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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File No. 0-8419
SBE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-1517641
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2305 Camino Ramon, Suite 200, San Ramon, California 94583
(Address of principal executive offices and Zip Code)
(925) 355-2000
(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 (or such shorter period that the registrant
was required to file such reports), 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
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statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |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, 2002 as reported on the Nasdaq
SmallCap Market, was $2,306,399. Shares of Common Stock held by each executive
officer, director and stockholder whose ownership exceeds five percent of Common
Stock outstanding have been excluded because such persons may be deemed to be
affiliates of the registrant. This determination of affiliate status for
purposes of the foregoing calculation is not necessarily a conclusive
determination of affiliate status for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2002 was 4,142,692.
Documents incorporated by reference
Portions of the registrant's definitive proxy statement for the
registrant's Annual Meeting of Stockholders, scheduled for March 18, 2003, have
been incorporated by reference into Part III of this Annual Report on Form 10-K.
2
SBE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1 Business 4
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures about Market
Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management 28
Item 13 Certain Relationships and Related Transactions 28
Item 14 Controls and Procedures 28
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 29
SIGNATURES 32
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SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS SET FORTH IN OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, OUR
EXPECTATIONS REGARDING OUR SALES TO THE HEWLETT-PACKARD COMPANY (PREVIOUSLY
COMPAQ COMPUTER), THE BELIEF THAT THE MARKET FOR CLIENT SERVER NETWORKING
PRODUCTS IS GROWING, THE ADEQUACY OF ANTICIPATED SOURCES OF CASH, PLANNED
CAPITAL EXPENDITURES, THE EFFECT OF INTEREST RATE INCREASES, AND TRENDS OR
EXPECTATIONS REGARDING OUR OPERATIONS. IN ADDITION, WORDS SUCH AS "BELIEVES,"
"ANTICIPATES," "EXPECTS," "INTENDS," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS
OF IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE BASED ON CURRENTLY AVAILABLE
OPERATING, FINANCIAL AND COMPETITIVE INFORMATION AND ARE SUBJECT TO VARIOUS
RISKS AND UNCERTAINTIES. READERS ARE CAUTIONED THAT THE FORWARD-LOOKING
STATEMENTS REFLECT MANAGEMENT'S ESTIMATES ONLY AS OF THE DATE HEREOF, AND WE
ASSUME NO OBLIGATION TO UPDATE THESE STATEMENTS. ACTUAL FUTURE RESULTS, EVENTS
AND TRENDS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH
STATEMENTS DEPENDING ON A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO
THOSE SET FORTH UNDER "ITEM 1 - BUSINESS -- RISK FACTORS" ON PAGE 6 AND
ELSEWHERE IN THIS FORM 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
SBE, Inc. designs, markets, sells and supports network communications controller
solutions for original equipment manufacturers in the global networking
marketplace. Our solutions enable both datacom and telecom companies to rapidly
deliver advanced networking products and services in order to compete
effectively in today's fast-evolving public switched telephone network ("PSTN")
and Internet environment. Our products are distributed worldwide through a
direct sales force, distributors, independent manufacturers' representatives and
value-added resellers. We were incorporated in 1961 as Linear Systems, Inc.
We currently market, sell and support four lines of high-speed networking
products: HighWire(TM) , WAN Adapters, LAN Adapters and VMEbus. All of these
products are sold primarily to original equipment manufacturers ("OEMs"). These
products are often customized for a specific customer's application, and they
support applications in a broad spectrum of industrial and commercial markets.
Markets and application areas that our products serve include enterprise
servers, data storage, process control, medical imaging, CAE/automated test
equipment, government/military defense systems and telecommunications networks.
The HighWire and VME products are "intelligent," containing their own
microprocessors and memory. This architecture allows our communications
controllers to offload many of the lower-level communications tasks that would
typically be performed by the host platform, improving overall system
performance. The Adapters are open standards interface model layer one adapter
cards that do not have a microprocessor onboard ("state machine products")
designed to be low cost and high performance connectivity products that provide
developers of data communications equipment an easy, cost effective way to
integrate wide area networks ("WAN") and local area networks ("LAN") interfaces
for their systems. All four product lines are supported by communications
software developed by us and a variety of third party partners.
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In the telecommunications market, our HighWire products provide high bandwidth
intelligent connectivity to servers designed to act as gateways and signaling
points within communication networks and network devices. The HighWire
co-processing controllers enable operators of wireline and wireless networks to
deliver Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")
services such as Caller ID, voice messaging, personal number calling, Service
Provider Local Number Portability and customized routing and billing, as well as
digital wireless services such as Personal Communications Systems ("PCS") and
Global System for Mobile Telecommunications ("GSM"). The HighWire products are
designed for integration with standard server platforms that will enable
traditional carriers and new telecom entrants to pursue cost-reduced and
performance-enhanced network architectures based on Internet Protocol ("IP"),
broadband or other "packet" technologies.
With the addition of the embedded Linux operating system software, several
HighWire products can now be used in combination with either our WAN and LAN
peripheral control interface ("PCI") mezzanine card ("PMC") products or other
third party PMC form factor products to provide core computing and connectivity
solutions to the communications, military/government, medical and industrial
control markets. Our HighWire product has been uniquely positioned as an
intelligent real time controller in a ground based mobile unit used by the
military. Utilizing our HighWire products in conjunction with other available
PMC modules such as A-to-D converters or video capture PMC modules gives us new
opportunities to market our products into the factory/process control or video
surveillance applications markets.
Our WAN Adapter products are focused on the need for WAN interfaces in data
communications products residing between the middle and the edge of the internet
used in routers, firewalls, virtual private network ("VPN") servers and Voice
over Internet Protocol ("VoIP") gateways. Due to increasing IT demand in
conjunction with network security used for enterprise networks an enterprise
network is the network covering the entire entity's private branch exchange
("PBX'), LAN, WAN and internetworking bridges), this is our fastest growing
product family. We offer a broad range of interfaces including synchronous
serial, T1/E1, HSSI and T3 in both PCI and PMC industry standard form factors.
Our newly released LAN Adapter products are focused on LAN connectivity using
high speed Ethernet technology. We have one, two and four port LAN adapter PMC
modules that feature connectivity to 10 Mb/second, 100 Mb/second or 1000
Mb/second. Ethernet LAN connectivity is required by virtually every market
segment in the OEM spectrum. We expect to sell our LAN Adapter products to our
existing WAN Adapter prospects and customers, as well as to new customers that
have not historically required WAN connectivity.
Our VMEbus products are designed for high reliability industrial applications
and are used in many wireline, wireless and satellite based communications
networks. Our VME products are intelligent communications controller products
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 have 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
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connecting networks and computers to deliver information more efficiently.
Our VMEbus communications products target all four major protocol communications
technologies for each of the bus architectures: Fiber Distributed Data Interface
("FDDI"), Token Ring, Ethernet and high-speed serial communications. The latter
is a growing wide-area networking technology that enables computers to talk to
one another using telephone lines. FDDI, Token Ring and Ethernet are local area
networking technologies that offer a wide range of speed and reliability
options.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
The consolidated financial statements contemplate the realization of assets and
the satisfaction of liabilities in the normal course of business. We incurred
net losses of $1.7 million and $9.9 million for the years ended October 31, 2002
and 2001, respectively, and generated negative cash flows from operations of
$2.7 million and $1.5 million in these years. These factors raise a substantial
doubt about our ability to continue as a going concern. Our plans with respect
to this matter included the restructuring executed in the fourth quarter of
fiscal 2002, which reduced headcount from 47 employees to 24 employees and has
reduced our cost structure entering fiscal 2003. We believe the cost reduction
and a projected increase in sales during fiscal 2003 will generate sufficient
cash flows to fund our operations through October 31, 2003. However, these
projected sales are to a limited number of new and existing OEM customers and
are based on internal and customer provided estimates of future demand, not firm
customer orders. If the projected sales do not materialize, we will need to
reduce expenses further and raise additional capital through customer
prepayments or the issuance of debt or equity securities. If additional funds
are raised through the issuance of preferred stock or debt, these securities
could have rights, privileges or preferences senior to those of Common Stock,
and debt covenants could impose restrictions on our operations. The sale of
equity or debt could result in additional dilution to current stockholders, and
such financing may not be available to us on acceptable terms, if at all. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amount or
classification of liabilities or any other adjustments that might be necessary
should we be unable to continue as a going concern.
WE DEPEND UPON A SMALL NUMBER OF OEM CUSTOMERS, AND THE LOSS OF ANY OF
THEM, OR THEIR FAILURE TO SELL THEIR PRODUCTS, WOULD LIMIT OUR ABILITY TO
GENERATE REVENUES.
In fiscal 2002, most of our sales were derived from a limited number of OEM
customers. In fiscal 2002, 2001 and 2000, sales of VME products to The
Hewlett-Packard Company (previously Compaq Computer) ("HP") accounted for 30%,
34% and 66%, respectively, of our net sales. A substantial portion of such sales
were attributable to sales of VME products pursuant to a long-term supply
agreement with HP. On October 31, 2002, HP placed an end of life purchase order
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for shipment of these VME products over the first two quarters of fiscal 2003;
however, we still expect sales to HP will constitute a substantial portion of
our net sales in fiscal 2003, both as a result of the end of life VME product
orders and projected sales of WAN Adapter products to HP. We do not expect sales
of VME products to HP to be a substantial portion of our revenues after fiscal
2003.
Orders by our OEM customers are affected by factors such as new product
introductions, product life cycles, inventory levels, manufacturing strategy,
contract awards, competitive conditions and general economic conditions. Our
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
our operating results. A significant reduction in orders from any of our OEM
customers, particularly HP, Nortel and Lockheed Martin, would have a material
adverse effect on our operating results, financial condition and cash flows. In
addition, we anticipate a significant portion of future sales will be dependent
on a few new OEM customers, and there can be no assurance that we will become a
qualified supplier with new OEM customers or that we will remain a qualified
supplier with existing OEM customers.
IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE AND ADAPTER PRODUCTS, WE MAY LOSE
SALES AND OUR REPUTATION MAY BE HARMED.
Since late 1998, we have focused a significant portion of our research and
development, marketing and sales efforts on HighWire and Adapter 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 our products. If the HighWire and Adapter products or other
new products developed by us do not gain market acceptance, our business,
operating results, financial condition and cash flows would be materially
adversely affected.
THE COMMUNICATIONS PRODUCTS MARKET IS INTENSELY COMPETITIVE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR REVENUES AND MARGINS.
We compete directly with traditional vendors of terminal servers, modems, remote
control software, terminal emulation software and application-specific
communications solutions. We also compete with suppliers of routers, hubs,
network interface cards and other data communications products. In the future,
we expect competition from companies offering client/server access solutions
based on emerging technologies such as switched digital telephone services. In
addition, we may encounter increased competition from operating system and
network operating system vendors to the extent such vendors include full
communications capabilities in their products. We may also encounter future
competition from telephony service providers (such as AT&T or the regional Bell
operating companies) that may offer communications services through their
telephone networks.
Increased competition with respect to any of our products could result in price
reductions and loss of market share, which would adversely affect our business,
operating results, financial condition and cash flows. Many of our current and
potential competitors have greater financial, marketing, technical and other
resources than we do. There can be no assurance that we will be able to compete
successfully with our existing competitors or will be able to compete
successfully with new competitors.
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OUR OPERATING RESULTS IN FUTURE PERIODS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
AND MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
CAUSING OUR STOCK PRICE TO FALL.
Our 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 our control, including timing of significant orders from
OEM customers, fluctuating market demand for, and declines in the average
selling prices of, our products, delays in the introduction of our new products,
competitive product introductions, the mix of products sold, changes in our
distribution network, the failure to anticipate changing customer product
requirements, the cost and availability of components and general economic
conditions. We generally do not operate with a significant order backlog, and a
substantial portion of our revenue in any quarter is derived from orders booked
in that quarter. Accordingly, our sales expectations are based almost entirely
on our internal estimates of future demand and not on firm customer orders.
Due to the adverse economic conditions in the telecommunications industry, our
OEM telecommunications customers may hold excess inventory of our products. A
result of the economic downturn is that certain of our customers have cancelled
or delayed many of their new desiIgn projects and new product rollouts that
included our products. Due to the current economic uncertainty, our customers
now typically require a "just-in-time" ordering and delivery cycle where they
will place a purchase order with us after they receive an order from their
customer. This "just-in-time" inventory purchase cycle by our customers has made
forecasting of our future sales volumes very difficult.
Based on the foregoing, we believe that quarterly operating results are likely
to vary significantly in the future and that period-to-period comparisons of our
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 our revenue or operating results will be below the expectations
of public market analysts and investors. In such event, the price of our common
stock is likely to fall.
