-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MYWcfLBT4u0AcHKDy2p4yKQttWnyO0nq9IJg2pIQe4v46bKsIuiSphY7a6FsBBKL 1q6jFLibN3Omk/jf1GCy5w== 0000087050-00-000003.txt : 20000203 0000087050-00-000003.hdr.sgml : 20000203 ACCESSION NUMBER: 0000087050-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBE INC CENTRAL INDEX KEY: 0000087050 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 941517641 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08419 FILM NUMBER: 517061 BUSINESS ADDRESS: STREET 1: 4550 NORRIS CANYON ROAD CITY: SAN RAMON STATE: CA ZIP: 94583 BUSINESS PHONE: 5103552000 MAIL ADDRESS: STREET 1: 4550 NORRIS CANYON RD CITY: SAN RAMON STATE: CA ZIP: 94583 10-K 1 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 FORM 10-K --------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 DATE OF REPORT: FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999 SBE, INC. --------- (Exact name of Registrant as specified in its charter) Delaware 94-1517641 -------- ---------- (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) Commission File No. 0-8419 4550 Norris Canyon Road, San Ramon, California 94583 ---------------------------------------------------- (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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The approximate aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant, based on the closing price for the Registrant's Common Stock on December 31, 1999 as reported on the Nasdaq National Market, was $12,504,231. Shares of Common Stock held by each executive officer, director and stockholder whose ownership exceeds five percent of Common Stock outstanding have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status for purposes of the foregoing calculation is not necessarily a conclusive determination of affiliate status for other purposes. The number of shares of the Registrant's Common Stock outstanding as of December 31, 1999 was 2,905,861. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- (1) Proxy statement for Annual Meeting of Stockholders scheduled for March 21, 2000 - Part III Exhibit Index on Page 22 Total Pages 44 SBE, INC. FORM 10-K --------- TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 13 Item 3 Legal Proceedings 13 Item 4 Submission of Matters to a Vote of Security Holders 13 PART II Item 5 Market for The Registrant's Common Equity and Related Stockholder Matters 14 Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A Quantitative and Qualitative Disclosures about Market Risk 19 Item 8 Financial Statements and Supplementary Data 19 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10 Directors and Executive Officers of the Registrant 20 Item 11 Executive Compensation 21 Item 12 Security Ownership of Certain Beneficial Owners and Management 21 Item 13 Certain Relationships and Related Transactions 21 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 22 SIGNATURES 25 SCHEDULE 42 EXHIBITS 43 2 PART I Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, particularly in the sections entitled "Item 1-Business-Risk Factors" and "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 1. BUSINESS OVERVIEW SBE, Inc. (the "Company") designs, markets, sells and supports innovative communication controller solutions for the global communications marketplace. The Company's solutions enable both traditional carriers and new emerging carriers to rapidly deliver advanced communications products and services in order to compete effectively in today's fast-evolving public communications network environment. The Company's products are distributed worldwide through a direct sales force, distributors, independent manufacturers' representatives and value-added resellers. Founded in 1961 as Linear Systems, Inc., the Company evolved from a supplier of radio communications equipment to a provider of comprehensive network communications solutions for original equipment manufacturers and end users. Over the last year the Company expanded its product lines to include its Highwire (tm) family of high performance telecommunications controllers. The Highwire family provides high bandwidth intelligent connectivity to servers designed to act as gateways and signaling points within telecommunication networks. The Highwire coprocessing controllers enable operators of wireline and wireless networks to deliver Intelligent Network (IN) and Advanced Intelligent Network (AIN) services such as Caller ID, voice messaging, personal number calling, Service Provider Local Number Portability and customized routing and billing, as well as digital wireless services such as Personal Communications Systems (PCS) and Global System for Mobile Telecommunications (GSM). The Highwire products are designed for integration with standard server platforms that will enable traditional carriers and new telecom entrants to pursue cost-reduced and performance-enhanced network architectures based on Internet Protocol (IP), Asynchronous Transfer Mode (ATM) or other "packet" technologies. The Company is focusing substantial resources on the continued development, marketing and sales activities for the Highwire products. The Company markets, sells and supports three lines of high-speed intelligent communications controller products: Highwire, WanXL and VMEbus. All of these products are sold primarily to original equipment manufacturers ("OEMs"). These products are often customized for a specific customer's application, and they support applications in a broad spectrum of industrial and commercial markets. Markets and application areas include cellular network data communication, data networking, process control, medical imaging, CAE/automated test equipment, military defense systems and telecommunications networks. The Company's Highwire communications controllers leverage the Company's core technology strength into the telecommunications applications market. The 3 Company's WanXL products are designed for applications that require high-performance and high-speed communications capability such as financial data feed video feeds. The Company's VMEbus products are designed for high reliability industrial applications and are used in many wireline, wireless, and satellite based communications networks. All of these products are "intelligent," containing their own microprocessors and memory. This architecture allows these communications controllers to offload many of the lower-level communications tasks that would typically be performed by the host platform, improving overall system performance. All three product lines are supported by communications software developed by both the Company and a variety of third party partners. RISK FACTORS DEPENDENCE ON A LIMITED NUMBER OF OEM CUSTOMERS. In fiscal 1999, most of the Company's sales were derived from a limited number of OEM customers. In fiscal 1999, sales to Compaq Computer accounted for 70 percent of the Company's net sales. The Company expects that sales from Compaq Computer will also constitute a substantial portion of the Company's net sales in fiscal 2000. Orders by the Company's OEM customers are affected by factors such as new product introductions, product life cycles, inventory levels, manufacturing strategy, contract awards, competitive conditions and general economic conditions. The Company's sales to any single OEM customer are also subject to significant variability from quarter to quarter. Such fluctuations may have a material adverse effect on the Company's operating results. A significant reduction in orders from any of the Company's OEM customers, particularly Compaq Computer and Lockheed Martin, would have a material effect on the Company's operating results and financial condition. In addition, there can be no assurance that the Company will become a qualified supplier with new OEM customers or that the Company will remain a qualified supplier with existing OEM customers. FUTURE SUCCESS DEPENDENT ON NEW PRODUCT LINES. Since late 1998, the Company has focused a significant portion of its research and development, marketing and sales efforts on Highwire products. The success of these products is dependent on several factors, including timely completion of new product designs, achievement of acceptable manufacturing quality and yields, introduction of competitive products by other companies and market acceptance of the Company's products. If the Highwire products or other new products developed by the Company do not gain market acceptance, the Company's business, operating results and financial condition would be materially adversely affected. HIGHLY COMPETITIVE ENVIRONMENT. The market for communications products is highly competitive. The Company competes directly with traditional vendors of terminal servers, modems, remote control software, terminal emulation software and application-specific communications solutions. The Company also competes with suppliers of routers, hubs, network interface cards and other data communications products. In the future, the Company expects competition from companies offering client/server access solutions based on emerging technologies such as switched digital telephone services. In addition, the Company may encounter increased competition from operating system and network operating system vendors to the extent such vendors include full communications capabilities in their products. The Company may also encounter future competition from telephony service providers (such as AT&T or the regional Bell operating companies) that may offer communications services through their telephone networks. Increased competition with respect to any of the Company's products could result in price reductions and loss of market share, which would adversely affect the 4 Company's business, operating results and financial condition. Many of the Company's current and potential competitors have greater financial, marketing, technical and other resources than the Company. There can be no assurance that the Company will be able to compete successfully with its existing competitors or will be able to compete successfully with new competitors. FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future due to several factors, some of which are outside the control of the Company, including timing of significant orders from OEM customers, fluctuating market demand for, and declines in, the average selling prices of the Company's products, delays in the introduction of the Company's new products, competitive product introductions, the mix of products sold, changes in the Company's distribution network, the failure to anticipate changing customer product requirements, the cost and availability of components and general economic conditions. The Company generally does not operate with a significant order backlog, and a substantial portion of the Company's revenues in any quarter is derived from orders booked in that quarter. Accordingly, the Company's sales expectations are based almost entirely on its internal estimates of future demand and not on firm customer orders. Based on the foregoing, the Company believes that quarterly operating results are likely to vary significantly in the future and that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Further, it is likely that in some future quarter the Company's revenues or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock