 221,939 --- --- 221,939
Stock issued in connection
with stock purchase
plan --- --- 18,602 165,930 --- --- 165,930
Net loss --- --- --- --- --- (9,624,503) (9,624,503)
----- -------- --------- ----------- ----------- ----------- -----------
Balances, October 31, 1996 113 750,460 2,232,858 8,426,315 --- (5,196,161) 3,980,614
Stock retired/issued in
connection with
conversion to
common stock (113) (750,460) 240,083 750,460 --- --- ---
Stock issued in connection
with dividend on
converted preferred
shares --- --- 8,836 31,558 --- --- 31,558
Stock issued in connection
with exercise of stock
warrants --- --- 42,539 --- --- --- ---
Stock issued in connection
with stock option
plans --- --- 102,588 570,988 --- --- 570,988
Stock issued in connection
with stock purchase
plan --- --- 13,612 49,516 --- --- 49,516
Net income --- --- --- --- --- 3,333,181 3,333,181
----- -------- --------- ----------- ----------- ----------- -----------
Balances, October 31, 1997 --- $ --- 2,640,516 $ 9,828,837 $ --- $(1,862,980) $ 7,965,857
----- -------- --------- ----------- ----------- ----------- -----------
----- -------- --------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
-32-
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 31 1997 1996 1995
------------ ----------- ----------
Cash flows from operating activities:
Net income (loss) $ 3,333,181 $(9,624,503) $(4,567,971)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 1,083,274 1,659,787 1,312,061
Gain from sale of property and
equipment (684,502) --- ---
Costs and reserves related to
sale of property and equipment (442,585) --- ---
Restructuring costs --- 329,498 ---
Write-off of prepaid offering costs --- 105,000 ---
Writedown of capitalized software --- 794,018 ---
Write-off of equity investment --- --- 330,000
Loss on sale of investments --- --- 293,797
Deferred taxes --- --- 10,178
Other --- --- 955
Changes in assets and liabilities:
(Increase) decrease in trade
accounts receivable (736,314) 1,343,773 56,465
Decrease (increase) in
inventories 1,890,215 (129,943) (563,621)
(Increase) decrease in deferred
and recoverable income tax 8,990 1,827,325 (1,776,485)
(Increase) decrease in other
assets (78,252) 195,883 30,355
(Decrease) increase in trade
accounts payable (55,703) 143,925 138,613
Increase in other current
liabilities 258,099 380,519 122,174
Increase in noncurrent liabilities --- 99,805 218,725
---------- ----------- -----------
Net cash provided (used) by
operating activities 4,576,403 (2,874,913) (4,394,754)
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (290,464) (385,236) (1,802,826)
Disposals of property and equipment 1,600,000 --- ---
Proceeds from sale of fixed assets 1,709 8,208 2,729
Capitalized software costs --- (41,500) (1,486,967)
Proceeds from sale of investments --- --- 5,936,416
Purchase of investments --- --- (250,585)
---------- ----------- -----------
Net cash provided (used) by
investing activities 1,311,245 (418,528) 2,398,767
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings on line
of credit --- 5,528,595 ---
Repayment of borrowings on line
of credit (980,340) (4,548,255) ---
Proceeds from sale of preferred stock --- 1,109,087 ---
Proceeds from stock plans 620,504 387,869 287,126
---------- ----------- -----------
Net cash (used) provided
by financing activities (359,836) 2,477,296 287,126
---------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 5,527,812 (816,145) (1,708,861)
Cash and cash equivalents at
beginning of year 41,061 857,206 2,566,067
---------- ----------- -----------
Cash and cash equivalents at
end of year $5,568,873 $ 41,061 $ 857,206
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 24,858 $ 43,859 $ 14,783
---------- ----------- -----------
---------- ----------- -----------
Income taxes $ 2,540 $ 417 $ 33,824
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Conversion of preferred stock
into common stock $ 750,460 $ 358,627 $ ---
---------- ----------- -----------
---------- ----------- -----------
Issuance of common stock in lieu of
dividend on converted preferred stock $ 31,558 $ --- $ ---
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SEGMENT AND BASIS OF PRESENTATION:
SBE, Inc. and subsidiary (the Company) designs and manufactures high-performance
network systems and products for world-wide distribution. The Company's
business falls exclusively within one industry segment.