IF WE ARE UNABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGES THAT
CHARACTERIZE OUR INDUSTRY, OUR BUSINESS WOULD SUFFER.
The markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product introductions. Our future
success will depend on our ability to enhance our existing products and to
introduce new products and features to meet and adapt to changing customer
requirements and emerging technologies such as Frame Relay, DSL ("Digital
Subscriber Line"), ATM ("Asynchronous Transfer Mode"),VoIP ("Voice over Internet
Protocol") and 3G Wireless ("Third Generation Wireless Services"). There can be
no assurance that we will be successful in identifying, developing,
manufacturing and marketing new products or enhancing our existing products. In
addition, there can be no assurance that services, products or technologies
developed by others will not render our products noncompetitive or obsolete.
WE DEPEND ON OUR KEY PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL
AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NEEDED, OUR BUSINESS WOULD BE HARMED.
We are highly dependent on the technical, management, marketing and sales skills
of a limited number of key employees. We do not have employment agreements with,
or life insurance on the lives of, any of our key employees. The loss of the
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services of any key employees could adversely affect our business and operating
results. Our future success will depend on our ability to continue to attract
and retain highly talented personnel to the extent our business grows.
Competition for qualified personnel in the networking industry, and in the San
Francisco Bay Area, is intense. There can be no assurance that we will be
successful in retaining our key employees or that we can attract or retain
additional skilled personnel as required.
BECAUSE OF OUR DEPENDENCE ON SINGLE SUPPLIERS FOR SOME COMPONENTS, WE MAY BE
UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF SUCH COMPONENTS, OR WE MAY BE REQUIRED TO
PAY HIGHER PRICES OR TO PURCHASE COMPONENTS OF LESSER QUALITY.
The chipsets used in most of our 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 or margins that, in
turn, would have a material adverse effect on our business, operating results,
financial condition and cash flows.
OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.
The development and marketing of our products is capital-intensive. While we
believe that our existing cash balances and our anticipated cash flow from
operations will satisfy our working capital needs for the next twelve months, we
cannot assure that this will be the case. Further declines in our sales or a
failure to keep expenses in line with revenues could require us to seek
additional financing in fiscal 2003. In addition, should we experience a
significant growth in customer orders, we may be required to seek additional
capital to meet our working capital needs. There can be no assurance that
additional financing, if required, will be available on reasonable terms or at
all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to our stockholders.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD REDUCE ANY
COMPETITIVE ADVANTAGE WE HAVE.
Although we believe that our future success will depend primarily on continuing
innovation, sales, marketing and technical expertise, the quality of product
support and customer relations, we must also protect the proprietary technology
contained in our products. We do not currently hold any patents and rely on a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in our products. There
can be no assurance that steps taken by us in this regard will be adequate to
deter misappropriation or independent third-party development of our technology.
Although we believe that our products and technology do not infringe on the
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims against us.
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RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
OUR COMMON STOCK IS AT RISK FOR DELISTING FROM THE NASDAQ SMALLCAP MARKET.
IF IT IS DELISTED, OUR STOCK PRICE AND YOUR LIQUIDITY MAY BE IMPACTED.
Our common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has
requirements that a company must meet in order to remain listed on the Nasdaq
SmallCap Market. These requirements include maintaining a minimum closing bid
price of $1.00 and minimum stockholders' equity of $2.5 million. The closing bid
price for our common stock has been below $1.00 for short periods of time during
fiscal 2002. If the closing bid price of our common stock is below $1.00 for a
period of 30 consecutive trading days, our common stock could be subject to
delisting from the Nasdaq SmallCap Market. Our stockholders' equity as of
October 31, 2002 was $3.7 million. Our common stock is also at risk for
delisting for failure to meet the stockholders' equity requirement.
If we fail to maintain the standards necessary to be quoted on the Nasdaq
SmallCap Market and our common stock is delisted, trading in our common stock
would be conducted on the OTC Bulletin Board as long as we continue to file
reports required by the Securities and Exchange Commission. The OTC Bulletin
Board is generally considered to be a less efficient market than the Nasdaq
SmallCap Market, and our stock price, as well as the liquidity of our Common
Stock, may be adversely impacted as a result.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. YOU
MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU
PURCHASED SUCH SHARES.
The trading price of our common stock is subject to wide fluctuations in
response to quarter-to-quarter fluctuations in operating results, the failure to
meet analyst estimates, announcements of technological innovations or new
products by us or our 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 our common stock.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE DELAWARE GENERAL CORPORATION
LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.
Our 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 our
outstanding voting stock. Furthermore, certain other provisions of our
certificate of incorporation and bylaws may have the effect of delaying or
preventing changes in control or management, which could adversely affect the
market price of our common stock. In addition, we are subject to the provisions
of Section 203 of the Delaware General Corporation Law, an anti-takeover law.
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PRODUCTS
We design, market, sell and support innovative communications controller and
adapter products for the global communications, military/government, medical and
industrial control marketplace. We offer four principal lines of products:
HighWire, WAN Adapter, LAN Adapter, and VMEbus.
HIGHWIRE PRODUCTS. Our HighWire products have been focused on providing
communications solutions to the telecommunications market. With the recent
addition of embedded Linux operating system software we are now able to broaden
the reach of our HighWire products to include military/government, medical and
industrial control markets.
The switched telecommunications market is characterized as an Intelligent
Network. The Intelligent Network ("IN") utilizes out of band signaling to
provide the basis for virtually all new telecommunications services. The IN
architecture uses two separate but parallel paths; one to handle the voice or
data traffic and a second to carry the signaling information for call set up and
routing. The signaling channel utilizes a protocol referred to as Signaling
System Seven or "SS7." Network operators utilize the IN architecture to increase
the efficiency of their networks by offloading signaling traffic onto the SS7
network, thus freeing up trunk line capacity needed for revenue generating
traffic.
A second generation Intelligent Network called the Advanced Intelligent Network
("AIN") is used by carriers and service providers seeking to differentiate
themselves by offering advanced voice and data communications services. The AIN
is a network architecture and a set of standards designed to allow network
operators to create, deploy and modify these services quickly and economically.
AIN services represent the merging of telephony with database information
through SS7 signaling. Such services include Caller ID, voice messaging,
personal number calling, Service Provider Local Number Portability and
customized routing and billing, as well as digital wireless services such as PCS
and GSM.
In fiscal 2002, we added the embedded Linux operating system software to several
HighWire products expanding the product focus beyond the telecommunications
applications market into the military/government, medical and industrial control
applications markets. The HighWire products can now be used in combination with
our WAN and LAN PMC products or with other third party PMC product to provide
computing and connectivity solutions to the military/government, medical and
industrial controller markets.
WAN ADAPTER PRODUCTS. Our WAN Adapter products are focused on the need for WAN
interfaces in data communications products residing between the middle and the
edge of the internet used in routers, firewalls, virtual private network ("VPN")
servers and Voice over Internet Protocol ("VoIP") gateways. Due to increasing IT
demand in conjunction with network security used for enterprise networks an
enterprise network is the network covering the entire entity's PBX, LAN, WAN and
internetworking bridges), this is our fastest growing product family. We offer a
broad range of interfaces including synchronous serial, T1/E1, HSSI and T3 in
both PCI and PMC industry standard form factors.
LAN ADAPTER PRODUCTS. Our newly released LAN Adapter products are focused on LAN
connectivity using high speed Ethernet technology. We have one, two and four
port LAN adapter PMC modules that feature connectivity to 10 Mb/second, 100
11
Mb/second or 1000 Mb/second. Ethernet LAN connectivity is required by virtually
every market segment in the OEM spectrum. We expect to sell our LAN Adapter
products to our existing WAN Adapter prospects and customers as well as to new
customer opportunities which have not historically required WAN connectivity.
VMEBUS INTELLIGENT COMMUNICATIONS CONTROLLER PRODUCTS. Intelligent
communications controller products are used to provide connectivity between a
system such as a mini-computer or bridge/router and a local or wide area
network. Communications 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 have 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.
Our VMEbus communications products target all four major protocol communications
technologies for each of the bus architectures: Fiber Distributed Data Interface
("FDDI"), Token Ring, Ethernet and high-speed serial communications. The latter
is a growing wide-area networking technology that enables computers to talk to
one another using telephone lines. FDDI, Token Ring and Ethernet are local area
networking technologies that offer a wide range of speed and reliability
options.
During fiscal 2002, we expanded our WAN Adapter products and developed our LAN
Adapter products and positioned ourselves to be the single source supplier to
our major customers for all of their WAN and LAN connectivity needs. We also
added embedded Linux to several HighWire products expanding the applicability of
these products beyond telecommunications.
The following table shows sales by major product type as a percentage of net
sales for fiscal 2002, 2001 and 2000:
Year Ended October 31,
2002 2001 2000
----------------------------------------------
(percentage of net sales)
VME Communication Controllers 56% 64% 75%
WAN Adapter 31 31 21
HighWire 13 5 4
------------------------------------------------
100% 100% 100%
================================================
Distribution, Sales and Marketing
We market our Adapter, HighWire and VMEbus communications controller products to
OEMs and systems integrators. We sell our products both domestically and
internationally, using a direct sales force as well as independent
manufacturers' representatives. We believe that our direct sales force is well
suited to differentiate our products from those of our competitors.
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We market our products through multiple indirect distribution channels
worldwide, including distributors, manufacturers' representatives, value-added
resellers and certain OEM partners. We actively support our indirect channel
marketing partners with our own sales and marketing organization. Our sales
staff solicits prospective customers, provides technical advice with respect to
our products and works closely with marketing partners to train and educate
their staffs on how to sell, install and support our product lines.
We have focused our sales and marketing efforts principally in the United
States, Canada and Europe. All of our international sales are negotiated in U.S.
dollars.
We conduct our sales and marketing activities from our principal office in San
Ramon, California. Our direct sales force is based in three locations in the
United States.
RESEARCH AND DEVELOPMENT
Our product development efforts are focused principally on our strategic
businesses, providing high bandwidth connectivity and computing solutions using
WAN and LAN communications applications, client/server internetworking and
VMEbus intelligent communications controllers. Our experience in high-speed data
communications creates opportunities to leverage our engineering investment and
develop additional integrated products for simpler, more innovative
communications solutions for customers. The development of new internetworking
products, high-performance communications controllers and communications-related
software is critical to attracting new, and retaining existing, customers.
During the past three years, we have developed communications products based on
Compact PCI, PCI, PMC, VMEbus and EISA architecture. We have also redesigned and
upgraded certain communications products to improve the products' performance
and lower the products' manufacturing costs. In addition, we have acquired or
licensed certain hardware products that have been integrated principally through
the addition of software into our product line.
During fiscal 2002, we focused the majority of our development efforts on
completing the HighWire product line, developing software drivers for our
Adapter products and developing a new LAN Adapter product line based on high
speed Gigabit Ethernet technology. We completed hardware and software design
efforts and released to production several WAN Adapter products which provide
enhanced functionality and are aimed primarily at the enterprise markets such as
VoIP, VPN and security routers. We also added the embedded Linux operating
system software to several HighWire products which provides additional
functionality and expands the potential market for these products from the
telecommunications applications market to encompass the military/government,
medical and industrial control markets.
During fiscal 2002, 2001 and 2000, we incurred $3.0 million, $5.7 million and
$5.6 million, respectively, in product research and development expenses.
13
MANUFACTURING
We do not engage in any manufacturing activities, instead utilizing third-party
manufacturers to build our products. In December 1996, we sold all of our
manufacturing assets and entered into a contract manufacturing agreement with
XeTel to supply manufacturing services. In the second half of fiscal 2002, we
terminated our manufacturing services agreement with XeTel and entered into
non-exclusive contract manufacturing agreements with ProWorks, Inc. and Sonic
Manufacturing Technology. We believe that ProWorks and Sonic will be able to
provide lower prices and a more efficient and timely product delivery than we
could produce with our previous manufacturing resources.
COMPETITION
The market for telecommunications and client/server access products is highly
competitive. Many of our competitors have greater financial resources and are
more established. Competition within the telecommunications market is fragmented
principally by application segment. Our HighWire products compete with offerings
from Radisys, Performance Technologies, Interphase, Artesyn, and Adax, along
with various other platform and controller product providers. Our VMEbus, Wan
Adapter and LAN Adapter communications controller products compete primarily
with products from Digi International, Motorola, Interphase Corp., Themis
Computers, SBS Technologies and various other companies on a product-by-product
basis. To compete in this market, we emphasize the functionality, support,
quality and price of our product in relation to its competitors, as well as our
ability to customize the product or software to exactly meet the customer's
needs.