is likely to be materially adversely affected. RAPID TECHNOLOGICAL CHANGE; ONGOING NEW PRODUCT DEVELOPMENT REQUIREMENTS. The markets for the Company's products are characterized by rapidly changing technologies, evolving industry standards and frequent new product introductions. The Company's future success will depend on its ability to enhance its existing products and to introduce new products and features to meet and adapt to changing customer requirements and emerging technologies such as ISDN (Integrated Services Digital Network), Frame Relay, ADSL (Asymmetric Digital Subscriber Line) and ATM (Asynchronous Transfer Mode). There can be no assurance that the Company will be successful in identifying, developing, manufacturing and marketing new products or enhancing its existing products. In addition, there can be no assurance that services, products or technologies developed by others will not render the Company's products noncompetitive or obsolete. DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent on the technical, management, marketing and sales skills of a limited number of key employees. The Company does not have employment agreements with, or life insurance on the lives of, any of its key employees. The loss of the services of any key employees could adversely affect the Company's business and operating results. NEED TO RECRUIT AND RETAIN QUALIFIED PERSONNEL. The Company's success also depends on its ability to continue to attract and retain additional highly talented personnel. Competition for qualified personnel in the networking industry, and in the San Francisco Bay Area, is intense. There can be no assurance that the Company will be successful in retaining its key employees or that it can attract or retain additional skilled personnel as required. DEPENDENCE ON KEY SUPPLIERS. The chipsets used in the Company's products are currently available only from Motorola. In addition, certain other components are currently available only from single suppliers. The inability to obtain 5 sufficient key components as required, or to develop alternative sources if and as required in the future, could result in delays or reductions in product shipments which, in turn, would have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON CONTRACT MANUFACTURER. In December 1996, the Company sold all of its manufacturing operations to XeTel Corporation ("XeTel"), a contract manufacturing company headquartered in Austin, Texas. At the same time the Company and XeTel entered into an exclusive manufacturing service agreement under which XeTel is to manufacture all of the Company's products until at least December 2000. The Company is dependent on XeTel's ability to manufacture the Company's products according to specifications and in required volumes on a timely basis. The failure of XeTel to perform its obligations under the manufacturing service agreement could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON PROPRIETARY TECHNOLOGY. Although the Company believes that its future success will depend primarily on continuing innovation, sales, marketing and technical expertise, the quality of product support and customer relations, the Company must also protect the proprietary technology contained in its products. The Company does not currently hold any patents and relies on a combination of copyright, trademark, trade secret laws and contractual provisions to establish and protect proprietary rights in its products. There can be no assurance that steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of its technology. Although the Company believes that its products and technology do not infringe proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against the Company. STOCK PRICE VOLATILITY. The trading price of the Company's Common Stock is subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, the failure to meet analyst estimates, announcements of technological innovations or new products by the Company or its competitors, general conditions in the computer and communications industries and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating perform-ance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. ANTI-TAKEOVER PROVISIONS AND DELAWARE LAW. The Company's Board of Directors has the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be materially adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Furthermore, certain provisions of the company's Certificate of Incorporation may have the effect of delaying or preventing changes in control or management of the Company, which could adversely affect the market price of the Company's Common Stock. In addition, the Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. 6 YEAR 2000 COMPLIANCE. - ---------------------- Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. The Company's current products, to the extent they have the capability to process date-related information, were designed to be Year 2000 compliant; in other words, the products were designed to manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results relating to such dates. There can be no assurance that systems operated by third parties that interface with or contain the Company's products will timely achieve Year 2000 compliance. Any failure of these third parties' systems to timely achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes it has identified substantially all of the major information systems used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption of its business. The Company had already modified, upgraded and replaced systems that had been identified as potentially being adversely affected at the end of year 1999. The Company depends on third party suppliers for the manufacturing of its products. The Company has been gathering information from, and is communicating with, these suppliers and, to the extent possible, has resolved issues involving the Year 2000 problem. However, the Company has limited or no control over the actions of its suppliers. Therefore, the Company cannot guarantee that its manufacturing services suppliers will resolve any or all Year 2000 problems with their systems before the occurrence of a material disruption to their businesses. Any failure of these suppliers to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition or operating results. The Company has developed contingency plans to be implemented as part of its efforts to identify and correct Year 2000 problems affecting its internal systems. Depending on the systems affected, these plans include (a) accelerated replacement of affected equipment or software; (b) increased work hours; and (c) other similar approaches. If the Company is required to implement any of these contingency plans, such plans could have a material adverse effect on its business, financial condition or operating results. PRODUCTS The Company designs, markets, sells and supports innovative communications controller solutions for the global communications marketplace. The Company offers three principal lines of products: Highwire, WanXL and VMEbus. All three families offer a variety of intelligent communications controllers that enable computers to exchange data across networks. Highwire Products. The Highwire products are focused on providing communications solutions to the telecommunications applications market. The telecommunications applications market is characterized as an Intelligent Network. The Intelligent Network (IN) utilizes out of band signaling to provide the basis for virtually all new telecommunications services. The IN 7 architecture uses two separate but parallel paths; one to handle the voice or data traffic and a second to carry the signaling information for call set up and routing. The signaling channel utilizes a protocol called SS7 (signaling system 7). Network operators utilize the IN architecture to increase the efficiency of their networks by offloading signaling traffic onto the SS7 network, thus freeing up trunk line capacity needed for revenue generating traffic. A second generation Intelligent Network called the Advanced Intelligent Network (AIN) is used by carriers and service providers seeking to differentiate themselves by offering advanced voice and data communications services. The AIN is a network architecture and a set of standards designed to allow network operators to create, deploy and modify these services quickly and economically. AIN services represent the merging of telephony with database information through SS7 signaling. Such services include Caller ID, voice messaging, personal number calling, Service Provider Local Number Portability and customized routing and billing as well as digital wireless services such as PCS and GSM. Network operators are increasingly using SS7 networks as a source of competitive advantage to introduce new services through software changes in IN elements rather than in central office switches. The Company's Highwire products are designed to provide from 1 to 128 SS7 signaling channels per controller card and to integrate easily with the industry's leading applications providers. WanXL Client/Server WAN products. The need to collect, store, analyze and distribute information in a secure, timely and efficient manner has become an integral part of operating a successful organization. Developments in computer technology have resulted in less reliance on centralized mainframes and greater reliance on distributed computing, which has led to the computer software architecture concept of "client/server" computing systems. Client/server computing systems typically provide for a large number of desktop computers, or clients, interconnected with one, or often more than one, file server. The server provides central resources to all remote computer users and provides common services such as printing, communications and data backup and information gateways to other local or distant client/server systems. The fundamental premise of this architecture relies heavily on computer networking for both LAN interconnections for desktop-to-server communications and WAN interconnections for server-to-server communications. As a result of the growing installed base of client/server computing systems, the Company believes the market opportunity for client/server networking products is rapidly expanding. According to a recent industry study, the market for WAN access equipment was $2.8 billion in 1999, with increased demand in 2000. The Company's WanXL products are specifically targeted to meet the interconnectivity needs of client/server systems. The Company offers a family of products with one to four ports per controller with various physical connection options and software features. VMEbus Intelligent Communications Controller Products. Intelligent communications controller products are used to provide connectivity between a system such as a mini-computer or bridge/router and a local or wide area network. Communication controller products enable computers to exchange data in much the same way as the telephone system allows people to converse with one another. As computers become more pervasive in all areas of society, computer users are demanding greater productivity, efficiency and lower costs in their 8 computer systems, which has led to the sharing of databases, software applications