On December 6, 1996 the Company sold all the assets of its manufacturing
operation to XeTel Corporation, a contract manufacturing company with
headquarters in Austin, Texas, for $1.6 million. Additionally, the Company
entered into a four-year exclusive agreement to purchase manufacturing services
from XeTel and subleased a portion of its San Ramon facility to XeTel. The
Company reported a gain of $685,000 net of expenses on the sale of these assets
in fiscal 1997.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
The Company considers all highly liquid investments readily convertible into
cash with an original maturity of three months or less upon acquisition by the
Company to be cash equivalents. Substantially all of its cash and cash
equivalents are held in one large financial institution.
INVENTORIES:
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost. The Company provides for
depreciation by charges to expense, which are sufficient to write off the costs
of the assets over their estimated useful lives of three to eight years, on a
straight-line basis. Leasehold improvements are amortized over the lesser of
their useful lives or the remaining term of the related leases.
-34-
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the asset and allowance for depreciation accounts
and any gain or loss on such sale or disposal is credited or charged to income.
Maintenance, repairs and minor renewals are charged to expense as incurred.
Expenditures which substantially increase an asset's useful life are
capitalized.
CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of costs to purchase software and to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized as related sales are recorded on a per-unit basis with a minimum
amortization based on a straight-line method over a three-year useful life. The
Company evaluates the estimated net realizable value of each software product
and records provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
REVENUE RECOGNITION AND WARRANTY COSTS:
The Company records product sales at the time of product shipment. Warranty
costs are not significant; however, the Company provides a reserve for estimated
warranty costs at the time of sale and periodically adjusts such amounts to
reflect actual expenses. The Company's sales transactions are negotiated
principally in US dollars.
PRODUCT RESEARCH AND DEVELOPMENT EXPENDITURES:
Product research and development (R&D) expenditures, except certain software
development costs, are charged to expense as incurred. Contractual
reimbursements for R&D expenditures under joint R&D contracts with customers are
accounted for as a reduction of related expenses as incurred. For the years
ended October 31, 1997, 1996 and 1995, direct costs incurred under R&D contracts
were $172,895, $42,543 and $112,868, respectively, and reimbursements earned
were $338,470, $73,852 and $221,120, respectively.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the consolidated
financial statements or tax returns. Under SFAS No. 109 the Company provides a
deferred tax expense or benefit equal to the change in the deferred tax asset or
liability during the year. Deferred income taxes represent future net tax
effects resulting from temporary differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
recorded against net deferred tax assets where, in the opinion of management,
realization is uncertain.
-35-
NET INCOME (NET LOSS) PER COMMON SHARE:
Net income per common share for the year ended October 31, 1997 was computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding. Common stock equivalents relate to stock
options and warrants. Common stock equivalents are excluded from the net loss
per common share (LPS) calculation for the years ended October 31, 1996 and
1995, as they have the effect of decreasing LPS. The difference between primary
and fully diluted net income (loss) per share was not significant in any year.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), was issued and will become effective during the Company's
fiscal year ending October 31, 1998. The Company expects that the
implementation of SFAS 128 should not have a material effect on the earnings per
share calculation.
In March 1997, Statement of Financial Accounting Standards 129, "Disclosure of
Information About Capital Structure", was issued and is effective for the
Company's fiscal year ending October 31, 1998. In June 1997, Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information", were issued and are effective for the
year ending October 31, 1999. The Company has not determined the impact of the
implementation of these pronouncements.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation with no effect on net loss as
previously reported.
2. INVENTORIES
Inventories at October 31, 1997 and 1996 are comprised of the following :
1997 1996
- ----------------------------------------------------------------------
Finished goods $ 822,670 $ 750,508
Subassemblies --- 174,620
Parts and materials 28,471 1,816,228
--------- ----------
$ 851,141 $2,741,356
--------- ----------
--------- ----------
-36-
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1997 and 1996 are comprised of the
following:
1997 1996
- ----------------------------------------------------------------------
Machinery and equipment $ 4,840,507 $ 6,988,575
Furniture and fixtures 1,007,679 1,078,008
Leasehold improvements 289,572 519,309
----------- -----------
6,137,758 8,585,892
Less accumulated depreciation
and amortization 5,054,721 6,515,503
----------- -----------
$ 1,083,037 $ 2,070,389
----------- -----------
----------- -----------
Depreciation and amortization expense totaled $807,694, $1,307,054 and
$1,251,513 for the years ending October 31, 1997, 1996 and 1995, respectively.