Additionally, we compete with the internal engineering resources of our
customers. As our customers become successful with their products, they examine
methods to reduce costs and integrate functions. To compete with the internal
engineering resources of our customers, we work jointly with their engineering
staffs to understand our customers' system requirements and to anticipate new
product needs versus time-to-market decisions.
INTELLECTUAL PROPERTY
We believe that our future success will depend principally on our continuing
product innovation, sales, marketing and technical expertise, product support
and customer relations. We also believe that we need to protect the proprietary
technology contained in our products. We do not currently hold any patents and
rely on a combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in our products. We
typically enter into confidentiality agreements with our employees, strategic
partners, channel partners and suppliers and limit access to the distribution of
our proprietary information.
BACKLOG
On December 31, 2002, we had a backlog of product orders of approximately $1.5
million for shipment within the next twelve months. On December 31, 2001, we had
a backlog of product orders of approximately $337,000 for shipment within the
next twelve months. Because recorded sales orders are subject to changes in
customer delivery schedules, cancellation, or price changes, our backlog as of
14
any particular date may not be representative of actual sales for any succeeding
fiscal period and is not considered firm.
EMPLOYEES
On December 31, 2002, we had 24 employees. None of our employees is represented
by a labor union. We have experienced no work stoppages. We believe our employee
relations are good.
We believe that our future success will depend, in part, on our ability to
attract and retain qualified technical (particularly engineering), marketing and
management personnel. Such experienced personnel are in great demand, and we
must compete for their services with other firms, many of which have greater
financial resources.
ITEM 2. PROPERTIES
In December 2001, we relocated our engineering and administrative headquarters
to 15,000 square feet of leased space located in San Ramon, California. The
lease expires in 2004. We expect the facility to satisfy our anticipated needs
for the foreseeable future. In conjunction with the relocation to the new
building, we assigned the lease related to our former 63,000 square foot
engineering and administrative headquarters facility to a third party. The third
party has guaranteed payment of the remaining lease payments though the
termination of the original lease in 2006.
We leased 6,100 square feet of office space in Madison, Wisconsin for various
product development activities. At the end of fiscal 2002, we abandoned the
office in Madison, Wisconsin and negotiated a termination of the lease releasing
us from further financial obligations effective December 31, 2002.
Additionally, through the acquisition of LAN Media Corp. in July 2000, we lease
approximately 3,650 square feet of office space in Sunnyvale, California. The
Sunnyvale lease expires in May 2003. We subleased this office space to a third
party for the remaining term of the lease.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our stockholders in the fourth
quarter of fiscal 2002.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol SBEI.
The following table presents quarterly information on the price range of our
common stock, indicating the high and low bid prices reported by the Nasdaq
SmallCap Market. These prices do not include retail markups, markdowns or
commissions. As of December 31, 2002, there were approximately 407 holders of
record of our Common Stock. There are no restrictions on our ability to pay
dividends; however, it is currently the intention of the Board of Directors to
retain all earnings, if any, for use in our business and we do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of dividends will depend, among other factors, upon our earnings,
capital requirements, operating results and financial condition.
Fiscal quarter ended
----------------------------------------------------------------------
Fiscal 2002 January 31 April 30 July 31 October 31
- -------------------------------------------------------------------------------------------------
High $1.43 $2.35 $2.18 $1.50
Low 0.49 1.15 1.21 0.80
Fiscal 2001
High $8.75 $5.50 $3.50 $1.70
Low 3.38 2.25 1.05 0.80
The following table includes information regarding our equity incentive plans as
of the end of fiscal 2002.
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
- ------------- ------------------- ---------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders 1,209,341 $3.32 139,003
Equity compensation plans
not approved by security
holders 682,472 $3.11 36,714
--------- ------- ---------
Total 1,891,813 $3.24 175,717
--------- ------- ---------
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Form 10-K.
For years ended October 31,
and at October 31 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts and number of employees)
Net sales $6,898 $ 7,726 $ 29,178 $19,854 $ 21,124
Net income (loss) $(1,731) $(9,896) $ 3,970 $ (254) $ 184
Net income (loss) per share - basic $(0.46) $ (2.92) $ 1.24 $(0.08) $ 0.07
Net income (loss) per share - diluted $(0.46) $ (2.92) $ 1.04 $(0.08) $ 0.06
Product research and development $3,027 $ 5,652 $ 5,635 $ 5,167 $ 3,864
Working capital $2,985 $ 7,595 $ 11,793 $ 7,191 $ 7,845
Total assets $5,321 $ 10,690 $ 17,427 $11,264 $ 11,783
Long-term liabilities $10 $ 4,870 $ 288 $ 503 $ 631
Stockholders' equity $3,696 $ 4,119 $ 13,829 $ 8,636 $ 8,846
Number of employees 24 47 87 72 68
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SBE, Inc. designs, manufactures and markets high-speed, intelligent network
communications controller and software products that are embedded within an
original equipment manufacturer's ("OEM") products. Our products enable both
traditional and emerging datacom and telecommunications service providers to
deliver advanced communications products and services, which we believe help
these providers compete more effectively in today's highly competitive datacom
and telecommunications service markets. Our products include wide area network
("WAN") and local area network ("LAN") interface Adapters and high performance
intelligent Linux embedded communications controllers for workstations, media
gateways, routers, internet access devices, home location registers and data
messaging applications.
Our business is characterized by a concentration of sales to a small number of
OEMs who provide products and services to the datacom and telecommunications
service markets. Consequently, the timing of significant orders from major
customers and their product cycles cause fluctuation in our operating results.
HP is the largest of our customers and represented 30%, 34% and 66% of net sales
in fiscal 2002, 2001 and 2000, respectively. If any of our major customers,
especially HP, Nortel and Lockheed Martin, reduces orders for our products, we
could lose revenues and suffer damage to our business reputation. Orders by our
OEM customers are affected by factors such as new product introductions, product
life cycles, inventory levels, manufacturing strategy, contract awards,
17
competitive conditions and general economic conditions.
We are attempting to diversify our sales with the introduction of new products
that are targeted at large growing enterprise markets such as VPN, security and
other communications devices. Our HighWire products have been focused primarily
on the telecommunications market and the significant increases in communications
activity that are driven by the convergence of traditional telephony
applications with the Internet. With the introduction of embedded Linux
operating system on the HighWire products, we can now begin to market the
HighWire products to the military/government, medical and industrial control
application markets. With the introduction of our LAN Adapter products in
January 2003 we are attempting to penetrate the Gigabit Ethernet LAN market.
While we believe the market for the HighWire and LAN Adapter product families is
large, there can be no assurance that we will be able to succeed in penetrating
these markets and diversifying our sales.
One of our strategies to increase sales is to have our products designed into
new OEM product offerings. We believe these design wins result in long-term
revenue from the OEM if the OEM products are ultimately successful. We were
awarded ten design wins in fiscal 2002 compared to three during fiscal 2001.
These design wins are for OEM product applications using our WAN Adapter
products in a diverse set of applications that include secure Virtual Private
Network ("VPN") routers, wireless Internet access, SS7 network analyzers, Voice
over Internet Protocol ("VoIP") gateways and storage area networks ("SANs").
During the year ended October 31, 2002, we reduced our workforce from 47 to 24
employees, or 49% over the prior year. We also vacated the leased office space
located in Madison, Wisconsin and retained a real estate agent to seek a third
party to sublease the space We were able to secure a third party corporation to
take over our Madison office lease and we negotiated a termination of our lease
for the office space ending any further financial obligations effective December
31, 2002. As a result of the reduction in our workforce and reduction in real
estate needs, we expect to realize an annual savings of approximately $2.0
million as compared to fiscal 2002. We recorded $446,000 in restructuring costs
related to the reduction in our workforce and the abandoned facility in fiscal
2002.
On April 30, 2002, we completed a private placement of shares of our common
stock and a warrant to purchase common stock resulting in gross cash proceeds of
approximately $1.0 million, and on May 14, 2002, we secured a $1.0 million line
of credit from a bank.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include levels
of reserves for doubtful accounts, obsolete inventory, warranty costs and
deferred tax assets. Actual results could differ from those estimates.
Our critical accounting policies and estimates include the following:
18
REVENUE RECOGNITION
We record product sales at the time of product shipment. Our sales transactions
are negotiated in U.S. dollars. Our agreements with OEMs, such as HP, Nortel and
Lockheed Martin, typically incorporate clauses reflecting the following
understandings:
- all prices are fixed and determinable at the time of sale;
- title and risk of loss pass at the time of shipment;
- collectibility of the sales prices is probable. The OEM is obligated
to pay and such obligation is not contingent on the ultimate sale of
the OEM's integrated solution;
- the OEM's obligation to us would not be changed in the event of theft
or physical destruction or damage of the product;
- we do not have significant obligations for future performance to
directly bring about resale of the product by the OEMs; and
- there is no contractual right of return other than for defective
products; we can reasonably estimate such returns and record a
warranty reserve at the point of shipment.
WARRANTY RESERVES
We accrue the estimated costs to be incurred in performing warranty services at
the time of revenue recognition and shipment of the products to the OEMs. Our
estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience
increased warranty claim activity or increased costs associated with servicing
those claims, the warranty accrual will increase, resulting in decreased gross
margin.
INVENTORIES
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value. Our inventories include high-technology parts that may
be subject to rapid technological obsolescence. We consider technological
obsolescence in estimating required reserves to reduce recorded amounts to
market values. Such estimates could change in the future and have a material
adverse impact on our financial position and results of operations.
PROPERTY AND EQUIPMENT
We review property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. In
performing the review for recoverability, we estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. The
amount of the impairment loss, if any, would be calculated based on the excess
of the carrying amount of the asset over its fair value.
CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of costs to purchase software and costs to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized as related sales are recorded on a per-unit basis with a minimum
amortization based on a straight-line method over a two-year estimated useful
19
life. We evaluate the estimated net realizable value of each software product
and record provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.
DEFERRED TAXES
We record a valuation allowance to reduce our deferred taxes to the amount that
is more likely than not to be realized. Based on the uncertainty of future
pre-tax income, we have fully reserved our deferred tax assets as of October 31,
2002. In the event we were to determine that we would be able to realize our
deferred tax assets in the future, an adjustment to the deferred tax asset would
increase income in the period such determination was made.
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, 2002, 2001 and 2000. These operating results are not necessarily indicative
of our operating results for any future period.
Year Ended October 31,
2002 2001 2000
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 46 63 36
---- ---- ----
Gross profit 54 37 64
Operating expenses:
Product research and development 44 73 19
Sales and marketing 31 40 16
General and administrative 34 42 16
Loan reserve 7 --- ---
Restructuring costs 6 12 ---
---- ---- -----
Total operating expenses (122) (168) (51)
----- ------- ------
Operating income (loss) (68) (131) 13
Forfeited deposit, net 39 --- ---
Interest and other income 2 3 1
-- ---- -----
Income (loss) before income taxes (27) (128) 14
Income tax benefit 2 --- ---
---- ----- -----
Net income (loss) (25)% (128)% 14%
===== ========= ======
NET SALES
Net sales for fiscal 2002 were $6.9 million, an 11% decrease from $7.7 million
for fiscal 2001. Net sales for fiscal 2001 were $7.7 million, a 74% decrease
from fiscal 2000. The decrease in both periods was primarily attributable to a
decrease in sales to HP. Net sales to HP were $2.1 million for fiscal 2002, as
compared to $2.6 million in fiscal 2001 and $19.4 million in fiscal 2000. Sales
to HP, primarily of VMEBus products, represented 30% of net sales for fiscal
2002, compared to 34% during fiscal 2001 and 66% in fiscal 2000. A substantial
portion of such sales was attributable to sales of VME products pursuant to a
long-term supply agreement with HP. On October 31, 2002, HP placed an end of
life purchase order for shipment of these VME products over the first two
quarters of fiscal 2003. We expect sales to HP will constitute a substantial
20
portion of our net sales in fiscal 2003, both as a result of the end of life VME
product orders and projected sales of WAN Adapter products to HP. We do not
expect sales of VME products to HP to be a substantial portion of our revenues
after fiscal 2003. Lockheed Martin was the only other customer representing 10%
or more of our sales, accounting for 11% of net sales in fiscal 2002 and 20% in
fiscal 2001.
Sales of our Adapter products were $2.1 million for fiscal 2002, as compared to
$2.0 million in fiscal 2001 and $1.6 million in fiscal 2000. Sales of our
HighWire products were $1.0 million in fiscal 2002, as compared to $350,000 in
fiscal 2001. Our Adapter products are used primarily in edge-of-the-network
applications such as VPN and other routers, VoIP gateways and security devices,
whereas our HighWire products are primarily targeted at core-of-the-network
applications used primarily by telecommunications central offices. The recent
introduction of our HighWire products with the embedded Linux operating systems
software makes it possible to now market these products to the
military/government, medical and industrial control market. We, however, expect
our product mix to continue to be heavily weighted towards our VME and Adapter
products for the foreseeable future.