and computer peripheral equipment. Communications controllers have become a central component to connecting networks and computers to deliver information more efficiently. The Company's VMEbus communications products target all four major protocol communications technologies for each of the bus architectures: Fiber Distributed Data Interface (FDDI), Token Ring, Ethernet and high-speed serial communications. The latter is a growing wide-area networking technology that enables computers to talk to one another using telephone lines. FDDI, Token Ring and Ethernet are local area networking technologies that offer a wide range of speed and reliability options. The Company's strategy for its intelligent controller products is to expand its offerings to more segments of the market by adding software interfaces, improved performance and new technologies that will provide lower-cost solutions for high-speed, high-volume communication applications. Other Products - --------------- Single-Board Computer Products. The Company supplies high-performance single-board computers (SBC) for Multibus*foot1 Multibus is a Trademark of Intel Corporation. and VMEbus architectures. An SBC manages and processes the data that passes between the boards within a computer system. The Company's SBC products provide a high-speed interface for linking to peripherals and intelligent I/O controllers that accommodate plug-on modules for many industrial applications. Integrated Circuits. The Company has designed a number of proprietary integrated circuits that are used on many SBE products. The Company has a small group of customers that purchase some of these proprietary chips for their applications. The Company is not actively pursuing this line of business. Custom Products. The Company has developed several products specifically for single customer applications. These products typically have proprietary functions that meet specific application needs of the customer. The Company does not seek new custom relationships unless the products have significant sales potential. Software Products. The Company supplies software products that operate various communications protocols for certain communications controller products including X.25 for serial communications, SMT (Station Management) for FDDI and TCP/IP for Ethernet applications. Real-time operating systems for Motorola's 68000 family are also supported. The Company's software products are principally bundled with the hardware platform based upon the customer's application requirement. The following table shows sales by major product type as a percentage of net sales for fiscal 1999, 1998 and 1997. - --------------- *Multibus is a Tradmark of Intel Corporation 9 Year Ended October 31, 1999 1998 1997 ------------------------------ (percentage of net sales) VME Communication Controllers 92% 80% 72% WanXL products 3 4 14 Single Board Computer 4 5 3 Integrated Circuits -- 6 1 Other 1 5 10 ---- ---- ---- 100% 100% 100% ==== ==== ==== DISTRIBUTION, SALES AND MARKETING The Company primarily markets its Highwire and VMEbus intelligent communications controller products to OEMs and systems integrators. The Company sells its products both domestically and internationally using a direct sales force as well as through independent manufacturers' representatives. The Company also sells certain products directly to end users. The Company believes that its direct sales force is well suited to differentiate the Company's products from those of its competitors. The Company's product sales are concentrated among a small number of customers and, consequently, the timing of significant orders from major customers has caused and is likely to continue to cause the Company's operating results to fluctuate. See "Risk Factors-Dependence on a Limited Number of OEM Customers." The Company markets its WanXL client/server products through multiple indirect distribution channels worldwide, including distributors, manufacturers' representatives, value-added resellers and certain OEM partners. The Company actively supports its indirect channel marketing partners with its own sales and marketing organization. SBE's sales staff solicits prospective customers, provides technical advice with respect to SBE products and works closely with marketing partners to train and educate their staffs on how to sell, install and support the WanXL product line. The Company has focused its sales and marketing efforts principally in the United States, Asia and Europe. All of the Company's international sales are negotiated in U.S. dollars. The Company provides most of its distributors and resellers with product return rights for stock balancing or product evaluation. Stock balancing permits distributors to return products for credit, within specified limits and subject to purchasing additional products. The Company believes that it has adequate reserves to cover product returns although there can be no assurance that the Company will not experience significant returns in the future. The Company conducts its sales and marketing activities from its principal offices in San Ramon, California. The Company's direct sales force is based in four locations in the United States and one location in the United Kingdom. 10 RESEARCH AND DEVELOPMENT The Company's product development efforts are focused principally on its strategic businesses, telecommunications applications, client/server internetworking and VMEbus intelligent communications controllers. The Company's experience in high-speed data communication creates opportunities to leverage its engineering investments and develop additional integrated products for simpler, more innovative communications solutions for customers. The development of new internetworking products, high-performance communications controllers and communications-related software is critical to attracting new and retaining existing customers. During the past three years, the Company has developed communications products based on CPCIbus, PCIbus, VMEbus and EISA architecture. The Company has also redesigned and upgraded certain communications products to improve the products' performance and lower the products' manufacturing costs. In addition, the Company has acquired or licensed certain hardware products that have been integrated principally through the addition of software into the Company's product line. During fiscal 1999, the Company focused the majority of its development efforts on the Highwire product line, and it expects to continue Highwire development, while also developing other new product platforms, in fiscal 2000. Information relating to accounting for research and development costs is included in Note 1 of Notes to Consolidated Financial Statements. Also see the section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANUFACTURING The Company does not use raw materials in any of its products or production activity. Products are constructed from components that are generally available as needed from a variety of suppliers. The Company believes that it currently possesses adequate supply channels. An interruption in its existing supplier relationships or delays by some suppliers could result in production delays and may have a material adverse effect on the Company's operations. Certain parts used in the Company's products are purchased from Motorola. See "Risk Factors-Dependence on Key Suppliers." The Company believes these components will become available from alternative suppliers over time. Although the Company has rarely experienced any significant problems in obtaining sole-source components, the Company has sought to establish a close relationship with sole-source suppliers and, if necessary, build up an inventory of such components. In December 1996, the Company sold all of its manufacturing assets and entered into a contract manufacturing agreement with XeTel to supply manufacturing services. The Company believes that XeTel has been able to provide lower prices and a more efficient and timely product delivery than the Company could produce with its previous manufacturing resources. 11 COMPETITION The market for telecommunications and client/server access products is highly competitive. Many of the Company's competitors have greater financial resources and are more established than the Company. Competition within the telecommunications market is fragmented principally by application segment. The Company's Highwire products compete with offerings from Radisys, Performance Technology, Artesyn, SBS Technology and Adax along with various other platform and controller products providers. The Company's VMEbus and WanXL communications controller products compete primarily with products from Digi International, Motorola, Interphase Corp., CMC, a Rockwell Company, Themis Computers, Performance Technologies and various other companies on a product-by-product basis. To compete in this market the Company emphasizes the functionality, support, quality and price of its product in relation to its competitors as well as the Company's ability to customize the product or software to exactly meet the customer's needs. Additionally, the Company competes with the internal engineering resources of its customers. As its customers become successful with their products, they examine methods to reduce costs and integrate functions. To compete with the internal engineering resources of its customers, the Company works jointly with their engineering staffs to understand its customers' system requirements and to anticipate product needs. INTELLECTUAL PROPERTY The Company believes that its future success will depend principally on its continuing product innovation, sales, marketing and technical expertise, product support and customer relations. The Company also believes that it needs to protect the proprietary technology contained in its products. The Company does not currently hold any patents and relies on a combination of copyright, trademark, trade secret laws and contractual provisions to establish and protect proprietary rights in its products. The Company typically enters into confidentiality agreements with its employees, strategic partners, Channel Partners and suppliers and limits access to the distribution of its proprietary information. BACKLOG On December 31, 1999 the Company had a backlog of orders of approximately $6.9 million for shipment within the next 12 months. On December 31, 1998 the Company had a backlog of orders of approximately $4.4 million for shipment within the next 12 months. Because recorded sales orders are subject to changes in customer delivery schedules, cancellation, or price changes, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding fiscal period and is not considered firm. EMPLOYEES On January 3, 2000 the Company had 71 employees. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages. The Company believes its employee relations are good. The Company believes that the Company's future success will depend, in part, on its ability to attract and retain qualified technical (particularly 12 engineering), marketing and management personnel. Such experienced personnel are in great demand, and the Company must compete for their services with other firms, many of which have greater financial resources than the Company. ITEM 2. PROPERTIES The Company's engineering and administrative headquarters are located in 63,000 square feet of leased space in a building located in San Ramon, California. The lease expires in 2006. The Company expects that the facility will satisfy its anticipated needs through the foreseeable future. In December 1996, in conjunction with the sale of all of the Company's manufacturing assets, the Company subleased approximately 24,000 square feet of this space to XeTel for a four-year term with an option to renew for an additional five years. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER MATTERS Fiscal quarter ended ---------------------------------------------- 1999 January 31 April 30 July 31 October 31 - ------------------------------------------------------------------------- High $ 9.00 $ 8.50 $ 6.50 $ 5.06 Low 6.63 4.19 4.63 3.50 1998 High $ 15.88 $ 8.50 $ 6.50 $ 6.63 Low 7.00 6.25 3.13 2.88 The Company's common stock is quoted on the Nasdaq National Market under the symbol SBEI. The above table sets forth the high and low bid prices for 1999 and 1998 for the quarters indicated. The Company has not paid cash dividends on its common stock and anticipates that for the foreseeable future it would retain earnings for use in its business. As of December 31, 1999, the Company had 676 named stockholders of record. ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except for per share amounts and number of employees) For years ended October 31, and at October 31 1999 1998 1997 1996 1995 - --------------------------------- ------- ------- ------- --------- --------- Net sales $18,022 $18,985 $24,970 $ 13,350 $ 19,368 Net income (loss) $ 52 $ 380 $ 3,333 ($9,625) ($4,568) Net income (loss) per share $ 0.05 $ 0.13 $ 1.23 ($4.51) ($2.22) Product research and development $ 4,634 $ 3,592 $ 2,808 $ 5,084 $ 6,900 Working capital $ 7,102 $ 7,609 $ 7,492 $ 2,049 $ 7,644 Total assets $10,480 $11,183 $11,269 $ 7,894 $ 14,978 Long-term obligations $ 503 $ 631 $ 925 $ 757 $ 1,218 Stockholders' equity $ 8,490 $ 8,534 $ 7,966 $ 3,981 $ 12,108 Shares outstanding 2,895 2,680 2,641 2,233 2,074 Number of employees 68 64 80 92 173
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and the section entitled "Item 1-Business" (particularly "Item 1-Business-Risk Factors"). The Company's business is characterized by a concentration of sales to a small number of customers and consequently the timing of significant orders from major customers and their product cycles causes fluctuations in the Company's operating results. See "Item 1-Business-Risk Factors-Dependence on Limited Number of OEM Customers." The Company is attempting to diversify its sales with the introduction of new products that are targeted at large growing markets such as telecommunications and client/server. The Company's Highwire products are focused on the telecommunications applications market and the significant increases in communications activity that are driven by the convergence of traditional telephony applications with the Internet. While the Company believes the market for the Highwire product family is large, there can be no assurance that the Company will be able to succeed in penetrating this market and diversifying its sales. See "Item 1-Business-Risk Factors-Future Success Dependent on New Product Lines." RESULTS OF OPERATIONS The following table sets forth, as a percentage of net sales, certain consolidated statements of operations data for the fiscal years ended October 31, 1999, 1998 and 1997. These operating results are not necessarily indicative of Company's operating results for any future period. YEAR ENDED OCTOBER 31, ---------------------- 1999 1998 1997 Net sales 100% 100% 100% Cost of sales 37 40 49 ----- ----- ----- Gross profit 63 60 51 Operating expenses: Product research and development 26 19 11 Sales and marketing 22 23 15 General and administrative 16 17 15 ----- ----- ----- Total operating expenses 63 59 41 ----- ----- ----- Operating income 0 1 10 Gain on sale of assets --- --- 3 Interest and other expense, net 1 1 --- ----- ----- ----- Income before taxes 1 2 13 Income tax provision --- --- --- ----- ----- ----- Net income 1 % 2% 13% ===== ===== ===== 15 NET SALES Net sales for fiscal 1999 were $18.0 million, a five percent decrease from fiscal 1998. Net sales for fiscal 1998 were $19.0 million, a 24 percent decrease from fiscal 1997. The decrease from fiscal 1998 to fiscal 1999 was primarily attributable to lower sales of VMEbus and Integrated Circuit products. The decrease from fiscal 1997 to fiscal 1998 was primarily attributable to lower sales of WanXL and VMEbus products and lower sales to integrators that distribute product primarily in Asia. Sales to individual customers in excess of 10 percent of net sales of the Company included net sales to Compaq of $12.6 million in fiscal 1999; net sales to Compaq and Motorola of $9.4 million and $2.8 million, respectively, in fiscal 1998; and net sales to Compaq, Motorola, and Silicon Graphics of $8.8 million, $3.8 million and $3.0 million, respectively, in fiscal 1997. Net sales to Motorola were $500,000 in fiscal 1999. Net sales to Silicon Graphics were $200,000 and $100,000 in fiscal 1998 and 1999, respectively. The Company expects to continue to experience fluctuation in product sales as large customers' needs change. See "Item 1-Business-Risk Factors-Dependence on a Limited Number of OEM Customers." International sales constituted 4 percent, 5 percent and 12 percent of net sales in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The decrease in international sales from fiscal 1997 is primarily attributable to lower demand in Asia. GROSS PROFIT Gross profit as a percentage of sales was 63 percent, 60 percent and 51 percent in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The increase from fiscal 1998 to fiscal 1999 was primarily attributable to lower material costs and improved operational efficiencies. The increase from fiscal 1997 to fiscal 1998 was primarily attributable to discontinuance of low-margin netXpand products and improved operational efficiencies. PRODUCT RESEARCH AND DEVELOPMENT Product research and development expenses were $4.6 million in fiscal 1999, $3.6 million in fiscal 1998 and $2.8 million in fiscal 1997, representing 26 percent, 19 percent and 11 percent of sales, respectively. The increase in research and development spending from fiscal 1998 to fiscal 1999 was a result of higher spending on new telecommunications product development. The increase in research and development spending from fiscal 1997 to fiscal 1998 was due to expanded software development programs for the WanXL product line. The Company expects that product research and development expenses will increase from fiscal 1999 levels as the Company focuses its resources on developing new telecommunications product offerings and enhancing its traditional board-level products. See "Item 1-Business-Risk Factors-Future Success Dependent on New Product Lines; -Rapid Technological Change; -Ongoing Product Development Requirements." The Company capitalized no internal software development costs in fiscal 1999, fiscal 1998 or fiscal 1997. All previously capitalized software development costs have been fully amortized. SALES AND MARKETING Sales and marketing expenses for fiscal 1999 were $3.9 million, down 8 percent from $4.3 million in fiscal 1998. This decrease was due to lower marketing 16 program costs for advertising and tradeshows. Sales and marketing expenses for fiscal 1997 were $3.8 million. The increase from fiscal 1997 to fiscal 1998 was due to expanded marketing programs and the establishment of an UK branch office. The Company expects sales and marketing expenses, as new products are announced, will increase slightly as a percentage of total sales from fiscal 1999 levels for the foreseeable future. GENERAL AND ADMINISTRATIVE General and administrative expenses for fiscal 1999 decreased 14 percent from $3.3 million in fiscal 1998 to $2.8 million. General and administrative expenses for fiscal 1998 decreased 11 percent from $3.7 million in fiscal 1997. The decrease from fiscal 1998 to fiscal 1999 was a result of lower outside costs and continued expense control efforts. The decrease from fiscal 1997 to fiscal 1998 represents lower variable expenses for profit sharing and bonuses. INTEREST AND OTHER INCOME, NET Interest income increased in fiscal 1999 from fiscal 1998 due to higher cash balances in fiscal 1999. Interest income decreased in fiscal 1998 from fiscal 1997 due to lower cash balances in fiscal 1998. Interest expense remained constant from fiscal 1998 to fiscal 1999. Interest expense for fiscal 1998 decreased from fiscal 1997 due to the repayment of borrowings in fiscal 1997. INCOME TAXES The Company recorded tax provisions of $1,600 and $31,600 in fiscal 1999 and fiscal 1998, respectively. The Company recorded a tax benefit of $82,000 in fiscal 1997 due to the application of certain credits to prior year returns. The Company's effective tax rate was 1 percent and 7 percent in fiscal 1999 and 1998, respectively. The Company has recorded a valuation allowance in fiscal 1999, 1998 and 1997 for certain deferred tax assets due to the uncertainty of realization. This valuation allowance increased from approximately $3.9 million in fiscal 1998 to $4.1 million in fiscal 1999. In the event of future taxable income, the Company's effective income tax rate in future periods could be lower than the statutory rate as such tax assets are realized. NET INCOME As a result of the factors discussed above, the Company recorded net income of $151,000, $380,000 and $3.3 million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $3.3 million and $3.4 million on October 31, 1999 and October 31, 1998, respectively. In fiscal 1999, $1.3 million of cash was provided by operating activities, principally as a result of a $547,000 decrease in accounts receivable, a $237,000 decrease in inventories and a $119,000 decrease in other assets, along with a $151,000 net income and $780,000 of non cash depreciation and amortization charges. These increases in cash were offset by a $440,000 decrease in trade accounts payable, a $93,000 decrease in other current liabilities, and a $46,000 decrease in non current liabilities. Working capital at October 31, 1999 was $7.1 million, as compared to $7.6 million at October 31, 1998. In fiscal 1999 the Company purchased $847,000 of fixed assets, consisting 17 primarily of an enterprise resource planning system, computers, and engineering equipment, and purchased $268,000 of capitalized software. The Company expects capital expenditures during fiscal 2000 to approximate the same level as fiscal 1999. The Company received $164,000 in fiscal 1999 from employee stock option exercises and stock purchase plan purchases, a decrease of 13 percent from fiscal 1998 amounts. In fiscal 1999, the Company made a loan to an officer and stockholder in the amount of $743,800 under a two-year recourse promissory note bearing an interest rate of 4.47 percent and collateralized by 145,313 shares of Common Stock of the Company. The loan was used to pay for the exercise of 139,400 shares of Company stock options and related taxes. In May 1999, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company's issued and outstanding common stock. The Company repurchased 74,500 shares of its common