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs at October 31, 1997 and 1996 comprise the following:
1997 1996
- ----------------------------------------------------------------------
Purchased software $ 109,116 $ 109,116
Internally developed software 805,333 805,333
---------- ----------
914,449 914,449
Less accumulated amortization 638,861 363,281
---------- ----------
$ 275,588 $ 551,168
---------- ----------
---------- ----------
No software costs were capitalized in 1997. The Company capitalized $41,500 of
purchased software costs in 1996. Amortization of capitalized software costs
totaled $275,580, $352,733 and $60,548 for the years ended October 31, 1997,
1996 and 1995, respectively. Additionally, the Company recorded a writedown of
its capitalized software costs of $794,000 during fiscal year 1996. The
carrying value of the asset was reduced due to the uncertainty of the future
realization of the asset, because of slower than expected sales of netXpand
products.
5. BANK FACILITY:
On August 26, 1997 the Company entered into a revolving working capital line of
credit agreement with a bank. The agreement allows for a $2,000,000 line of
credit and expires on September 1, 1998. Borrowings under the line of credit
bear interest at the bank's prime rate plus one half percent and are
collateralized by accounts receivable and all other tangible assets. Borrowings
are limited to 75 percent of adjusted accounts receivable balances, and the
Company is required to maintain a minimum tangible net worth of $4.5 million, a
quick ratio of cash, investments, and receivables to current liabilities of not
less than 1.30:1.00, maximum debt to equity ratio of 1.00:1.00, and minimum
profitability levels. The line of credit agreement also prohibits the payment
of cash dividends without consent of the bank.
-37-
6. CONVERTIBLE PREFERRED STOCK
On July 10, 1996, the Company issued and sold 167 shares of Series A Preferred
Stock ("Series A Preferred") for net proceeds of approximately $1.1 million The
issuance of Series A Preferred was exempt, pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended (the "Act"), from registration
requirements under the Act.
Each share of Series A Preferred is convertible into the number of shares of
Common Stock of the Company ("Common Stock") equal to $7,500 divided by the
Conversion Price. The applicable Conversion Price is lesser of $6.675 or 75
percent of the average closing bid price of the Common Stock for the five
consecutive trading days immediately prior to conversion; provided however, that
the Series A Preferred, taken as a whole, may not at any time convert into 16.7
percent or more of the Company's outstanding Common Stock (measured on July 10,
1996 and on the date of conversion). The Series A Preferred will automatically
convert into Common Stock when the average closing bid price of the Common Stock
over a five trading day period is equal to or greater than $13.35. In addition,
all unconverted shares of Series A Preferred will be converted automatically
upon the earlier to occur of July 10, 1998 and the written consent of the
holders of two thirds of the then outstanding Series A Preferred. Holders of
Series A Preferred are also entitled to certain dividend rights and liquidation
preferences. The shares of Series A Preferred have no voting rights.
As of December 4, 1996 all outstanding shares of Series A Preferred had been
converted into 240,083 shares of Common Stock.
In connection with the sale of the Series A Preferred, the Company issued
warrants to purchase an aggregate of 93,703 shares of Common Stock with an
exercise price of $8.25 per share. The warrants expire in July 1999. As of
October 31, 1997 all the warrants had been exercised on a net basis, which
resulted in the issuance of 42,539 shares of Common Stock.
Additionally, the Company issued 8,836 shares of Common Stock in lieu of
$31,588 of dividends due on the convertible preferred stock.
7. INCOME TAXES
The components of the provision for income taxes for the years ended October 31,
1997, 1996 and 1995, are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------
Federal:
Current $(83,610) $ --- $(1,731,734)
Deferred --- --- 10,178
State:
Current 1,600 1,600 3,000
Deferred --- ---
-------- -------- -----------
Total (benefit) provision
for income taxes $(82,010) $ 1,600 $(1,718,556)
-------- -------- -----------
-------- -------- -----------
-38-
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
1997 1996 1995
- -----------------------------------------------------------------------------
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
State taxes, net of federal
income tax benefit --- --- ---
Change in valuation allowance (30.0) 34.0 12.2
Refund of prior year taxes (5.5) --- ---
Tax credits --- --- (5.0)
Nontaxable interest income --- --- (0.7)
Other, net (1.0) --- 0.2
------- ------ -------
(2.5)% 0.0% (27.3)%
------- ------ -------
------- ------ -------
Significant components of the Company's deferred tax balances as of October 31,
1997 and 1996 are as follows:
1997 1996
- -----------------------------------------------------------------------------
Deferred tax assets:
Current
Accrued employee benefits $ 70,000 $ 77,000
Inventory allowances 401,000 136,000
Allowance for doubtful accounts 67,000 42,000
Warranty accruals 100,000 37,000
Noncurrent
Deferred rent 173,000 179,000
R&D credit carryforward 784,000 706,000
Alternative minimum tax carryforward 251,000 143,000
Operating loss carryforward 1,841,000 3,136,000
Investments 130,000 130,000
Capital loss carryforward 74,000 74,000
----------- -----------
Total deferred tax assets 3,891,000 4,660,000
----------- -----------
Deferred tax liabilities:
Noncurrent
Depreciation (294,000) (96,000)
Capitalized software costs (220,000) (223,000)
----------- -----------
Total deferred tax liabilities (514,000) (319,000)
----------- -----------
Deferred tax asset valuation allowance (3,377,000) (4,341,000)
----------- -----------
Net deferred tax assets $ --- $ ---
----------- -----------
----------- -----------
A valuation allowance was established to offset certain deferred tax assets due
to management's uncertainty of realizing the benefit of these items. The net
changes in the valuation allowance were a decrease of $964,000 and an increase
of $3.4 million for the years ended October 31, 1997 and 1996, respectively.