On October 31, 2002, we announced the restructuring of our product supply
contract with HP. The restructured agreement provides for shipment of a minimum
of approximately $1.6 million of our VME serial controller cards products over
the first two quarters of fiscal 2003. This will conclude the scheduled shipment
of VME products under the HP supply contract supporting their fault-tolerant
wireless base station business. We will provide ongoing engineering support to
HP and will ship future VME product on an as needed basis. As part of the
restructured contract, HP will forfeit $4.4 million of its $4.9 million
refundable deposit. The remaining deposit of $0.5 million will be paid to HP in
the second quarter of fiscal 2003. In relation to this restructured agreement,
non-operating income of $2.7 million was recorded as "forfeited deposit, net" in
the statement of operations. Such amount is composed of the forfeited deposit of
$4.4 million, net of a reserve of $1.7 million for inventory dedicated to the
program that is not required to fulfill the agreed-upon minimum shipments.
Due to the adverse economic conditions in the telecommunications industry, our
customers have cancelled or delayed many of their new design projects and new
product rollouts that included our products. Our sales backlog at December 31,
2002 is $1.5 million compared to $337,000 at December 31, 2001. While we
anticipate an increase in our sales volume over the course of fiscal 2003 as our
customers slowly deploy existing inventory and gradually return to new product
design and product rollout there can be no assurances that such increase will
occur. Over the past 12 to 18 months there has been a shift in the ordering
patterns of our customers. Previously, our customers would typically place a
purchase order with us based on their forecasted sales volumes. Due to the
current economic uncertainty, our customers now typically require a
"just-in-time" ordering and delivery cycle where they will place a purchase
order with us after they receive an order from their customer. This
"just-in-time" inventory purchase cycle by our customers has made forecasting of
our future sales volumes very difficult. Because our sales are generally
concentrated with a small group of OEM customers, we could experience
significant fluctuations in our quarterly sales volumes due to fluctuating
demand from any major customer or delay in the rollout of any significant new
product by a major customer.
International sales constituted 13%, 9% and 4% of net sales in fiscal 2002, 2001
and 2000, respectively. International sales are executed in U.S. dollars and are
principally transacted in Europe.
21
GROSS PROFIT
Gross profit as a percentage of net sales was 54%, 37% and 64% in fiscal 2002,
2001 and 2000, respectively. During 2001, we recorded inventory write-downs of
$1.0 million. Excluding the inventory write-downs, the gross margin for fiscal
2001 would have been 50%. The increase in the gross profit from fiscal 2001 to
fiscal 2002 was primarily attributable to lower materials costs combined with a
more profitable product mix in fiscal 2002. Gross profit as a percentage of
sales decreased in fiscal 2001 as a result of inventory valuation write-downs
and lower production volumes. We expect our gross profit to range between 50%
and 57% for fiscal 2003. However, if market and economic conditions,
particularly in the telecommunications sector, deteriorate or fail to recover as
expected, gross profit as a percentage of net sales may decline from the current
level.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development expenses were $3.0 million in fiscal 2002, $5.7
million in fiscal 2001 and $5.6 million in fiscal 2000, representing 44%, 73%
and 19% of net sales, respectively. The decrease in research and development
expense as a percentage of revenue from fiscal 2001 to fiscal 2002 is the direct
result of headcount reductions combined with other project-related cost
containment measures. The increase in research and development spending as a
percentage of revenue from fiscal 2000 to fiscal 2001 was due to lower revenue
without a corresponding reduction in research and development spending. During
fiscal 2001, we emphasized completion of the development programs for the
HighWire product line and software development for the SS7 and WAN product
lines. During fiscal 2002, we completed the HighWire product line, including the
addition of the embedded Linux operating system software, and we added several
new products to our WAN Adapter line which expand and enhance the adapter
product lines capabilities at a reduced cost point. We also began work on the
new LAN Adapter Gigabit Ethernet product line that was released to production in
January 2003.
We expect a reduction in overall spending for our product research and
development in absolute dollars and as a percentage of sales in fiscal 2003 due
to staffing reductions and other cost containment measures during the later part
of fiscal 2002. We did not capitalize any internal software development costs in
fiscal 2002, 2001 or 2000, respectively.
SALES AND MARKETING
Sales and marketing expenses for fiscal 2002 were $2.2 million, a 31% decrease
over fiscal 2001. This decrease is primarily related to lower headcount in the
marketing departments plus a decrease in commissions due to lower sales volume.
Fiscal 2001 expense was $3.1 million, a 33% decrease over fiscal 2000. Sales and
marketing programs are focused on design wins with new customers and, therefore,
as new customer sales increase, sales and marketing expenses will increase. New
customer's product design-in sales cycles may span over periods as long as
twenty-four months. Due to staffing reductions and cost containment measures
during the latter part of 2002 and 2001, we expect the sales and marketing
expense for fiscal 2003 will decrease in absolute dollars and as a percentage of
total sales from fiscal 2002 levels.
In the latter part of fiscal 2001, we reorganized our sales and marketing
groups, enhancing the industry and product expertise of the groups. The sales
22
department is organized around, and the members of our sales team are
compensated for, meeting certain objectives referred to as "Design Wins." A
Design Win is defined as a program with an OEM customer which will generate at
least $400,000 in recurring annual revenue within 12 to 18 months after the
customer accepts and confirms the use of our product in their platform. We had
three Design Wins in the fourth quarter of 2001 and 10 Design Wins in fiscal
2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for fiscal 2002 decreased to $2.4 million, a
28% decrease over fiscal 2001. The decrease was due to headcount and expense
containment measures. Fiscal 2001 expense decreased to $3.3 million from $4.6
million in fiscal 2000 or, 29%, as a result of headcount and expense containment
measures. Due to staffing reductions and cost containment measures during the
latter part of 2002 and 2001, we expect general and administrative expense for
fiscal 2003 will decrease in absolute dollars and as a percentage of total sales
from fiscal 2002 levels.
LOAN RESERVE
On November 6, 1998, we made a loan to an officer and stockholder in the amount
of $622,800 under a two-year recourse promissory note bearing an interest rate
of 4.47% and collateralized by 145,313 shares of our Common Stock. The loan was
used to pay for the exercise of an option to purchase 139,400 shares of our
Common Stock and related taxes. On April 16, 1999, the loan was increased to
$743,800. The loan was extended for a one-year term under the same terms and
conditions on November 6, 2000. On December 14, 2001, the note was amended,
restated and consolidated to extend the term to December 2003 and to require
certain mandatory repayments of principal of up to $100,000 a year while the
note is outstanding. The loan bears interest at a rate of 2.48% per annum, with
interest due annually and the entire amount of the principal due on December 14,
2003.
While the officer is current on his payments on the loan and we plan on pursuing
all available courses of action to collect the amounts ultimately due on the
loan, on October 31, 2002 we determined that it was probable that we will be
unable to fully recover the balance of the loan on its due date of December 14,
2003. Accordingly, a valuation allowance of $474,000 was recorded based
generally on the fair value of the Common Stock collateralizing the note at
October 31, 2002 and the amount of the officer's personal assets considered
likely to be available in the future. The estimated loss on the loan may be
revised in the future based on changes in the fair value of the Common Stock and
personal assets collateralizing the loan.
RESTRUCTURING COSTS
In response to the continued economic slowdown, we implemented restructuring
plans in fiscal 2002 and 2001 and recorded restructuring charges of $446,000 and
$964,000, respectively. Restructuring costs for fiscal 2002 are comprised of
severance costs associated with staff reductions totaling $115,000, leasehold
improvements and equipment write-downs related to the abandonment of our
Madison, Wisconsin office of $185,000 and estimated losses related to future
rents net of estimated future recoveries from potential sublease of $146,000. We
reduced our headcount from 47 employees to 24 employees during fiscal 2002.
23
Restructuring costs for fiscal 2001 are comprised of severance costs associated
with staff reductions totaling $52,000, leasehold improvements and equipment
write-downs related to the relocation of our headquarters of $337,000 and losses
related to its sublease of $575,000, which is net of the reversal of a $281,000
liability associated with deferred rent. We reduced our headcount from 87
employees to 47 employees during fiscal 2001.
As of October 31, 2002 and 2001, $249,000 and $590,000 of the restructuring
costs were included in other current liabilities, respectively.
INTEREST AND OTHER INCOME
Interest and other income in fiscal 2002 decreased slightly from 2001 due to
lower average cash balances in fiscal 2002. Fiscal 2001 income increased
slightly from fiscal 2000 due to higher average cash balances in fiscal 2001 as
compared to fiscal 2000.
INCOME TAXES
On March 9, 2002, the President of the United States signed into law the Job
Creation and Workers Assistance Act of 2002 which extends the net operating loss
carryback from two to five years for losses generated in tax years ending in
2001 and 2002. As a result, we recorded a tax benefit of $91,000 in fiscal 2002
due to the expected refund of federal income taxes related to this Act. We also
filed amended federal and state tax returns to claim $86,000 in research and
development credits related to LMC. We recorded tax provisions of $1,000 and
$126,000 in fiscal 2001 and fiscal 2000, respectively. Our effective tax rate
was (8)%, 0% and 3% in fiscal 2002, 2001 and 2000, respectively. We recorded a
valuation allowance in fiscal 2002, 2001, and 2000 for deferred tax assets due
to the uncertainty of realization. In the event of future taxable income, our
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, we recorded a net loss of $1.7
million in fiscal 2002, a net loss of $9.9 million in fiscal 2001 and net income
of $4 million in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity is dependent on many factors, including sales volume, operating
profit and the efficiency of asset use and turnover. Our future liquidity will
be affected by, among other things:
- actual versus anticipated sales of our products;
- our actual versus anticipated operating expenses and results of
ongoing cost control actions;
- the timing of product shipments, which occur primarily during the last
month of the quarter;
- our actual versus anticipated gross profit margin;
- our ability to raise additional capital, if necessary; and
- our ability to secure credit facilities, if necessary.
We had cash and cash equivalents of $1.6 million and $3.6 million on October 31,
24
2002 and October 31, 2001, respectively. In fiscal 2002, $2.7 million of cash
was used by operating activities, principally as a result of net losses of $1.7
million adjusted for a $4.7 million non-cash decrease in non-current liabilities
which was the result of the forfeiture of the HP refundable deposit. These
decreases in cash were partially offset by $730,000 of non-cash depreciation and
amortization charges, a $185,000 non-cash charge related to write-offs of fixed
assets and leasehold improvements included in the restructuring costs, a
non-cash valuation allowance on a loan from an officer and a $2.5 million
decrease in inventories. The decrease in inventories is primarily related to a
$1.7 million write down of inventories purchased to support the HP supply
agreement. Working capital at October 31, 2002 was $3.0 million, as compared to
$7.6 million at October 31, 2001.
In fiscal 2002, we purchased $149,000 of fixed assets, consisting primarily of
computers and engineering equipment. Purchased software costs amounting to
$105,000 were capitalized in fiscal 2002. We expect similar levels of capital
expenditures in fiscal 2003.
We received $31,000 in fiscal 2002 from payments related to common stock
purchases made by employees pursuant to the employee stock purchase plan. During
the second quarter of fiscal 2002, we sold 555,556 shares of common stock plus a
warrant to purchase 111,111 shares of common stock for approximately $1.0
million in a private placement transaction with Stonestreet L.P. of Ontario,
Canada. The net cash proceeds after expenses were approximately $864,000.
On May 14, 2002, we secured a twelve month revolving $1.0 million working
capital line of credit with a bank. The credit line is secured by a first lien
on all our assets and carries a floating annual interest rate equal to the
bank's prime rate of 4.25% at October 31, 2002 plus 1.50%. We can draw down on
the credit line based on a formula equal to 80% of our domestic accounts
receivable. As of October, 31, 2002, we have not drawn down on this line of
credit.
Our future commitments consist principally of future minimum lease payments
related to our office facilities. Minimum lease payments are as follows: fiscal
2003: $1.1 million; 2004: $1.0 million; 2005: $0.7 million; 2006: $0.3 million.
Related minimum reimbursement from sublease payments are as follows: fiscal
2003: $0.7 million; 2004: $0.6 million; 2005: $0.6 million; 2006: $0.3 million.