stock in the open market for an aggregate purchase price of $358,000 in fiscal 1999. Repurchases may be made from time to time, subject to prevailing conditions, in the open market or in privately negotiated transactions. Based on the current operating plan, the Company anticipates that its current cash balances, cash flow from operations and credit facilities will be sufficient to meet its working capital needs in the foreseeable future. YEAR 2000 COMPLIANCE Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, those programs could cause date-related transaction failures. The Company's current products, to the extent they have the capability to process date-related information, were designed to be Year 2000 compliant; in other words, the products were designed to manage and manipulate data involving the transition of dates from 1999 to 2000 without functional or data abnormality and without inaccurate results relating to such dates. There can be no assurance that systems operated by third parties that interface with or contain the Company's products will timely achieve Year 2000 compliance. Any failure of these third parties' systems to timely achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes it has identified substantially all of the major information systems used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption of its business. The Company had already modified, upgraded and replaced systems that had been identified as potentially being adversely affected at the end of year 1999. The Company depends on third party suppliers for the manufacturing of its products. The Company has been gathering information from, and is communicating with, these suppliers and, to the extent possible, has resolved issues involving the Year 2000 problem. However, the Company has limited or no control over the actions of its suppliers. Therefore, the Company cannot guarantee that its manufacturing services suppliers will resolve any or all Year 2000 problems with their systems before the occurrence of a material disruption to their 18 businesses. Any failure of these suppliers to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition or operating results. The Company has developed contingency plans to be implemented as part of its efforts to identify and correct Year 2000 problems affecting its internal systems. Depending on the systems affected, these plans include (a) accelerated replacement of affected equipment or software; (b) increased work hours; and (c) other similar approaches. If the Company is required to implement any of these contingency plans, such plans could have a material adverse effect on its business, financial condition or operating results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's cash and cash equivalents are subject to interest rate risk. The Company invests primarily on a short-term basis. The Company's financial Instrument holdings at October 31, 1999 were analyzed to determine their sensitivity to interest rate changes. The fair values of these instruments were determined by net present values. In our sensitivity analysis, the same change in interest rate was used for all maturities and all other factors were held constant. If interest rates increased by 10%, the expected effect on net income related to the Company's financial instruments would be immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required under Item 8 are provided under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of Directors; Section 16(a) Beneficial Ownership Reporting Compliance - ------------------------------------------------------------------------- The information called for by Item 10 concerning the Company's directors is incorporated by reference from the information in the section entitled "Election of Directors" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on March 21, 2000 (the "2000 Proxy Statement"). The information called for by Item 10 concerning the compliance of certain persons with the beneficial ownership reporting requirements of Section 16(a) of the Act is incorporated by reference from the information in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the 2000 Proxy Statement. Identification of Executive Officers - --------------------------------------- The executive officers of the Company and their respective ages and positions with the Company are set forth in the following table. Executive officers serve at the discretion of the Board of Directors. There are no family relationships between a director or executive officer and any other director or executive officer of the Company. Name Age Position - -------------------- --- ---------------------------------------- William B. Heye, Jr. 61 President and Chief Executive Officer Timothy J. Repp 39 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Michael R. Coker 46 Vice President, Sales David Schaetzel 43 Vice President, Engineering Mr. Heye has served as President, Chief Executive Officer, and a director of the Company since November 1991. From 1989 to November 1991, he served as Executive Vice President of Ampex Corporation, a manufacturer of high-performance scanning recording systems, and President of Ampex Video Systems Corporation, a wholly-owned subsidiary of Ampex Corporation and a manufacturer of professional video recorders and editing systems for the television industry. From 1986 to 1989, Mr. Heye served as Executive Vice President of Airborn, Inc., a manufacturer of components for the aerospace and military markets. Prior to 1986, Mr. Heye served in various senior management positions at Texas Instruments, Inc. in the United States and overseas, including Vice President and General Manager of Consumer Products and President of Texas Instruments Asia, Ltd., with headquarters in Tokyo, Japan. Mr. Repp has served as Secretary of the Company since December 1996 and as Vice President, Finance, Chief Financial Officer and Treasurer since January 1992. 20 He joined the Company in January 1991 as Controller. From 1987 until 1990, he was assistant controller at Grubb and Ellis, a national real estate firm, and prior to 1987 he was an audit manager at Coopers & Lybrand (now PricewaterhouseCoopers LLP), an international professional services firm. Mr. Coker has been Vice President, Sales since December 1998. He joined the Company as Vice President, Sales in March 1996. From October 1996 to December 1998, he was Vice President, Sales and Marketing. From January 1993 to February 1996, he was President and Chief Executive Officer of Syskonnect, a provider of networking communication equipment. From October 1983 to December of 1993, Mr. Coker served in various senior management positions, including Vice President of International Sales, Vice President, Marketing and Director of Marketing at Vitalink, a provider of routers, bridges and networking products. Mr. Schaetzel has been Vice President, Engineering since June 1999. He joined the Company as a Hardware Engineer in August 1997 and has served in various engineering management positions since then. From 1994 to June 1997, Mr. Schaetzel was an executive of Woodward Governor Co., a manufacturer of engine control systems. From 1992 to 1994, he was a consultant in microelectronics design, development and manufacturing. Prior to 1992, he was a manager at TRW, a manufacturer of electronic products. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference from the information in the section entitled "Executive Compensation" appearing in the 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated by reference from the information in the section entitled "Security Ownership of Certain Beneficial Owners and Management" appearing in the 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is incorporated by reference from the information in the section entitled "Certain Transactions" appearing in the 2000 Proxy Statement. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Report: (a) Financial Statements -------------------- Page ---- Report of Independent Accountants 26 Consolidated Balance Sheets at October 31, 1999 and 1998 27 Consolidated Statements of Operations for fiscal years 1999, 1998 and 1997 28 Consolidated Statements of Stockholders' Equity for fiscal years 1999, 1998 and 1997 29 Consolidated Statements of Cash Flows for fiscal years 1999, 1998 and 1997 30 Notes to Consolidated Financial Statements 31 (b) Financial Statement Schedule ---------------------------- Schedule II - Valuation and Qualifying Accounts 42 All other schedules are omitted as the required information is not applicable or has been included in the consolidated financial statements or the notes thereto. 22 (c) Exhibits Exhibit Sequential Number Description Page No. ------ ----------- ---------- (e) 3.1 Certificate of Incorporation, as amended through December 15, 1997 --- (i) 3.2 Bylaws, as amended through December 8, 1998 --- (f) 10.1 1996 Stock Option Plan, as amended --- (a) 10.2 1991 Non-Employee Directors' Stock Option Plan, as amended --- (h) 10.3 1992 Employee Stock Purchase Plan, as amended --- (g) 10.4 1998 Non-Officer Stock Option Plan --- (b) 10.5 Lease for 4550 Norris Canyon Road, San Ramon, California dated November 2, 1992 between the Company and PacTel Properties --- (c) 10.6 Amendment dated June 6, 1995 to lease for 4550 Norris Canyon Road, San Ramon, California, between the Company and CalProp L.P. (assignee of PacTel Properties) --- (d) 10.7 Asset Purchase Agreement between XeTel Corporation and the Company dated as of December 6, 1996 --- (e) 10.8 Letter of agreement to provide credit facilities between the Company and Comerica Bank - California, dated August 26, 1997 --- (i) 10.9 Full Recourse Promissory Note executed by William B. Heye, Jr. in favor of the Company dated November 6, 1998 --- 11.1 Statement re computation of per share earnings 43 23.1 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants 44 27.1 Financial Data Schedule 45 (d) REPORTS ON FORM 8-K No report on Form 8-K was filed by the Company during the quarter Ended October 31, 1999. 23 Explanations for letter footnotes: - ---------------------------------- (a) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1991 and incorporated herein by reference. (b) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1993 and incorporated herein by reference. (c) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1995 and incorporated herein by reference. (d) Filed as an exhibit to the report on Form 8-K dated December 6, 1996 and incorporated herein by reference. (e) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1997 and incorporated herein by reference. (f) Filed as an exhibit to Form S-8 dated September 15, 1998 and incorporated herein by reference. (g) Filed as an exhibit to Form S-8 dated October 16, 1998 and incorporated herein by reference. (h) Filed as an exhibit to Form S-8 dated November 24, 1998 and incorporated herein by reference. (i) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1998 and incorporated herein by reference. 24 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SBE, Inc. (Registrant) Dated: January 31, 2000 By: /s/ Timothy J. Repp ------------------- Timothy J. Repp Chief Financial Officer and Vice President, Finance Pursuant to the requirements for the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities indicated, as of January 31, 2000. Signature Title --------- ----- /s/ William B. Heye, Jr. - ------------------------ William B. Heye Jr. Chief Executive Officer and President (Principal Executive Officer) /s/ Timothy J. Repp - ------------------- Timothy J. Repp Chief Financial Officer, Vice President, Finance, Secretary (Principal Financial And Accounting Officer) /s/ Raimon L. Conlisk - --------------------- Raimon L. Conlisk Director, Chairman of the Board /s/ Randall L-W. Caudill - ------------------------ Randall L-W. Caudill Director /s/ Ronald J. Ritchie - --------------------- Ronald J. Ritchie Director 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of SBE, Inc. and Subsidiary: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) present fairly, in all material respects, the financial position of SBE, Inc. and subsidiary as of October 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(b) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial state-ments, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reason-able basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP November 23, 1999 San Francisco, California 26