The Company has research and experimentation tax credit carryforwards of
$784,000 for federal and state tax purposes. These carryforwards expire in the
periods ending 2007 through 2012. The Company has a net operating loss
carryforward for federal and state income tax purposes of approximately $4.9
million and $1.7 million, respectively, which expire in periods ending 1999
through 2012.
-39-
8. COMMITMENTS
The Company leases all its buildings under noncancelable operating leases which
expire at various dates through the year 2006. Future minimum lease payments
under all operating leases, net of sublease proceeds, with initial or remaining
noncancelable lease terms in excess of one year at October 31, 1997 are as
follows:
Year ending October 31:
1998 $ 393,416
1999 393,416
2000 417,318
2001 645,408
2002 643,085
Thereafter 2,182,553
----------
Total minimum lease payments $4,675,196
----------
----------
Under the terms of the San Ramon, California building lease, rent includes the
lessor's operating costs and is offset by sublease proceeds. The building lease
also includes two five-year renewal options at market rates as defined by the
lease. Rent expense under all operating leases for the years ended October 31,
1997, 1996 and 1995 was $664,409 (net of sublease proceeds of $328,911),
$822,835 and $794,700, respectively.
9. STOCK OPTION AND STOCK PURCHASE PLANS
The Company has one employee stock option plan, its 1996 Stock Option Plan (the
Employee Plan). Originally adopted as the 1987 Supplemental Stock Option Plan,
this plan was amended and restated on January 18, 1996 and retitled the 1996
Stock Option Plan. A total of 1,130,000 shares of common stock are reserved
under the plan. Stock options granted under the Employee Plan are exercisable
over a maximum term of ten years from the date of grant, vest in various
installments over this period and have exercise prices reflecting market value
at the date of grant. In May 1996, due to the reduced market price of the
Company's common stock, the Company offered employees the opportunity to have
their options repriced to $8.93 in exchange for restrictions of certain rights
under their option grants.
Additionally, in 1991, stockholders approved a "Non-Employee Director Stock
Option Plan" (the Plan). A total of 140,000 shares of common stock are reserved
for issuance under this Plan. Options granted under the plan vest over a
four-year period, expire five years after the date of grant and have exercise
prices reflecting market value at the date of grant.
At October 31, 1997 and 1996, 36,917 and 13,913 shares, respectively, were
available for stock option grants under the Employee Plan. A total of 59,000
shares were available for grant under the Non-Employee Director Plan at both
October 31, 1997 and 1996.