We realized significant reductions in our operating expenses due to management's
implementation of a program of controlled spending and headcount reduction
instituted in mid-fiscal 2001. In addition, we had further headcount and cost
reductions in late fiscal 2002 which are expected to translate to an estimated
$2.0 million decrease in salaries and benefits and other expenses in fiscal
2003. With these reductions, we have reduced our quarterly cash flow break-even
point to approximately $1.7 million to $1.9 million in revenue at an expected
50% gross margin. We believe the cost reduction and a projected increase in
sales during fiscal 2003 will generate sufficient cash flows to fund our
operations through October 31, 2003 and beyond. However, our projected sales are
to a limited number of new and existing OEM customers and are based on internal
and customer provided estimates of future demand, not firm customer orders. If
the projected sales do not materialize, we will need to reduce expenses further
and raise additional capital through customer prepayments or the issuance of
debt or equity securities. If additional funds are raised through the issuance
of preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of Common Stock, and debt covenants could impose
restrictions on our operations. The sale of equity or debt could result in
25
additional dilution to current stockholders, and such financing may not be
available to us on acceptable terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our cash and cash equivalents are subject to interest rate risk. We invest
primarily on a short-term basis. Our financial instrument holdings at October
31, 2002 were analyzed to determine their sensitivity to interest rate changes.
The fair values of these instruments were determined by net present values. In
our sensitivity analysis, the same change in interest rate was used for all
maturities and all other factors were held constant. If interest rates increased
by 10%, the expected effect on net income (loss) related to our financial
instruments would be immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under Item 8 are
provided under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors; Section 16(a) Beneficial Ownership Reporting
- --------------------------------------------------------------------------------
Compliance
- ----------
The information required by Item 10 concerning our directors is incorporated by
reference from the information in the section entitled "Election of Directors"
appearing in our definitive Proxy Statement to be filed with the Securities and
Exchange Commission for the Annual Meeting of Stockholders scheduled for March
18, 2003 (the "2003 Proxy Statement"). The information required by Item 10
concerning the compliance of certain persons with the beneficial ownership
reporting requirements of Section 16(a) of the Act is incorporated by reference
from the information in the section entitled "Compliance with Section 16(a) of
the Securities and Exchange Act of 1934" appearing in the 2003 Proxy Statement.
Identification of Executive Officers
- ------------------------------------
Our executive officers and their respective ages and positions as of December
31, 2002 are set forth in the following table. Executive officers serve at the
discretion of the board of directors. There are no familial relationships
between our directors or our executive officers and any other director or
executive officer.
Name Age Position
- ----------------------------------------------------------------------------------------------------
William B. Heye, Jr. 64 President and Chief Executive Officer
David W. Brunton 52 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Daniel Grey 47 Senior Vice President, Sales and Marketing
Kirk Anderson 43 Vice President, Operations
Mr. Heye joined us in November 1991 as President, Chief Executive Officer and
member of the Board of Directors. From 1989 to November 1991, he served as
Executive Vice President of Ampex Corporation, a manufacturer of
high-performance scanning recording systems, and President of Ampex Video
Systems Corporation, a wholly-owned subsidiary of Ampex Corporation and a
manufacturer of professional video recorders and editing systems for the
television industry. From 1986 to 1989, Mr. Heye served as Executive Vice
President of Airborn, Inc., a manufacturer of components for the aerospace and
military markets. Prior to 1986, Mr. Heye served in various senior management
positions at Texas Instruments, Inc. in the United States and overseas,
including Vice President and General Manager of Consumer Products and President
of Texas Instruments Asia, Ltd., with headquarters in Tokyo, Japan.
Mr. Brunton joined us in November 2001 as Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer. From 2000 to 2001 he was the Chief
Financial Officer for NetStream, Inc., a telephony broadband network service
provider. From 1997 to 2000, Mr. Brunton was the Chief Financial Officer and
Senior Vice President - Operations for ReSourcePhoenix.com, a financial services
27
outsource provider. From 1987 to 1997, Mr. Brunton was the Corporate Controller
for the Phoenix American Companies, an equipment leasing, cable TV,
telecommunications and software development company. Mr. Brunton is a CPA who
prior to 1987 was with Arthur Andersen & Co.
Mr. Grey has served as Senior Vice President Sales and Marketing since May 2001.
For the 18 months prior to SBE, he was the Senior Vice President of Sales for
SBS Technologies where he increased sales in the Communications Group over 240%
in one year and consolidated the Communications and
Commercial/Military/Industrial sales forces. From 1999 to 2000, Mr. Grey was
Vice President of Sales for Lan Media Corporation, later acquired by SBE. Mr.
Grey was the Western Regional Sales Manager from 1996 to 1999 for Performance
Technologies, Inc. where he managed key accounts and increased sales to become
the largest sales region for the company. From 1989 to 1996, as the Director of
Western Sales for SBE, he drove sales to record levels through the initiation of
relationships with industry leaders such as Cisco Systems, Sun Microsystems,
Silicon Graphics, HP and Tandem Computers. Grey has experienced 20 years of
success propelling sales for other well known companies in the embedded
computing market including Force Computers and Mizar.
Mr. Anderson has served as Vice President, Operations since October 2001. He
joined us as Manager, of Operations in 1997 and was promoted to Director,
Operations in 1999. Prior to joining us Mr. Anderson was the Manager, Marketing
Logistics for Wesley Jessen from 1994 to 1997 were he was responsible for
logistical planning and manufacturing budgeting and control. Prior to 1994 he
held various management positions in operations, finance and marketing for
several high-tech companies in Silicon Valley, including Vitalink
Communications, a pioneer in internetworking products.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information in the section entitled "Executive Compensation" appearing in the
2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" appearing in the 2003 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information in the sections entitled "Certain Transactions" and "Executive
Compensation" appearing in the 2003 Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days prior to the date of the
filing of this report, of the effectiveness of our disclosure controls and
28
procedures, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures are effective and
sufficient to ensure that we record, process, summarize, and report information
required to be disclosed by us in our periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.
Subsequent to the date of such evaluation, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES and
REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a)(1) Financial Statements
--------------------
Page
----
Report of Independent Accountants 36
Consolidated Balance Sheets at October 31, 2002 and 2001 37
Consolidated Statements of Operations for fiscal years 2002, 2001
and 2000 38
Consolidated Statements of Stockholders' Equity for fiscal years 2002,
2001 and 2000 39
Consolidated Statements of Cash Flows for fiscal years 2002, 2001
and 2000 40
Notes to Consolidated Financial Statements 41
(a)(2) Financial Statement Schedule
----------------------------
Schedule II-- Valuation and Qualifying Accounts 56
All other schedules are omitted as the required information is not
applicable or has been included in the consolidated financial
statements or the notes thereto.
(a)(3) List of Exhibits
Exhibit
Number Description
------- -----------
3.1(1) Certificate of Incorporation, as amended through December
15, 1997.
29
3.2(2) Bylaws, as amended through December 8, 1998.
10.1* 1996 Stock Option Plan, as amended.
10.2* 1991 Non-Employee Directors' Stock Option Plan, as amended.
10.3 1992 Employee Stock Purchase Plan, as amended.
10.4 1998 Non-Officer Stock Option Plan as amended.
10.5(7) Lease for 4550 Norris Canyon Road, San Ramon, California
dated November 2, 1992 between the Company and PacTel
Properties.
10.6(8) Amendment dated June 6, 1995 to lease for 4550 Norris Canyon
Road, San Ramon, California, between the Company and CalProp
L.P. (assignee of PacTel Properties).
10.7(2)* Full Recourse Promissory Note executed by William B. Heye,
Jr. in favor of the Company dated November 6, 1998, as
amended December 14, 2001.
10.8(9)+ Amendment No. S/M018-4 dated April 3, 2001, to the Purchase
Agreement dated May 6, 1991, between SBE, Inc. and Compaq
Computer Corporation, as amended October 30, 2002
10.9(10) Loan and security agreement dated May 13, 2002 between SBE,
Inc. and Silicon Valley Bank.
10.10(11) Stock subscription agreement and warrant to purchase 111,111
of SBE, Inc. Common Stock dated April 30, 2002 between SBE,
Inc. and Stonestreet LP.
10.11(12) Amendment dated August 22, 2002 to stock subscription
agreement dated April 20, 2002 between SBE, Inc. and
Stonestreet LP.
10.12 Amendment to the Full Recourse Promissory Note executed by
William Heye, Jr. in favor of the Company dated December 14,
2001.
* Indicates management contract or compensation plans or arrangements filed
pursuant to Item 601(5)(10) of Regulation SK.
+ Certain confidential information has been deleted from this exhibit pursuant
to a confidential treatment order that has been granted.
11.1 Statement re computation of per share earnings
30
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
No report on Form 8-K was filed by us during the quarter ended October
31, 2002.
(1) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1997 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Form S-8 dated September 15, 1998 and
incorporated herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1991 and incorporated herein by reference.
(5) Filed as an exhibit to Form S-8 dated November 24, 1998 and
incorporated herein by reference.
(6) Filed as an exhibit to Form S-8 dated October 16, 1998 and
incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1993 and incorporated herein by reference.
(8) Filed as an exhibit to Annual Report on Form 10-K for the year
ended October 31, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Quarterly Report on Form 10-Q for the
quarter ended April 30, 2001 and incorporated herein by
reference.
(10) Filed as an exhibit to Quarterly Report on Form 10Q for the
quarter ended April 30, 2002 and incorporated herein by
reference.
(11) Filed as an exhibit to Form S-3 dated May 23, 2002 and
incorporated herein by reference.
(12) Filed as an exhibit to Quarterly Report on Form 10Q for the
quarter ended July 31, 2002 and incorporated herein by reference.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SBE, Inc.
Date: January 24, 2003 By: /s/ William B. Heye, Jr.
--------------------------
William B. Heye, Jr.
Chief Executive Officer and
President
(Principal Executive Officer)
Date: January 24, 2003 By: /s/ David W. Brunton
-----------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned officers
and directors of the registrant constitutes and appoints, jointly and severally,
William B. Heye, Jr. and David W. Brunton, and each of them, as lawful
attorneys-in-fact and agents for the undersigned and for each of them, each with
full power of substitution and resubstitution, for and in the name, place and
stead of each of the undersigned officers and directors, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary or appropriate to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
or any of them, or any of their substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements for the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated, as
of January 24, 2003.
32
Signature Title
--------- -----
/s/ William B. Heye, Jr.
- ------------------------
William B. Heye Jr. Chief Executive Officer and President
(Principal Executive Officer)
/s/ David W. Brunton
- --------------------
David W. Brunton Chief Financial Officer, Vice President,
Finance and Secretary (Principal Financial and
Accounting Officer)
/s/ Raimon L. Conlisk
- ---------------------
Raimon L. Conlisk Director, Chairman of the Board
/s/ Randall L-W. Caudill
- ------------------------
Randall L-W. Caudill Director
/s/ Ronald J. Ritchie
- ---------------------
Ronald J. Ritchie Director
CERTIFICATIONS
I, William B. Heye, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of SBE, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
33
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 24, 2003
/s/ William B. Heye, Jr.
- ---------------------------
William B. Heye, Jr.