SBE, INC. CONSOLIDATED BALANCE SHEETS October 31 1999 1998 - -------------------------------------------------------------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,325,741 $ 3,381,021 Trade accounts receivable, net 3,290,216 3,836,916 Inventories 1,517,290 1,753,771 Deferred income taxes 158,000 239,986 Other 298,032 416,576 ------------ ------------ Total current assets 8,589,279 9,628,270 Property, plant and equipment, net 1,512,518 1,330,476 Capitalized software costs, net 338,300 185,084 Other 39,450 39,450 ------------ ------------ Total assets $10,479,547 $11,183,280 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 935,393 $ 1,374,569 Accrued payroll and employee benefits 320,353 321,049 Accrued product warranties 101,049 207,444 Other 129,775 115,935 ------------ ------------ Total current liabilities 1,486,550 2,018,997 Deferred tax liabilities 158,000 239,986 Deferred rent 344,808 390,747 ------------ ------------ Total liabilities 1,989,358 2,649,730 ------------ ------------ Commitments and Contingencies (Note 7 and 11). Stockholders' equity: Common stock and additional paid-in capital ($0.001 par value); authorized 10,000,000 shares; issued and outstanding 2,894,805 and 2,680,414 shares at October 31, 1999 and 1998, respectively 10,923,509 10,016,181 Note receivable from stockholder (743,800) --- Treasury stock (358,312) --- Accumulated deficit (1,331,208) (1,482,631) ------------ ------------ Total stockholders' equity 8,490,189 8,533,550 ------------ ------------ Total liabilities and stockholders' equity $10,479,547 $11,183,280 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
27
SBE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended October 31 1999 1998 1997 - ------------------------------------ ------------ ------------ ------------ Net sales $18,021,512 $18,985,054 $24,970,427 Cost of sales 6,687,975 7,518,068 12,151,883 ------------ ------------ ------------ Gross profit 11,333,537 11,466,986 12,818,544 Product research and development 4,633,502 3,591,962 2,807,872 Sales and marketing 3,949,527 4,295,030 3,833,801 General and administrative 2,820,495 3,268,098 3,686,890 ------------ ------------ ------------ Total expenses 11,403,524 11,155,090 10,328,563 Operating (loss) income (69,987) 311,896 2,489,981 Gain on sale of assets --- --- 684,502 Interest income 223,363 100,405 101,546 Interest expense (352) (352) (24,858) ------------ ------------ ------------ Income before income taxes 153,023 411,949 3,251,171 Provision (benefit) for income taxes 1,600 31,600 (82,010) ------------ ------------ ------------ Net income $ 151,423 $ 380,349 $ 3,333,181 Basic earnings per common share $ 0.05 $ 0.14 $ 1.33 ============ ============ ============ Diluted earnings per common share $ 0.05 $ 0.13 $ 1.23 ============ ============ ============ Basic - Shares used in per share computations 2,849,349 2,666,707 2,501,786 ============ ============ ============ Diluted - Shares used in per share computations 2,908,613 2,890,740 2,703,423 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
28
SBE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock and Preferred Stock Additional Paid-in Capital Notes Receivable Shares Amount Shares Amount from Stockholder --------- ---------- ----------- ------------ ----------------- Balance, October 31, 1996 113 $ 750,460 2,232,881 $ 8,426,315 --- Stock retired/issued in connection with conversion to common stock (113) (750,460) 240,083 750,460 --- Stock issued in connection with exercise of stock warrants --- --- 42,539 --- --- Stock issued in connection with dividend on converted preferred shares --- --- 8,836 31,558 --- Stock issued in connection with stock option plans --- --- 102,588 570,988 --- Stock issued in connection with stock purchase plan --- --- 13,612 49,516 --- Net income --- --- --- --- --- --------- ---------- ----------- ------------ ----------------- Balance, October 31, 1997 --- --- 2,640,539 9,828,837 --- Stock issued in connection with stock option plans --- --- 20,325 100,908 --- Stock issued in connection with stock purchase plan --- --- 19,550 86,436 --- Net income --- --- --- --- --- --------- ---------- ----------- ------------ ----------------- Balance, October 31, 1998 --- --- 2,680,414 10,016,181 --- Stock issued in connection with stock option plans --- --- 194,750 833,446 --- Stock issued in connection with stock purchase plan --- --- 19,641 73,882 --- Stock repurchase --- --- --- --- --- Note receivable from stockholder --- --- --- --- $ (743,800) Net income --- --- --- --- --- --------- ---------- ----------- ------------ ----------------- Balance, October 31, 1999 --- $ --- 2,894,805 $10,923,509 $ (743,800) ========= ========== =========== ============ ================= Treasury Stock Accumulated Shares Amount Deficit Total -------- ---------- ------------ ------------ Balance, October 31, 1996 --- --- $(5,196,161) $ 3,980,614 Stock retired/issued in connection with conversion to common stock --- --- --- --- Stock issued in connection with exercise of stock warrants --- --- --- --- Stock issued in connection with dividend on converted preferred shares --- --- --- 31,558 Stock issued in connection with stock option plans --- --- --- 570,988 Stock issued in connection with stock purchase plan --- --- --- 49,516 Net income --- --- 3,333,181 3,333,181 -------- ---------- ------------ ------------ Balance, October 31, 1997 --- --- (1,862,980) 7,965,857 Stock issued in connection with stock option plans --- --- --- 100,908 Stock issued in connection with stock purchase plan --- --- --- 86,436 Net income --- --- 380,349 380,349 -------- ---------- ------------ ------------ Balance, October 31, 1998 --- --- (1,482,631) 8,533,550 Stock issued in connection with stock option plans --- --- --- 833,446 Stock issued in connection With stock purchase plan --- --- --- 73,882 Stock repurchase 74,500 $(358,312) --- (358,312) Note receivable from stockholder --- --- --- (743,800) Net income --- --- 151,423 151,423 -------- ---------- ------------ ------------ Balance, October 31, 1999 74,500 $(358,312) $(1,331,208) $ 8,490,189 ======== ========== ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
29
SBE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended October 31 1999 1998 1997 - -------------------------------------------------------------------- ------------ ------------ ----------- Cash flows from operating activities: Net income $ 151,423 $ 380,349 $3,333,181 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 779,821 1,020,708 1,083,274 Gain from sales of property and equipment --- --- (684,502) Costs and reserves related to sale of property and equipment --- --- (442,585) Changes in operating assets and liabilities: Decrease (increase) in trade accounts receivable 546,700 (1,056,643) (736,314) Decrease (increase) in inventories 236,481 (902,630) 1,890,215 Decrease (increase) in other assets 118,544 (258,956) (69,262) (Decrease) increase in trade accounts payable (439,176) 345,459 (55,703) (Decrease) increase in other current liabilities (93,271) (704,706) 258,099 Decrease in noncurrent liabilities (45,939) (21,134) --- ------------ ------------ ----------- Net cash provided by (used in) operating activities 1,254,583 (1,197,553) 4,576,403 ------------ ------------ ----------- Cash flows from investing activities: Capital expenditures: Purchases of property and equipment (846,829) (970,843) (290,464) Disposals of property and equipment --- --- 1,600,000 Proceeds from sale of fixed assets --- --- 1,709 Capitalized software costs (268,250) (206,800) --- ------------ ------------ ----------- Net cash (used in) provided by investing activities (1,115,079) (1,177,643) 1,311,245 ------------ ------------ ----------- Cash flows from financing activities: Repayments of borrowing on line of credit --- --- (980,340) Proceeds from stock plans 163,528 187,344 620,504 Purchase of treasury stock (358,312) --- --- ------------ ------------ ----------- Net cash (used in) provided by financing activities (194,784) 187,344 (359,836) ------------ ------------ ----------- Net (decrease) increase in cash and cash equivalents (55,280) (2,187,852) 5,527,812 Cash and cash equivalents at beginning of year 3,381,021 5,568,873 41,061 ------------ ------------ ----------- Cash and cash equivalents at end of year $ 3,325,741 $ 3,381,021 $5,568,873 ============ ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 352 $ 352 $ 24,858 ============ ============ =========== Income taxes $ 36,524 $ 121,197 $ 2,540 ============ ============ =========== SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES Conversion of preferred stock into common stock $ --- $ --- $ 750,460 ============ ============ =========== Issuance of common stock in lieu of dividend on converted preferred stock $ --- $ --- $ 31,558 ============ ============ =========== Exercise of stock options in exchange for note receivable $ 743,800 $ --- $ --- ============ ============ =========== The accompanying notes are an integral part of the consolidated financial statements.