-40-
A summary of the activity under the stock option plans is set forth below:
1991 Non-Employee
1996 Stock Directors
Option Plan Stock Option Plan
--------------------------------------------------
Exercise Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------
Outstanding at
October 31, 1994 315,926 $3.75 - $17.25 40,250 $5.25 - $13.00
Granted 275,907 7.50 - 14.50 20,000 9.50
Terminated (37,502) 7.00 - 14.50 --- ---
Exercised (21,543) 3.75 - 13.25 --- ---
---------------------------------------------------
Outstanding at
October 31, 1995 532,788 4.13 - 17.25 60,250 5.25 - 13.00
Granted 513,998 4.38 - 10.50 15,000 7.75
Terminated (232,703) 5.31 - 12.00 --- ---
Exercised (23,033) 4.25 - 10.25 (12,250) 5.25
---------------------------------------------------
Outstanding at
October 31, 1996 791,050 3.75 - 10.50 63,000 7.75 - 13.00
Granted 202,100 3.69 - 17.25 20,000 4.38 - 4.88
Terminated (226,787) 3.75 - 13.50 (31,000) 7.75 - 13.00
Exercised (102,588) 4.38 - 9.75 --- ---
---------------------------------------------------
Outstanding at
October 31, 1997 663,775 3.69 - 17.25 52,000 4.38 - 13.00
Exercisable at
October 31, 1997 345,587 $4.25 - $10.50 17,000 $7.75 - $13.00
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which
100,000 shares of common stock have been reserved for issuance. The Purchase
Plan allows participating employees to purchase, through payroll deductions,
shares of the Company's common stock at 85 percent of the stock's fair market
value at specified dates. At October 31, 1997, 77 employees were eligible to
participate in the Purchase Plan and 19,637 common shares were available for
issuance. In fiscal year 1997, 1996 and 1995, 13,612, 18,602 and 17,869 shares
were issued under the Purchase Plan, respectively.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has two stock option plans, the 1996 Stock Option
Plan and the 1991 Directors Plan. The Company accounts for these plans under
APB Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined pursuant to the provisions of
SFAS No. 123, the Company's pro forma net income for 1997 and 1996 would have
been $3,076,918 and ($10,209,271), respectively, resulting in earnings per share
of $1.11 for fiscal 1997 and a loss per share of $4.79 for fiscal 1996. 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 used for options granted in fiscal 1997: risk-free interest rate of
7 percent, expected dividend yield of zero, expected term of 6.45 years and
expected volatility of 93.4 percent. Assumptions used for fiscal 1996 were
similar to those used for fiscal 1997. The weighted average estimated fair
value of each option granted during fiscal 1997 and fiscal 1996 was $4.52 and
$2.48, respectively.
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Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to November 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
10. EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company contributes a percentage of income before income taxes into an
employee savings and investment plan. The percentage is determined annually by
the Board of Directors. These contributions are payable annually, vest over
five years and cover substantially all employees who have been with the Company
at least one year. Additionally, the Company makes matching payments to the
employee savings and investment plan of 50 percent of each employee's
contribution up to three percent of employees' earnings.
For the years ended October 31, 1997, 1996 and 1995, total expense under the
above plan was $279,899, $185,596 and $202,228, respectively.
11. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's trade accounts receivable are concentrated among a small number of
customers, principally located in the United States. Ongoing credit evaluations
of customers' financial condition are performed and, generally, no collateral is
required. The Company maintains an allowance for doubtful accounts for
potential credit losses and actual bad debt losses have not been material and
have not exceeded management's expectations. Trade accounts receivable are
recorded net of allowance for doubtful accounts of $169,000 and $105,000 at
October 31, 1997 and 1996, respectively.
Sales to individual customers in excess of 10 percent of net sales of the
Company included sales to Tandem Computers, Motorola, and Silicon Graphics of
$8.8 million, $3.8 million, and $3.0 million, respectively, in 1997, sales to
Tandem Computers of $2.7 million in fiscal 1996 and sales to America Online
and Tandem Computers of $3.1 million and $2.8 million, respectively, in
fiscal 1995. International sales accounted for 12 percent and 26 percent and
of total sales during fiscal 1997 and fiscal 1996, respectively.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
1997: Net sales $4,217 $5,852 $7,393 $7,508
Gross profit 1,961 2,593 3,711 4,553
Net income 830 384 740 1,379
Net income per share $0.35 $0.15 $0.27 $0.45
1996: Net sales $3,993 $2,662 $2,909 $3,785
Gross profit 1,659 852 1,055 1,505
Net loss (1,989) (3,915) (2,133) (1,588)
Net loss per share $(0.95) $(1.85) $(1.00) $(0.72)
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The Company's fiscal 1997 first quarter reflects a $685,000 gain on the sale of
assets and the Company's fiscal 1996 fourth quarter reflects a $706,000
restructuring charge.
13. SUBSEQUENT EVENT
On December 15, 1997 the Company reincorporated in the state of Delaware. In
connection with the event, the Company increased the number of its authorized
shares of preferred stock to 2,000,000 shares and established a par value of
$0.001 for both its common and preferred stock.
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SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
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, 1997
Allowance for Doubtful
Accounts 105,000 78,000 (13,795) 169,205
Allowance for Obsolete
Inventory 166,146 1,075,014 (218,697) 1,022,463
Allowance for Warranty
Claims 90,447 280,462 (118,953) 251,956
Allowance for the deferred
tax asset 4,341,000 (964,000) 0 3,377,000
YEAR ENDED OCTOBER 31, 1996
Allowance for Doubtful
Accounts 130,000 0 (25,000) 105,000
Allowance for Obsolete
Inventory 531,014 212,778 (577,646) 166,146
Allowance for Warranty
Claims 104,894 50,290 (64,736) 90,447
Allowance for the deferred
tax asset 948,000 3,393,000 0 4,341,000
(a) Deductions represent activity charged to related asset or liability account.
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