Chief Executive Officer and President
I, David W. Brunton certify that:
1. I have reviewed this annual report on Form 10-K of SBE, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this annual report;
34
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: January 24, 2003
/s/ David W. Brunton
- ---------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SBE, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 29 present fairly, in all material
respects, the financial position of SBE, Inc. and its subsidiaries at October
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended October 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) on page 29 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has generated negative cash flows from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 13, 2003
36
SBE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
October 31 2002 2001
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,582 $ 3,644
Trade accounts receivable, net 888 760
Inventories 1,910 4,428O
Other 220 464
------------- -----------
Total current assets 4,600 9,296
Property and equipment, net 533 1,236
Capitalized software costs, net 110 86
Other 78 72
------------- -------------
Total assets $ 5,321 $ 10,690
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 488 $ 545
Accrued payroll and employee benefits 159 343
Current portion of refundable deposit 447 ---
Other 521 813
------------- -------------
Total current liabilities 1,615 1,701
Other long term liabilities 10 ---
Refundable deposit --- 4,870
------------- -------------
Total liabilities 1,625 6,571
------------- -------------
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Convertible preferred stock: no par value;
Authorized 167,339 shares; issued 163,344 in fiscal 1999;
none outstanding at October 31, 2002 and 2001 --- ---
Common stock and additional paid-in capital
($0.001 par value); authorized 10,000,000 shares; issued 4,137,612 and
3,521,037 shares at October 31, 2002 and 2001, respectively (including
treasury shares: 79,500 at October 31, 2002 and 2001) 14,711 13,877
Note receivable from stockholder (270) (744)
Treasury stock (409) (409)
Retained deficit (10,336) (8,605)
-------------- --------------
Total stockholders' equity 3,696 4,119
------------- -------------
Total liabilities and stockholders' equity $ 5,321 $ 10,690
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
37
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
For the years ended October 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 6,898 $ 7,726 $ 29,178
Cost of sales 3,170 4,860 10,418
--------------- --------------- ----------------
Gross profit 3,728 2,866 18,760
Product research and development 3,027 5,652 5,635
Sales and marketing 2,151 3,105 4,612
General and administrative 2,364 3,265 4,602
Loan reserve 474 --- ---
Restructuring costs 446 964 ---
--------------- --------------- ----------------
Total operating expenses 8,462 12,986 14,849
Operating income (loss) (4,734) (10,120) 3,911
Interest income 51 225 185
Forfeited deposit, net 2,712 --- ---
Other income 63 --- ---
--------------- --------------- ----------------
Income (loss) before income taxes (1,908) (9,895) 4,096
Benefit (provision) for income taxes 177 (1) (126)
--------------- ---------------- -----------------
Net income (loss) $ (1,731) $ (9,896) $ 3,970
================ ================ ================
Basic earnings (loss) per common share $ (0.46) $ (2.92) $ 1.24
================ ================ ===============
Diluted earnings (loss) per common share $ (0.46) $ (2.92) $ 1.04
================ ================ ===============
Basic - Shares used in per share
computations 3,759 3,390 3,208
=============== =============== ================
Diluted - Shares used in per share
computations 3,759 3,390 3,814
=============== =============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
38
SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Convertible and Additional Note Receivable
Preferred Stock Paid-in Capital from stockholder
Shares Amount Shares Amount
Balance, October 31, 1999 163,344 $ 1,429 2,984,327 $11,110 $ (744)
Stock issued in connection with stock option plans - - 222,334 1,081 -
Stock retired/issued in connection with conversion to common stock (163,344) (1,429) 163,344 1,429 -
Stock issued in connection with stock purchase plan - - 19,331 104 -
Stock repurchase - - - - -
Deferred stock-based compensation - - - 131 -
Amortization of deferred stock compensation - - - - -
Net income - - - - -
--------- -------- --------- -------- ---------------
Balance, October 31, 2000 - - 3,389,336 13,855 (744)
Stock issued in connection with stock option plans - - 99,054 51 -
Stock issued in connection with stock purchase plan - - 32,645 109 -
Forfeiture of unvested stock options - - - (138) -
Amortization of deferred stock compensation - - - - -
Net loss - - - - -
--------- -------- --------- -------- ---------------
Balance, October 31, 2001 - - 3,521,035 13,877 (744)
Stock issued in connection with stock purchase plan - - 47,596 31 -
Stock and warrant issued in connection with private placement - - 555,556 782 -
Stock issued to Board of Directors in lieu of cash payments - - 13,425 21 -
Valuation allowance on note receivable from officer - - - - 474
Net loss - - - - -
--------- -------- --------- ------- ----------------
Balance, October 31, 2002 - $ - 4,137,612 $14,711 $ (270)
========= ======== ========= ======== ================
Retained
Deferred Earnings
Treasury Stock Stock-Based (Accumulated
Shares Amount Compensation deficit) Total
Balance, October 31, 1999 74,500 $ (358) $ (122) $ (2,679) $ 8,636
Stock issued in connection with stock option plans - - - - 1,081
Stock retired/issued in connection with conversion to common stock - - - - -
Stock issued in connection with stock purchase plan - - - - 104
Stock repurchase 5,000 (51) - - (51)
Deferred stock-based compensation - - (131) - -
Amortization of deferred stock compensation - - 89 - 89
Net income - - - 3,970 3,970
------ ------ ----------- ------------- -----------
Balance, October 31, 2000 79,500 (409) (164) 1,291 13,829
Stock issued in connection with stock option plans - - - - 51
Stock issued in connection with stock purchase plan - - - - 109
Forfeiture of unvested stock options - - 138 - -
Amortization of deferred stock compensation - - 26 - 26
Net loss - - - (9,896) (9,896)
------ ------ ----------- ------------- -----------
Balance, October 31, 2001 79,500 (409) - (8,605) 4,119
Stock issued in connection with stock purchase plan - - - - 31
Stock and warrant issued in connection with private placement - - - - 782
Stock issued to Board of Directors in lieu of cash payments - - - - 21
Valuation allowance on note receivable from officer - - - - 474
Net loss - - - (1,731) (1,731)
Balance, October 31, 2002 79,500 $ (409) $ - $ (10,336) $ 3,696
======== ====== =========== ============= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
table to be converted
39
SBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------- -------- -------- --------
Cash flows from operating activities:
Net income (loss) $(1,731) $(9,896) $ 3,970
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 730 1,077 962
Non-cash restructuring costs 185 337 ---
Stock-based compensation expense 21 26 89
Non-cash valuation allowance on loan from officer 474 --- ---
Effect of remeasured warrant (83) --- ---
Loss on sale of assets 19 5 ---
Changes in operating assets and liabilities:
Trade accounts receivable (128) 3,536 (808)
Inventories 2,518 490 (2,951)
Other assets 238 (70) (89)
Trade accounts payable (57) (549) (26)
Other current liabilities (29) (1,060) 1,211
Non-current liabilities (4,860) 4,582 (64)
-------- -------- --------
Net cash provided by (used in) operating activities (2,703) (1,522) 2,294
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (149) (299) (1,320)
Proceeds from sale of assets --- 4 ---
Capitalized software costs (105) (10) (182)
-------- -------- --------
Net cash used in investing activities (254) (305) (1,502)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock plans 31 160 1,185
Proceeds from issuance of common stock and warrants 864 --- ---
Purchase of treasury stock --- --- (51)
-------- -------- --------
Net cash provided by financing activities 895 160 1,134
-------- -------- --------
Net decrease in cash and cash equivalents (2,062) (1,667) (1,926)
Cash and cash equivalents at beginning of year 3,644 5,311 3,385
-------- -------- --------
Cash and cash equivalents at end of year $ 1,582 $ 3,644 $ 5,311
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ --- $ --- $ 24
======== ======== ========
Income taxes $ --- $ --- $ 126
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Conversion of preferred stock into common stock $ --- $ --- $ 1,429
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION:
SBE, Inc. and subsidiaries design and manufacture high-performance
communications controllers and equipment used primarily in carrier-grade
computer systems and signaling, switching and routing networks. Our products are
sold worldwide. Our business falls primarily within one industry segment.
The consolidated financial statements include the financial position and results
of operations of LAN Media Corporation, ("LMC"), which we acquired on July 14,
2000. The merger was accounted for as a pooling of interests and accordingly,
financial statements presented for all periods have been restated to reflect
combined operations and financial position. As consideration for all outstanding
shares of LMC, we issued 316,101 shares of our Common Stock. In addition, we
assumed all outstanding options held by LMC option holders.
The consolidated financial statements contemplate the realization of assets and
the satisfaction of liabilities in the normal course of business. We incurred
net losses of $1.7 million and $9.9 million for the years ended October 31, 2002
and 2001, respectively, and generated negative cash flows from operations of
$2.7 million and $1.5 million in these years. Our plans with respect to this
matter included the restructuring executed in the fourth quarter of fiscal 2002,
which reduced headcount from 47 employees to 24 employees and has reduced our
cost structure going forward. We believe the cost reduction and a projected
increase in sales during fiscal 2003 will generate sufficient cash flows to fund
our operations through October 31, 2003. However, these projected sales are to a
limited number of new and existing OEM customers and are based on internal and
customer provided estimates of future demand, not firm customer orders. If the
projected sales do not materialize, we will need to reduce expenses further and
raise additional capital through customer prepayments or the issuance of debt or
equity securities. If additional funds are raised through the issuance of
preferred stock or debt, these securities could have rights, privileges or
preferences senior to those of Common Stock, and debt covenants could impose
restrictions on our operations. The sale of equity or debt could result in
additional dilution to current stockholders, and such financing may not be
available to us on acceptable terms, if at all. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amount or classification of liabilities
or any other adjustments that might be necessary should we be unable to continue
as a going concern.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of SBE, Inc. and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires us 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
41
expenses during the reporting period. Such estimates include levels of reserves
for doubtful accounts, obsolete inventory, warranty costs and deferred tax
assets. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of our cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their carrying value due to the
short-term maturity rate structure of those instruments.
CASH AND CASH EQUIVALENTS:
We consider all highly liquid investments readily convertible into cash with an
original maturity of three months or less upon acquisition by us to be cash
equivalents. Substantially all of our cash and cash equivalents are held with
one large financial institution.
INVENTORIES:
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market value. Our inventories include high-technology parts that may
be subject to rapid technological obsolescence. We consider technological
obsolescence in estimating required reserves to reduce recorded amounts to
market values. Such estimates could change in the future and have a material
adverse impact on our financial position and results of operations.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost. We record depreciation charges over
the assets' estimated useful lives of three to eight years, on a straight-line
basis. Leasehold improvements are amortized over the lesser of their useful
lives or the remaining term of the related leases.
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss on sale or
disposal is recognized in operations. Maintenance, repairs and minor renewals
are charged to expense as incurred. Expenditures which substantially increase an
asset's useful life are capitalized.
We review property and equipment for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. In
performing the review for recoverability, we would estimate the future gross
cash flows expected to result from the use of the asset and its eventual
disposition. If such gross cash flows are less than the carrying amount of the
asset, the asset is considered impaired. The amount of the impairment loss, if
any, would then be calculated based on the excess of the carrying amount of the
asset over its fair value.
During the year ended October 31, 2001, we committed to relocating our
engineering and administrative headquarters located in San Ramon, California and
as a consequence wrote off $337,000 in leasehold improvements and property and
equipment associated with the former headquarters location. During the year
ended October 31, 2002, we abandoned and closed our research facility located in
Madison, Wisconsin, and as a consequence wrote off $185,000 in leasehold
improvements and property and equipment associated with this location. These
write offs are included in restructuring costs in their respective fiscal years.
42
CAPITALIZED SOFTWARE COSTS:
Capitalized software costs consist of costs to purchase software and costs to
internally develop software. Capitalization of software costs begins upon the
establishment of technological feasibility. All capitalized software costs are
amortized as related sales are recorded on a per-unit basis with a minimum
amortization based on a straight-line method over a two-year estimated useful
life. We evaluate the estimated net realizable value of each software product
and record provisions to the asset value of each product for which the net book
value is in excess of the net realizable value. No internal software development
costs were capitalized in the years ended October 31, 2002, 2001 and 2000.
REVENUE RECOGNITION AND WARRANTY COSTS:
We record product sales at the time of product shipment provided that we have
received a customer-executed purchase order, the price is fixed, title and risk
of loss have transferred to the customer, collection of the resulting receivable
is reasonably assured, and there are no significant remaining obligations. We
provide a reserve for estimated warranty costs, which have not been significant,
at the time of sale based on historical experience and expectations of future
conditions, and periodically adjust such amount to reflect actual expenses. Our
sales transactions are negotiated in U.S. dollars.
PRODUCT RESEARCH AND DEVELOPMENT EXPENDITURES:
Product research and development ("R&D") expenditures, other than certain
software development costs, are charged to expense as incurred. Contractual
reimbursements for R&D expenditures under joint R&D contracts with customers are
accounted for as a reduction of related expenses as incurred. For the years
ended October 31, 2002, 2001 and 2000, direct costs incurred under R&D contracts
were $7,900, $7,000 and $203,000, respectively, and reimbursements earned were
$7,900, $22,913 and $290,413 , respectively.
REFUNDABLE DEPOSIT:
A refundable deposit associated with a multi-year supply agreement with HP of
$4.9 million was received in April 2001. This deposit was refundable as we
delivered certain quantities of products to HP over a four year period ending in
2005. The supply contact was restructured in fiscal 2002 to include a final
purchase order for $1.6 million of our products to be shipped to HP in the first
two quarters of fiscal 2003 and the forfeiture by HP of $4.4 million of the $4.9
million refundable deposit. Under the agreement, we are required to retain for
future production or repair all VCOM finished goods and spare parts inventory
through October 31, 2005 unless notified otherwise by HP. Concurrent with the
forfeiture of the $4.4 million refundable deposit, we recorded a reserve of $1.7
million related to inventory purchased to fulfill the expected future orders
under the HP supply agreement. The $2.7 million of forfeiture of refundable
deposit net of inventory reserve is presented under Forfeited deposit, net on
the Statements of Operations. The remaining $447,000 of the deposit will be paid
to HP in the second quarter of fiscal 2003 and is included in current
liabilities at October 31, 2002
43
STOCK-BASED COMPENSATION:
We account for stock-based employee compensation arrangements in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and comply with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". Under APB 25, compensation expense is based on the difference, if
any, on the date of the grant between the fair value of our stock and the
exercise price of the option. We account for equity instruments issued to
non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services",
which require that such equity instruments be recorded at their fair value.