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Segment and Basis of Presentation: SBE, Inc. and subsidiary (the Company) designs and manufactures high-performance network systems and products for world-wide distribution. The Company's business falls exclusively within one industry segment. On December 6, 1996, the Company sold all the assets of its manufacturing operation to XeTel Corporation (XeTel), a contract manufacturing company with headquarters in Austin, Texas, for $1.6 million. Additionally, the Company entered into a four-year exclusive agreement to purchase manufacturing services from XeTel and subleased a portion of its San Ramon facility to XeTel. The Company reported a gain of $685,000 net of expenses on the sale of these assets in fiscal 1997. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Use of Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include levels of reserves for doubtful accounts, obsolete inventory, warranty costs and deferred tax assets. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investments readily convertible into cash with an original maturity of three months or less upon acquisition by the Company to be cash equivalents. Substantially all of its cash and cash equivalents are held in one large financial institution. Inventories: Inventories are stated at the lower of cost, using the first-in, first-out method, or market value. Property, Plant and Equipment: Property, plant and equipment are carried at cost. The Company provides for depreciation and amortization by charges to expense, which are sufficient to 31 write off the costs of the assets over their estimated useful lives of three to eight years, on a straight-line basis. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related leases. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the recognized in operations accounts and any gain or loss on such sale or disposal is recognized in operations accounts. Maintenance, repairs and minor renewals are charged to expense as incurred. Expenditures which substantially increase an asset's useful life are capitalized. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. No such events have occurred to date. In performing the review for recoverability, the Company would estimate the future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss, if an impairment exists, would be calculated based on the excess of the carrying amount of the asset over its fair value. Capitalized Software Costs: Capitalized software costs consist of costs to purchase software and to internally develop software. Capitalization of software costs begins upon the establishment of technological feasibility. All capitalized software costs are amortized as related sales are recorded on a per-unit basis with a minimum amortization based on a straight-line method over a three-year estimated useful life. The Company evaluates the estimated net realizable value of each software product and records provisions to the asset value of each product for which the net book value is in excess of the net realizable value. Revenue Recognition and Warranty Costs: The Company records product sales at the time of product shipment. Warranty costs are not significant; however, the Company provides a reserve for estimated warranty costs at the time of sale and periodically adjusts such amounts to reflect actual expenses. The Company's sales transactions are negotiated principally in US dollars. Product Research and Development Expenditures: Product research and development (R&D) expenditures, except certain software development costs, are charged to expense as incurred. Contractual reimbursements for R&D expenditures under joint R&D contracts with customers are accounted for as a reduction of related expenses as incurred. For the years ended October 31, 1999, 1998 and 1997, direct costs incurred under R&D contracts were $6,000, $1,032 and $172,895, respectively, and reimbursements earned were $43,750, $7,250 and $338,470 , respectively. Income Taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected 32 future tax consequences of items that have been included in the consolidated financial statements or tax returns. Deferred income taxes represent future net tax effects resulting from temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded against net deferred tax assets where, in the opinion of management, realization is uncertain. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes payable for the current period. Net Earnings Per Common Share: In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share." All historical earnings per share amounts have been restated to conform to the provisions of this Statement. Basic earnings per common share for the years ended October 31, 1999, 1998 and 1997 was computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share for the years ended October 31, 1999, 1998 and 1997 was computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents relate to stock options and include 59,264, 224,033, and 201,637 shares for the years ended October 31, 1999, 1998 and 1997 respectively. Recent Accounting Pronouncements: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management does not believe this will have a material effect on the Company's operations. Implementation of this standard has recently been delayed by the FASB for a 12-month period. The Company will adopt SFAS No. 133 as required for its first quarterly filing of fiscal year 2001. Reclassifications: Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation with no effect on net income as previously reported. 2. INVENTORIES Inventories at October 31, 1999 and 1998 are comprised of the following: 1999 1998 - ------------------------ ---------- ---------- Finished goods $ 773,616 $1,656,650 Parts and materials 743,674 97,121 ---------- ---------- $1,517,290 $1,753,771 ========== ========== 33 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at October 31, 1999 and 1998 are comprised of the following: 1999 1998 - --------------------------------- ---------- ---------- Machinery and equipment $6,536,207 $5,753,540 Furniture and fixtures 1,062,264 1,015,905 Leasehold improvements 320,276 320,276 ---------- ---------- 7,918,748 7,089,721 Less accumulated depreciation and amortization 6,406,230 5,759,245 ---------- ---------- $1,512,518 $1,330,476 ========== ========== Depreciation and amortization expense totaled $664,787, $723,404 and $807,694 for the years ended October 31, 1999, 1998 and 1997, respectively. 4. CAPITALIZED SOFTWARE COSTS Capitalized software costs at October 31, 1999 and 1998 are comprised of the following: 1999 1998 - ----------------------------- ---------- ---------- Purchased software $ 584,166 $ 315,916 Internally developed software 805,333 805,333 ---------- ---------- 1,389,499 1,121,249 Less accumulated amortization 1,051,199 936,165 ---------- ---------- $ 338,300 $ 185,084 ========== ========== The Company capitalized $268,250 and $206,800 of purchased software costs in 1999 and 1998, respectively. No software costs were capitalized in 1997. Amortization of capitalized software costs totaled $115,034, $297,304 and $275,580 for the years ended October 31, 1999, 1998 and 1997, respectively. 5. STOCKHOLDERS' EQUITY On July 10, 1996 the Company issued and sold 167 shares of Series A Preferred Stock ("Series A Preferred") for net proceeds of approximately $1.1 million. The issuance of Series A Preferred was exempt, pursuant to Regulation S promulgated under the Securities Act of 1933, as amended (the "Act"), from registration requirements under the Act. As of December 4, 1996 all outstanding shares of Series A Preferred had been converted into 240,083 shares of Common Stock. In connection with the sale of the Series A Preferred, the Company issued warrants to purchase an aggregate of 93,703 shares of Common Stock with an exercise price of $8.25 per share. As of October 31, 1997, all the warrants had been exercised on a net basis, which resulted in the issuance of 42,539 shares of Common Stock. All the warrants had expired in July 1999. 34 Additionally, during fiscal 1997, the Company issued 8,836 shares of Common Stock in lieu of $31,588 of dividends due on the convertible preferred stock. On December 15, 1997, the Company reincorporated in the state of Delaware. In connection with this event, the Company increased the number of authorized shares of preferred stock to 2,000,000 shares and established a par value of $0.001 for both its common and preferred stock. On November 6, 1998 the Company made a loan to an officer and stockholder in the amount of $622,800 under a two-year recourse promissory note bearing an interest rate of 4.47 percent and collateralized by 145,313 shares of Common Stock of the Company. The loan was used to pay for the exercise of 139,400 shares of Company stock options and related taxes. On April 16, 1999 the loan was increased to $743,800. In May 1999, the Board of Directors authorized the Company to repurchase up to 100,000 shares of the Company's issued and outstanding common stock. In fiscal 1999, the Company repurchased 74,500 shares of its common stock in the open market for an aggregate purchase price of approximately $358,312. 6. INCOME TAXES The components of the provision for (benefit from) income taxes for the years Ended October 31, 1999, 1998 and 1997, are as follows: 1999 1998 1997 ------ ------- --------- Federal: Current $ --- $18,000 $(83,610) Deferred --- --- --- State: Current 1,600 13,600 1,600 Deferred --- --- --- ------ ------- --------- Total provision (benefit) for income taxes $1,600 $31,600 $(82,010) ====== ======= ========= The effective income tax rate differs from the statutory federal income tax rate for the following reasons: 1999 1998 1997 ------ ------ ------ Statutory federal income tax rate 34.0% 34.0% 34.0% State taxes, net of federal income tax benefit --- --- --- Change in valuation allowance (32.9) (26.3) (30.0) Refund of prior year taxes --- --- (5.5) Tax credits --- --- --- Nontaxable interest income --- --- --- Other, net --- --- (1.0) ------ ------ ------ 1.1% 7.7% (2.5)% ====== ====== ====== 35 Significant components of the Company's deferred tax balances as of October 31, 1999 and 1998 are as follows: 1999 1998 ------------ ------------ Deferred tax assets: Current Accrued employee benefits $ 59,000 $ 62,000 Inventory allowances 550,000 558,000 Allowance for doubtful accounts 60,000 80,000 Warranty accruals 40,000 83,000 Noncurrent Deferred rent 156,000 164,000 R&D credit carryforward 1,358,000 1,115,000 Alternative minimum tax carryforward 143,000 143,000 Operating loss carryforward 1,413,000 1,252,000 Investments 130,000 130,000 Capital loss carryforward 74,000 74,000 ------------ ------------ Total deferred tax assets 3,274,000 3,661,000 ------------ ------------ Deferred tax liabilities: Noncurrent Depreciation 9,000 48,000 Capitalized software costs 149,000 192,000 ------------ ------------ Total deferred tax liabilities 158,000 240,000 ------------ ------------ Deferred tax asset valuation allowance (4,141,000) (3,901,000) ------------ ------------ Net deferred tax assets $ --- $ --- ============ ============ A valuation allowance was established to offset certain deferred tax assets due to management's uncertainty of realizing the benefit of these items. The valuation allowance increased by $240,000 and $524,000 for the years ended October 31, 1999 and 1998, respectively. The Company has research and experimentation tax credit carryforwards of $1,358,000 for federal and state tax purposes. These carryforwards expire in the periods ending 2007 through 2014. The Company has net operating loss carryforwards for federal and state income tax purposes of approximately $3.6 million and $3.3 million, respectively, which expire in periods ending 2000 through 2019. 7. COMMITMENTS The Company leases all its buildings under noncancelable operating leases which expire at various dates through the year 2006. Future minimum lease payments under all operating leases, net of sublease proceeds, with initial or remaining noncancelable lease terms in excess of one year at October 31, 1999 are as follows: Year ending October 31: 2000 $ 424,333 2001 658,596 2002 677,717 2003 638,796 2004 638,796 Thereafter 904,961 ---------- Total minimum lease payments $3,943,199 ========== 36 Under the terms of the San Ramon, California building lease, rent includes the lessor's operating costs and is offset by sublease proceeds. The building lease also includes two five-year renewal options at market rates as defined by the lease. Rent expense under all operating leases for the years ended October 31, 1999, 1998 and 1997 was $588,734 (net of sublease proceeds of $360,000), $657,142 (net of sublease proceeds of $363,750) and $664,409 (net of sublease proceeds of $328,911), respectively. The Company is committed to purchase $2.7 million of electronics components from a vendor before February, 2000. As of October 31, 1999, the Company had purchased $469,000 of components from the vendor. 