INCOME TAXES:
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of items that have been included
in the consolidated financial statements or tax returns. Deferred income taxes
represent the 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 our opinion, realization is uncertain. The provision for income taxes
represents the net change in deferred tax amounts, plus income taxes payable for
the current period.
NET EARNINGS PER COMMON SHARE:
Basic earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
per common share is computed by dividing net income (loss) by the weighted
average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents relate to stock options and include
605,803 shares of common stock for the year ended October 31, 2000. Common stock
equivalents are excluded from the diluted earnings per share calculation for
fiscal 2002 and 2001 due to their anti-dilutive effect.
COMPREHENSIVE INCOME:
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Through October 31, 2002, we have not had any transactions
that were required to be reported in other comprehensive income and,
accordingly, comprehensive income (loss) is the same as net income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June
1999, the FASB issued SFAS No. 137, which required us to adopt SFAS No. 133 in
the first quarter of fiscal 2001. The new standard required companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
44
value. Gains or losses resulting from changes in the values of those derivatives
are reported in the statement of operations or as a deferred item, depending on
the use of the derivatives and whether they qualify for hedge accounting. We
adopted SFAS No. 133 as required for our first quarterly filing of fiscal year
2001 with no material impact on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101, as amended, summarized the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We adopted SAB 101 in the fourth quarter of fiscal 2001 with no
material impact on our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangibles Assets". SFAS No. 141 revises the
accounting treatment for business combinations, requiring the use of purchase
accounting and prohibiting the use of the pooling-of-interests method for all
business combinations initiated after June 30, 2001, and broadens the criteria
for recording intangible assets separate from goodwill for all business
combinations completed after June 30, 2001. SFAS No. 142 revises the accounting
for goodwill and other intangibles assets by not allowing the amortization of
goodwill and establishing accounting for the impairment of goodwill and other
intangible assets. We adopted SFAS No. 142 as of November 1, 2002 and such
adoption did not have a material effect on our consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations Reporting the Effects of Disposal of a Segment
of a Business." SFAS No. 144 is effective for financial statements issued for
years beginning after December 15, 2001. The adoption of SFAS No. 144 on
November 1, 2002 did not have a material impact on our consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002. We will adopt SFAS No. 146 for exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS No. 146 will change, on
a prospective basis, the timing of when restructuring charges are recorded from
a commitment date approach to when the liability is incurred.
45
Reclassifications:
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 presentation with no effect on net income
(loss) or stockholders' equity as previously reported.
2. INVENTORIES
Inventories at October 31, 2002 and 2001 comprise the following (in thousands):
2002 2001
- --------------------------------------------------------------------------------------------------------
Finished goods $ 985 $ 1,546
Parts and materials 925 2,882
------------------ ------------------
Total inventory $ 1,910 $ 4,428
================== ==================
3. PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2002 and 2001 are comprised of the
following (in thousands):
2002 2001
- --------------------------------------------------------------------------------------------------------
Machinery and equipment $ 4,948 $ 7,548
Furniture and fixtures 236 1,146
Leasehold improvements 290 536
------------------ ------------------
5,474 9,230
Less accumulated depreciation
and amortization (4,941) (7,994)
------------------ ------------------
$ 533 $ 1,236
================== ==================
Depreciation and amortization expense totaled $649,000, $860,000 and $863,000
for the years ended October 31, 2002, 2001 and 2000, respectively.
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs at October 31, 2002 and 2001 comprise the following
(in thousands):
2002 2001
- --------------------------------------------------------------------------------------------------------
Purchased software $ 881 $ 776
Internally developed software 805 805
------------------ ------------------
1,686 1,581
Less accumulated amortization (1,576) (1,495)
------------------- -------------------
$ 110 $ 86
================== ==================
46
The Company capitalized $105,000, $10,000 and $182,000 of purchased software
costs in 2002, 2001, and 2000 respectively. Amortization of capitalized software
costs totaled $81,000, $217,000, and $227,000 for the years ended October 31,
2002, 2001, and 2000, respectively.
5. STOCKHOLDERS' EQUITY
On December 15, 1997, we reincorporated in the state of Delaware. In connection
with this event, we increased the number of authorized shares of preferred stock
to 2,000,000 shares, and established a par value of $0.001 per share for both
our common and preferred stock.
In May 1999, our Board of Directors authorized us to repurchase up to 100,000
shares of our issued and outstanding Common Stock. During fiscal 1999 and 2000,
we repurchased 79,500 shares of our Common Stock in the open market for an
aggregate purchase price of approximately $409,000.
We acquired LMC on July 14, 2000. As consideration for all outstanding shares of
LMC, we issued 316,101 shares of our Common Stock. In addition, we assumed all
outstanding options held by LMC option holders.
On April 30, 2002, we completed a private placement of 555,556 shares of Common
Stock at $1.80 per share plus a warrant to purchase 111,111 shares of common
stock, resulting in gross cash proceeds of approximately $1.0 million. The
warrant has a term of three years and is exercisable at $2.00 per share. The
equity investment was made by Stonestreet L.P., of Ontario, Canada. The shares
of Common Stock and the shares of Common Stock associated with the Stonestreet
LP and Vintage Partners LLC warrants were registered with the Securities and
Exchange Commission and the registration statement was declared effective on
June 14, 2002.
The fair value of the Stonestreet L.P. warrant of $164,000 on its issue date was
computed using the Black-Scholes option pricing model and was recorded as a
liability pursuant to the provisions of EITF No. 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue 96-3" as cash penalties could have been payable to Stonestreet LP
in the event a registration statement related to the private placement was not
declared effective and maintained. The registration statement was declared
effective on June 14, 2002. On August 22, 2002, the private placement
subscription agreement was amended such that no cash penalties are now payable
with respect to the warrant. Accordingly, as of August 22, 2002, the warrant was
reclassified from liabilities to equity at its fair value of $81,000, resulting
in $83,000 of other income.
In connection with the private placement, we retained the services of Vintage
Partners LLC of New York, New York and paid to Vintage Partners a finder's fee
of $60,000 and a warrant to purchase 11,429 shares of Common Stock. The warrant
has a three year term and is exercisable at $3.50 per share.
During fiscal 2002, we issued 13,425 shares of our Common Stock to the
non-employee members of our Board of Directors in lieu of 50% of their cash
compensation. The value of the Common Stock of $21,000 was recorded as a general
and administrative expense.
47
6. INCOME TAXES
The components of the provision (benefit) for income taxes for the years ended
October 31, 2002, 2001 and 2000, comprise the following:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Federal:
Current $ (161) $ --- $ 109
Deferred --- --- ---
State:
Current (16) 1 17
Deferred --- --- ---
------------- ------------- -------------
Total provision (benefit) for income taxes $ (177) $ 1 $ 126
============== ============= =============
We recorded a tax benefit of $91,000 in fiscal 2002 due to the expected refund
of federal income taxes related to the Job Creation and Workers Assistance Act
of 2002 which extends the net operating loss carryback period from two to five
years for losses generated in tax years ending in 2002. We also filed amended
federal and state tax returns to claim $86,000 in research and development
credits related to LMC.
The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
Change in valuation allowance 25.0 34.0 (30.9)
Other 1.0 --- ---
--- --- ---
(8.0)% 0% 3.1%
====== ========= ============
Significant components of our deferred tax balances as of October 31, 2002 and
2001 are as follows:
2002 2001
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Current
Accrued employee benefits $ 230 $ 57
Inventory allowances 944 498
Allowance for doubtful accounts 37 90
Warranty accruals 22 22
Noncurrent
R&D credit carryforward 2,475 2,546
Alternative minimum tax carryforward 80 193
Net operating loss carryforwards 4,202 2,310
Refundable deposit 178 1,940
Depreciation and amortization 261 55
Restructuring costs 164 369
------------ ------------
Total deferred tax assets 8,593 8,080
------------ ------------
Deferred tax liabilities:
Deferred tax asset valuation allowance (8,593) (8,080)
------------ ------------
Net deferred tax assets $ --- $ ---
============ ============
A valuation allowance is recorded to offset certain deferred tax assets due to
management's uncertainty of realizing the benefit of these items. The valuation
allowance increased by $0.5 million in fiscal 2002 primarily as a result of an
increase in unrealized net operating loss carryforwards, an increase in the
48
inventory allowance and an increase in accrued employee benefits. The increase
was partially offset by the forfeiture of the $4.4 million refundable deposit in
fiscal 2002 that was recognized for tax purposes in fiscal 2001. The valuation
allowance increased in fiscal 2001 by $4.9 million as a result of an increase in
the R&D credit carryforward, in increase in the net operating loss
carryforwards, restructuring costs and advance receipts from a refundable
deposit associated with a multi-year supply agreement with HP.
At October 31, 2002, we have research and experimentation tax credit
carryforwards of $1.7 million and $0.8 million for federal and state tax
purposes, respectively. These carryforwards expire in the periods ending 2009
through 2022. We have net operating loss carryforwards for federal and state
income tax purposes of approximately $11.0 million and $5.3 million,
respectively, which expire in periods ending 2003 through 2022.
7. COMMITMENTS
We lease our buildings under noncancelable operating leases which expire at
various dates through the year 2007. Future minimum lease payments under
noncancelable operating leases, are as follows (in thousands):
Year ending October 31:
2003 $1,147
2004 1,012
2005 731
2006 300
2007 6
-----------
3,196
Less: total reimbursements from subleases (2,253)
-------
Total minimum lease payments $ 943
======
In November 2001, we entered into a facilities lease for our engineering and
administrative headquarters located in San Ramon, California. The lease expires
in 2004. We expect the new facility to satisfy our anticipated needs through the
foreseeable future. Additionally, we assigned the lease related to our former
63,000 square foot engineering and administrative headquarters facility to a
third-party corporation. The third-party corporation has guaranteed payment of
the remaining lease payments though the termination of the original lease in
2006.
We leased 6,100 square feet of office space in Madison, Wisconsin for various
product development activities. We vacated this office space prior to October
31, 2002 and reached agreement with the property owner to terminated the lease
releasing us from further financial obligations effective December 31, 2002.
Additionally, through the acquisition of LMC in July 2000, we lease
approximately 3,650 square feet of office space in Sunnyvale, CA. The Sunnyvale
lease expires in May 2003. In fiscal 2001, we subleased this office space to a
third party corporation for the remaining term of the lease.
Our rent expense under all operating leases, net of reimbursements for
subleases, for the years ended October 31, 2002, 2001 and 2000 totaled $549,000,
$844,000 and $753,000, respectively. We had reimbursements of sublease proceeds
of $158,000, $261,000 and $390,000 for the years ended October 31, 2002, 2001
and 2000, respectively..
49
8. STOCK OPTION AND STOCK PURCHASE PLANS
We sponsor two employee stock option plans, the 1996 Stock Option Plan (the
"1996 Plan") and the 1998 Non-Officer Stock Option Plan (the "1998 Plan"). A
total of 1,730,000 shares of Common Stock were reserved under the 1996 Plan at
October 31, 2002. A total of 650,000 shares of Common Stock are reserved under
the 1998 Plan. Stock options granted under the 1996 and 1998 Plans are
exercisable over a maximum term of ten years from the date of grant, vest in
various installments over a one to four-year period and have exercise prices
reflecting the market value of the shares of Common Stock on the date of grant.
Additionally, in 1991, stockholders approved a Non-Employee Director Stock
Option Plan (the "Director Plan"). A total of 140,000 shares of Common Stock are
reserved for issuance under the Director Plan. Options granted under the
Director Plan vest over a one to four-year period, expire five to seven years
after the date of grant and have exercise prices reflecting market value at the
date of grant.
At October 31, 2002 and 2001, 96,253 and 191,536 shares of Common Stock,
respectively, were available for grant under the 1996 Plan. A total of 36,714
and 103,768 shares of Common Stock were available for grant under the 1998 Plan
at October 31, 2002 and 2001, respectively. A total of 42,750 and 40,750 shares
of Common Stock were available for grant under the Director Plan at October 31,
2002 and 2001, respectively.
A summary of the combined activity under all of the stock option plans is set
forth below:
Weighted
Average
Number of Price Per Exercise
Shares Share Price
- -----------------------------------------------------------------------------------------------
Outstanding at
October 31, 1999 976,213 $ 0.51 - $13.00 $ 5.10
Granted 617,995 $ 1.27 - 24.81 $ 11.71
Terminated (124,995) $ 0.51 - 21.56 $ 6.89
Exercised (222,334) $ 0.51 - 13.00 $ 4.86
-------------------------------------------------------
Outstanding at
October 31, 2000 1,246,879 $ 0.51 - $24.81 $ 8.24
Granted 791,000 $ 0.98-- $ 8.63 $ 2.88
Terminated (403,023) $ 0.51-- $24.81 $ 8.32
Exercised (99,054) $ 0.51-- $ 1.27 $ 0.52
-----------------------------------------------------
Outstanding at
October 31, 2001 1,419,003 $ 0.51-- $23.50 $ 6.18
Granted 809,000 $ 0.90-- $ 1.80 $ 0.92
Terminated (458,730) $ 0.51-- $23.50 $ 7.94
Outstanding at
October 31, 2002 1,769,273 $0.90--$19.81 $ 3.32
========================================================
50
The following table summarizes information with respect to all options to
purchase shares of Common Stock outstanding under the 1996 Plan, the 1998 Plan,
the Director Plan and the LMC Plan at October 31, 2002:
Options Outstanding Options Exercisable
================================================================================
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Price at 10/31/02 (years) Price at 10/31/02 Price
-------------- -------------- ---------------- ----------- ------------- -----------
$ 0.90 -$ 2.48 943,632 6.5 $ 1.02 93,794 $ 1.67
$ 2.48 -$ 4.96 341,831 4.3 $ 3.28 246,069 $ 3.22
$ 4.96 -$ 7.44 249,871 2.7 $ 5.28 205,877 $ 5.28
$ 7.44 -$ 9.93 134,610 2.9 $ 8.16 108,023 $ 8.12
$ 9.93 -$ 12.41 15,000 0.1 $ 10.50 15,000 $ 10.50
$12.41 -$ 14.89 65,000 2.2 $ 13.23 57,500 $ 13.13
$14.89 -$ 17.37 3,249 1.4 $ 16.03 2,841 $ 15.93
$17.37 -$ 19.81 16,080 1.7 $ 18.87 11,588 $ 18.76
------ ---------
1,769,273 740,692
========= =========
We sponsor an Employee Stock Purchase Plan (the "Purchase Plan") under which
300,000 shares of Common Stock were reserved for issuance at October 31, 2002.
The Purchase Plan allows participating employees to purchase, through payroll
deductions, shares of our Common Stock at 85 percent of the fair market value of
the shares at specified dates. At October 31, 2002, 24 employees were eligible
to participate in the Purchase Plan and 80,874 shares were available for
issuance. In fiscal year 2002, 2001 and 2000, 47,596, 32,645 and 19,331 shares
of Common Stock were issued under the Purchase Plan, respectively.
During the fiscal year ended October 31, 1999, we granted options under the LMC
stock option plan to purchase 23,970 shares of our Common Stock to consultants
in conjunction with services performed. We calculated the fair value of the
options on the date of grant and recorded compensation expense of $26,000 and
$89,000 in the fiscal years ended October 31, 2001 and 2000, respectively.
Had compensation cost for these plans been determined pursuant to the provisions
of SFAS No. 123, our pro forma net income (loss) would have been as follows:
Years ended October 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(in thousands except per share amount)
Pro forma net income (loss) $(2,452) $ (11,831) $ 2,146
Pro forma net income (loss) per share -basic $(0.65) $ (3.49) $ 0.67
Pro forma net income (loss) per share - diluted $(0.65) $ (3.49) $ 0.67
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:
51
Options granted in years ended October 31 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Expected life (in years) 5.00 5.00 5.00
Risk-free interest rate 2.00% 6.00% 6.00%
Volatility 148.00% 114.00% 104.00%
Dividend yield 0.00% 0.00% 0.00%
The weighted average estimated fair value of each option granted during fiscal
2002, 2001 and 2000 was $0.92, $1.78 and $11.79, respectively.
9. EMPLOYEE SAVINGS AND INVESTMENT PLAN
We contribute a percentage of income before income taxes into an employee
savings and investment plan. The percentage is determined annually by the Board
of Directors. These contributions are payable annually, vest over five years,
and cover substantially all employees who have been employed by us at least one
year. Additionally, we make matching payments to the employee savings and
investment plan of 50% of each employee's contribution up to three percent of
employees' earnings.
For the years ended October 31, 2002, 2001 and 2000, total expense under the
employee savings and investment plan was $99,471, $148,974 and $391,066,
respectively.
10. CONCENTRATION OF CREDIT AND BUSINESS RISKS
Our trade accounts receivable are concentrated among a small number of
customers, principally located in the United States. Two customers accounted for
more than 34% of total accounts receivable at October 31, 2002. We had one
customer who accounted for 21% and a second customer who accounted for 13% of
accounts receivable at October 31, 2002. One customer accounted for 10% of total
accounts receivable at October 31, 2001. Ongoing credit evaluations of
customers' financial condition are performed and, generally, no collateral is
required. We maintain an allowance for doubtful accounts for potential credit
losses. Actual bad debt losses have not been material and have not exceeded our
expectations. Trade accounts receivable are recorded net of an allowance for
doubtful accounts of $93,000 and $225,000 at October 31, 2002 and 2001,
respectively.
Sales to individual customers in excess of 10% of net sales included sales to HP
of $2.1 million, or 30% of net sales, and Lockheed Martin of $0.8 million, or
12%, in 2002, compared to sales to HP of $2.6 million, or 34%, and Lockheed
Martin of $1.5 million, or 19%, in 2001 and HP of $19.4 million, or 66%, in
2000. On October 31, 2002, we restructured the supply agreement with HP. Under
the restructured agreement, HP submitted an end-of-life non-cancelable purchase
order for approximately $1.6 million of our VME products to be shipped over the
first two quarters of fiscal 2003. Upon the fulfillment of this purchase order,
we do not expect to receive future purchase orders for significant amounts of
VME products from HP. We expect to continue to sell our Adapter products to HP.
International sales accounted for 13%, 9% and 4% of total sales during fiscal
2002, 2001 and 2000, respectively.
We depend on a limited number of customers for substantially all revenue to
date. Failure to anticipate or respond adequately to technological developments
in our industry, changes in customer or supplier requirements or changes in
regulatory requirements or industry standards, or any significant delays in the
52
development or introduction of products or services, could have a material
adverse effect on our business, operating results and cash flows.
Substantially all of our manufacturing process is subcontracted to two
independent companies.
The chipsets used in most of our 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 or margins that, in
turn, could have a material adverse effect on our business, operating results,
financial condition and cash flows.
11. ACQUISITION OF LAN MEDIA CORPORATION
On July 14, 2000, we completed the acquisition of LAN Media Corporation ("LMC"),
a privately held wide area network communications company headquartered in
Sunnyvale, California. As a result, the outstanding LMC common stock was
converted into approximately 316,000 shares of SBE, Inc. common stock, based on
an exchange ratio of approximately 7.99 shares of LMC common stock for each
share of our common stock. The merger was accounted for as a
pooling-of-interests under Accounting Principles Board Opinion No. 16, and
accordingly, financial statements for the fiscal 2000 period prior to the
combination were restated to reflect the combined operations and financial
position. All intercompany transactions have been eliminated.
The following reconciles revenue and net income (loss) previously reported to
the restated information presented in the consolidated financial statements:
Six Months Ended
April 30, 2000
- ------------------------------------------------------------------------
Net Sales
Previously Reported $14,433
LAN Media Corporation 1,480
-------
Restated $15,913
======
Net income (loss)
Previously Reported 2,743
LAN Media Corporation 202
--------
Restated $ 2,945
=======
In connection with the acquisition, we recorded a charge to operating expenses
of approximately $383,000 for acquisition related costs during the third quarter
of 2000.
12. RESTRUCTURING COSTS
In response to the continued economic slowdown, we implemented restructuring
plans in fiscal 2002 and 2001 and recorded restructuring charges of $446,000 and
$964,000, respectively. Restructuring costs for fiscal 2002 are comprised of
severance costs associated with staff reductions totaling $115,000 (we reduced
our headcount from 47 employees to 24 employees during fiscal 2002), leasehold
improvements and equipment write-downs related to the abandonment of our
Madison, Wisconsin office of $185,000 and accrued lease and brokerage costs
53
totaling $146,000. We reached agreement with the property owner to terminate the
Madison office lease releasing us from further obligations effective December
31, 2002. As part of the agreement we paid the lease payments for November and
December 2002 in addition to certain costs and commissions related to releasing
the office space.
Restructuring costs for fiscal 2001 are comprised of severance costs associated
with staff reductions totaling $52,000, leasehold improvements and equipment
write-downs related to the relocation of our headquarters of $337,000 and losses
related to its sublease of $575,000, net of the reversal of a $281,000 liability
associated with deferred rent. We reduced our headcount from 87 employees to 47
employees during fiscal 2001. The reduction in headcount plus the relocation of
the XeTel manufacturing facility from our engineering and headquarters facility
to Texas left us with excess facility space. We were able to enter into an
agreement with a third party corporation to assign the lease for our 63,000
square foot facility located at 4550 Norris Canyon Rd, San Ramon, California and
simultaneously sublease a 15,000 square foot facility also located in San Ramon,
California. We abandoned the leasehold improvements and certain of our equipment
in conjunction with the relocation. As a result of this transaction, a non-cash
$337,000 write down of leasehold improvements and equipment was expensed in
fiscal 2001. Real estate commissions and building expenses totaling $442,000
were accrued in fiscal 2001 and were paid in fiscal 2002. An additional amount
totaling $133,000 was accrued related to a loss associated with facilities
acquired with the purchase of LMC in fiscal 2000 and subleased to a third party
corporation in fiscal 2001. This amount will be paid over 36 months beginning
May 2001.
As of October 31, 2002 and 2001, $258,000 and $590,000 of the restructuring
costs were included in other current liabilities, respectively. As of October
31, 2002, $154,000 of the restructuring costs was included in other long-term
liabilities. This amount relates to rents associated with the Madison, Wisconsin
office that are due twelve months or longer from the balance sheet date.
The following table sets forth an analysis of the components of the
restructuring reserve and the payments made against it through October 31, 2002
(in thousands):
Restructuring accrual at October 31, 2001 $ 590
Plus:
Severance and benefits 115
Accrued lease costs 331
Less:
Cash paid for severance and benefits
and accrued lease costs (787)
-----
Total restructuring costs included in liabilities $ 249
====
13. LOAN TO OFFICER
On November 6, 1998, we made a loan to an officer and stockholder in the amount
of $622,800 under a two-year recourse promissory note bearing an interest rate
of 4.47% and collateralized by 145,313 shares of our Common Stock. The loan was
used to pay for the exercise of an option to purchase 139,400 shares of our
Common Stock and related taxes. On April 16, 1999, the loan was increased to
$743,800. The loan was extended for a one-year term under the same terms and
conditions on November 6, 2000. On December 14, 2001, the note was amended,
restated and consolidated to extend the term to December 2003 and to require
certain mandatory repayments of principal of up to $100,000 a year while the
54
note is outstanding. The loan bears interest at a rate of 2.48% per annum, with
interest due annually and the entire amount of the principal due on December 14,
2003.
While the officer is current on his payments on the loan and we plan on pursuing
all available courses of action to collect the amounts ultimately due on the
loan, on October 31, 2002 we determined that it was probable that we will be
unable to fully recover the balance of the loan on its due date of December 14,
2003. Accordingly, a valuation allowance of $474,000 was recorded based
generally on the fair value of the Common Stock collateralizing the note at
October 31, 2002 and the amount of the officer's personal assets considered
likely to be available to settle the note in December 2003. This valuation
allowance is subject to adjustment in the future based on changes in the fair
value of the Common Stock and personal assets collateralizing the loan.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
2002: Net sales $1,283 $1,724 $2,786 $1,105
Gross profit 696 914 1,695 423
Net income (loss) (1,218) (961) (178) 626
Basic income (loss) per
common share $(0.35) $(0.28) $(0.04) $0.15
Diluted income (loss) per
common share $(0.35) $(0.28) $(0.04) $0.15
2001: Net sales $3,418 $1,813 $1,449 $1,046
Gross profit 2,039 290 534 3
Net loss (1,313) (3,212) (2,244) (3,127)
Basic loss per common share $(0.39) $(0.95) $(0.66) $(0.91)
Diluted loss per common share $(0.39) $(0.95) $(0.66) $(0.91)
55
SBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001
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, 2002
Allowance for Doubtful Accounts $ 225,000 --- (132,000) $ 93,000
Allowance for Warranty Claims 55,627 --- (312) 55,315
Allowance for Deferred Tax Assets 8,080,000 513,000 --- 8,593,000
Allowance for Stockholder Loan --- 474,000 --- 474,000
YEAR ENDED OCTOBER 31, 2001
Allowance for Doubtful Accounts $ 251,620 --- (26,620) $ 225,000
Allowance for Warranty Claims 144,676 --- (89,049) 55,627
Allowance for Deferred Tax Assets 3,088,000 4,992,000 --- 8,080,000
Allowance for Stockholder Loan --- --- --- ---
56