8. STOCK OPTION AND STOCK PURCHASE PLANS The Company has two employee stock option plans, the 1996 Stock Option Plan (the 1996 Plan) and the 1998 Non-Officer Stock Option Plan (the 1998 Plan). Originally adopted as the 1987 Supplemental Stock Option Plan, the 1996 Plan was amended and restated on January 18, 1996 and retitled the 1996 Stock Option Plan. A total of 1,330,000 shares of common stock are reserved under the 1996 Plan. The Company's Board of Directors adopted the 1998 Plan on June 15, 1998. A total of 300,000 shares of common stock are reserved under the 1998 Plan. Stock options granted under the 1996 and 1998 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over this period and have exercise prices reflecting market value at the date of grant. In July 1998, due to the reduced market price of the Company's common stock, the Company offered employees the opportunity to cancel their existing options under the 1996 Plan and have the options reissued under the 1998 Plan at a price of $5.125. The new options retain their original vesting periods but carry restrictions of certain rights that had existed under the original option grants. Additionally, in 1991, stockholders approved a "Non-Employee Director Stock Option Plan." A total of 140,000 shares of common stock are reserved for issuance under this plan. Options granted under this plan vest over a four-year period, expire five years after the date of grant and have exercise prices reflecting market value at the date of grant. At October 31, 1999 and 1998, 286,245 and 326,470 shares, respectively, were available for stock option grants under the 1996 Plan. A total of 64,200 and 100,300 shares were available for grant under the 1998 Plan at October 31, 1999 and 1998, respectively. A total of 65,750 and 52,000 shares were available for grant under the Non-Employee Director Plan at October 31, 1999 and 1998, respectively. 37 A summary of the activity under the stock option plans is set forth below: Weighted Average Number of Price Per Aggregate Exercise Shares Share Price Price --------------- -------------- ------------ --------- [S] [C] [C] [C] [C] Outstanding at October 31, 1996 842,200 $4.13 -$13.00 5,545,900 $ 6.59 Granted 222,100 3.69 - 17.25 1,296,903 5.84 Terminated (245,937) 3.75 - 13.50 (1,952,804) 7.94 Exercised (102,588) 4.38 - 9.75 (571,011) 5.57 --------------- -------------- ------------ --------- Outstanding at October 31, 1997 715,775 3.69 - 17.25 4,318,988 6.03 Granted 453,650 3.44 - 15.50 3,436,502 7.58 Terminated (324,100) 3.69 - 17.25 (2,838,040) 8.76 Exercised (20,325) 3.69 - 8.93 (100,908) 4.96 --------------- -------------- ------------ --------- Outstanding at October 31, 1998 825,000 3.44 - 13.00 4,816,541 5.84 Granted 418,500 3.50 - 8.63 2,808,974 6.71 Terminated (255,925) 3.44 - 9.50 (1,386,797) 5.42 Exercised (194,750) 3.69 - 5.13 (833,446) 4.28 --------------- -------------- ------------ --------- Outstanding at October 31, 1999 792,825 3.50 - 13.00 5,405,272 6.82 =============== ============ Exercisable at October 31, 1999 266,233 $3.63 - $13.00 $ 1,669,993 $ 6.27 =============== ============ 38 The following table summarizes information with respect to stock options outstanding at October 31, 1999: Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Life Exercise Exercisable Exercise Exercise Price at 10/31/99 (years) Price at 10/31/999 Price - -------------- ----------- ----------------- -------- ------------ -------- [S] [C] [C] [C] [C] [C] $3.45 - $5.18 369,475 4.6 $4.72 171,433 $ 4.67 5.18 - 6.90 77,750 5.5 5.60 21,675 5.37 6.90 - 8.63 238,100 5.5 7.99 27,500 7.97 8.63 - 10.35 5,000 0.4 9.50 5,000 9.50 10.35 - 12.08 22,500 3.1 10.50 16,875 10.50 12.08 - 13.00 80,000 5.1 13.00 23,750 13.00 ----------- -------- 792,825 266,233 =========== ======== The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which 200,000 shares of common stock have been reserved for issuance. The Purchase Plan allows participating employees to purchase, through payroll deductions, shares of the Company's common stock at 85 percent of the stock's fair market value at specified dates. At October 31, 1999, 68 employees were eligible to participate in the Purchase Plan and 80,446 shares were available for issuance. In fiscal year 1999, 1998 and 1997, 19,641, 19,550 and 13,612 shares were issued under the Purchase Plan, respectively. In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company accounts for stock options under its three plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined pursuant to the provisions of SFAS No. 123, the Company's pro forma net income (loss) would have been as follows: Years ended October 31 1999 1998 1997 ------------ ---------- ---------- Pro forma net (loss) income $(1,241,358) $(983,566) $2,516,518 Pro forma net (loss) income per share $ (0.43) $ (0.37) $ 0.93 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: Options granted in years ended October 31 1999 1998 1997 ------ ------ ------ Expected life (in years) 5.00 5.00 6.45 Risk-free interest rate 6.00% 4.50% 7.00% Volatility 92.00% 91.00% 93.41% Dividend yield 0.00% 0.00% 0.00% The weighted average estimated fair value of each option granted during fiscal 1999, 1998 and 1997 was $4.99, $7.53 and $5.32, respectively. 39 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to November 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 9. EMPLOYEE SAVINGS AND INVESTMENT PLAN The Company contributes a percentage of income before income taxes into an employee savings and investment plan. The percentage is determined annually by the Board of Directors. These contributions are payable annually, vest over five years and cover substantially all employees who have been with the Company at least one year. Additionally, the Company makes matching payments to the employee savings and investment plan of 50 percent of each employee's contribution up to three percent of employees' earnings. For the years ended October 31, 1999, 1998 and 1997, total expense under the above plan was $121,530, $173,847 and $279,899, respectively. 10. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company's trade accounts receivable are concentrated among a small number of customers, principally located in the United States. Two customers accounted for 52 and 16 percent, respectively, of total accounts receivable at October 31, 1999, and one customer accounted for 80 percent of total accounts receivable at October 31, 1998. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains an allowance for doubtful accounts for potential credit losses, and actual bad debt losses have not been material and have not exceeded management's expectations. Trade accounts receivable are recorded net of allowance for doubtful accounts of $150,000 and $200,000 at October 31, 1999 and 1998, respectively. Sales to individual customers in excess of 10 percent of net sales of the Company included sales to Compaq Computer of $12.6 million in 1999; sales to Compaq Computer and Motorola of $9.4 million and $2.8 million, respectively, in 1998 and sales to Tandem Computers, Motorola, and Silicon Graphics of $8.8 million, $3.8 million and $3.0 million, respectively, in 1997. International sales accounted for 4 percent and 5 percent of total sales during fiscal 1999 and fiscal 1998, respectively. 40 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except First Second Third Fourth per share amounts) Quarter Quarter Quarter Quarter - ------------------------------------------- ----------- --------- --------- --------- 1999: Net sales $ 6,518 $ 3,760 $ 3,533 $ 4,211 Gross profit 4,267 2,483 2,067 2,517 Net income (loss) 1,230 (172) (436) (471) Basic earnings (loss) per share $ 0.44 $ (0.06) $ (0.15) $ (0.17) Diluted earnings (loss) per share $ 0.41 $ (0.06) $ (0.15) $ (0.17) 1998: Net sales $ 4,444 $ 4,412 $ 4,041 $ 6,088 Gross profit 2,722 2,768 2,438 3,539 Net (loss) income (469) (241) 154 936 Basic (loss) earnings per share $ (0.18) $ (0.09) $ 0.06 $ 0.35 Diluted (loss) earnings per share $ (0.18) $ (0.09) $ 0.06 $ 0.35
41
SBE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998 Column A Column B Column C Column D Column E ------------ -------------- --------------- --------------- ------------- Balance at Additions Balance at Beginning charged to costs End of Description of Period and expenses Deductions (a) Period - ----------------------------------- -------------- ---------------- --------------- ------------- YEAR ENDED OCTOBER 31, 1999 Allowance for Doubtful Accounts $ 200,000 --- (50,000) $ 150,000 Allowance for Obsolete Inventory 1,400,000 100,802 (119,432) 1,381,370 Allowance for Warranty Claims 207,445 (33,233) (73,164) 101,049 Allowance for the Deferred Tax asset 3,901,000 240,000 --- 4,141,000 YEAR ENDED OCTOBER 31, 1998 Allowance for Doubtful Accounts $ 169,205 32,373 (1,578) $ 200,000 Allowance for Obsolete Inventory 1,022,463 353,461 24,076 1,400,000 Allowance for Warranty Claims 251,957 47,410 (91,922) 207,445 Allowance for the Deferred Tax asset 3,377,000 524,000 --- 3,901,000
42 EX-11.1 2 EXHIBIT 11.1
SBE, INC. COMPUTATION OF EARNINGS PER SHARE FOR THE THREE YEARS ENDED OCTOBER 31 YEARS ENDED OCTOBER 31 ---------------------- 1999 1998 1997 ---------- ---------- ---------- BASIC EARNINGS PER SHARE: Net income $ 151,423 $ 380,349 $3,333,181 Weighted average number of common shares outstanding during the year 2,849,349 2,666,707 2,501,786 ---------- ---------- ---------- Number of shares for computation of net income per share 2,849,349 2,666,707 2,501,786 ========== ========== ========== Basic earnings per share $ 0.05 $ 0.14 $ 1.33 ========== ========== ========== DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding during the year 2,849,349 2,666,707 2,501,786 Assumed issuance of stock under the employee and non-employee stock option plans 59,264 224,033 201,637 ---------- ---------- ---------- Number of shares for computation of net income per share 2,908,613 2,890,740 2,703,423 ========== ========== ========== Diluted earnings per share $ 0.05 $ 0.13 $ 1.23 ========== ========== ==========
43 EX-23.1 3 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of SBE, Inc. on Form S-8 (File No. 33-42629) of our report dated November 23, 1999 on our audits of the consolidated financial statements and financial statement schedule of the Company as of October 31, 1999 and 1998 and for the years ended October 31, 1999, 1998 and 1997, which report is included in this 1999 Annual Report on Form 10-K. PricewaterhouseCoopers LLP San Francisco, California January 27, 2000 44 EX-27 4
5 1000 YEAR OCT-31-1999 NOV-01-1998 OCT-31-1999 3326 0 3290 0 1517 8589 1513 0 10480 1487 0 0 0 10924 (2433) 10480 18022 18022 6688 6688 0 0 0 153 2 151 0 0 0 151 0.05 0.05
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