-----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, E9Z1wdCf8eSwm5oKyDdptTQuiwMjmQrCY5ahuLnJaIPw3t0dNa/gv3QfU29LLJ5j rgKUzaVNgB52nF3zZxXSDA== 0000912057-97-002175.txt : 19970130 0000912057-97-002175.hdr.sgml : 19970130 ACCESSION NUMBER: 0000912057-97-002175 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970129 SROS: NASD 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: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08419 FILM NUMBER: 97513494 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 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission File No. 0-8419 SBE, INC. (Exact name of Registrant as specified in its charter) California 94-1517641 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 4550 Norris Canyon Road, San Ramon, California 94583 (Address of principal executive offices and Zip Code) (510) 355-2000 (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, 1996 as reported on the Nasdaq National Market, was approximately $8,007,704. Shares of Common Stock held by each executive officer, director and shareholder whose ownership exceeds five percent of Common Stock outstanding have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status for purposes of the foregoing calculation is not necessarily a conclusive determination of affiliate status for other purposes. The number of shares of the Registrant's Common Stock outstanding as of December 31, 1996 was 2,479,920. DOCUMENTS INCORPORATED BY REFERENCE (1) Proxy statement for Annual Meeting of Shareholders scheduled for April 8, 1997 -- Part III Exhibit Index on Page 23 Total Pages 59 -1- SBE, INC. FORM 10-K TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 13 Item 3 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for The Registrant's Common Equity and Related Shareholder Matters 15 Item 6 Selected Financial Data 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 8 Financial Statements and Supplementary Data 20 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III Item 10 Directors and Executive Officers of the Registrant 21 Item 11 Executive Compensation 22 Item 12 Security Ownership of Certain Beneficial Owners and Management 22 Item 13 Certain Relationships and Related Transactions 22 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 SIGNATURES 26 SCHEDULE 41 EXHIBITS 42 -2- PART I EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS REPORT PARTICULARLY IN THE SECTIONS ENTITLED "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ITEM 1. BUSINESS SBE, Inc. (the "Company") develops, markets, sells and supports remote access internetworking products and high speed intelligent computer communications controllers that enable users to exchange data between computer systems. The Company's products are distributed worldwide through a direct sales force, distributors, independent manufacturers' representatives and value-added resellers. Founded in 1961 as Linear Systems, Inc., the Company evolved from a high-quality supplier of radio communications equipment to a provider of comprehensive network communications solutions for original equipment manufacturers and end users. In September 1995, the Company began shipping its netXpand-Registered Trademark- products to meet the growing need for remote access data communications products. The Company markets, sells and supports a broad range of high-speed intelligent communications controller products sold primarily to original equipment manufacturers. These products support applications in a broad spectrum of industrial and commercial markets. Markets and application areas include data networking, process control, medical imaging, CAE/automated test equipment, military defense systems and telecommunications networks. The Company's remote access products are netXpand SoHo, Central and Routeman-TM-. These products allow a remote PC or network to access an existing network as a fully functional network node, thereby enabling users to access network resources from their remote locations as if they were directly connected to the enterprise network. These products include server hardware and software, client software and network management software. SBE's remote access products allow for single user dial-in to local area networks (LANs) over analog or digital phone lines, individual dial-out from LANs to other locations and routed or bridged LAN to LAN dial-up or direct connections. These products support all major desktop computing platforms, including IBM-compatible PCs and UNIX and Windows NT workstations. RISK FACTORS FUTURE SUCCESS DEPENDENT ON NEW PRODUCT LINE. Since early 1995, the Company focused a significant portion of its research and development, marketing and sales efforts on netXpand, its new line of standalone remote LAN products aimed at the small-office/home-office market. The success of these products is dependent on several factors, including timely completion of new product designs, achievement of acceptable manufacturing quality and yields, introduction of competitive products by other companies and market acceptance of the Company's products. If the netXpand products or new products developed by the Company do not gain widespread market acceptance, the Company's business, operating results and financial condition may be materially adversely affected. -3- Although the Company believes that its focus on remote access products provides it with competitive advantages in the remote access market, this focus also may leave the Company more vulnerable to a decline in the remote access market than companies with more diverse product offerings. Moreover, the Company's future success will depend in large part on continued growth in the remote access market, which in turn will depend in large part on the growth in the number of organizations utilizing remote access products and the number of applications developed for use with those products. There can be no assurance that these markets will continue to grow or that the Company will be able to respond effectively to the evolving requirements of these markets. HIGHLY COMPETITIVE ENVIRONMENT. The market for remote access products is highly competitive. The Company competes directly with traditional vendors of terminal servers, modems, remote control software, terminal emulation software and application specific remote access solutions. The Company also competes with suppliers of routers, hubs and other data communications products. In the future, the Company expects competition from companies offering remote access solutions based on emerging technologies such as switched digital telephone services. In addition, the Company may encounter increased competition from operating system and network operating system vendors to the extent such vendors include full remote access 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 remote access services through their telephone networks. The basic method of corporate remote access using the Company's netXpand products involves a remote user establishing a connection directly to a remote access server located on the corporation's network. This method of remote access could migrate to one in which the remote user establishes a connection to a public network, such as the Internet, to which the corporate network is also connected. The development of remote access service offerings from public networks could have a material adverse effect on the Company's business, operating results and financial condition. Increased competition with respect to any of the Company's products could result in price reductions and loss of market share, which would adversely affect the Company's business, operating results and financial condition. Many of the Company's current and potential competitors have greater financial, marketing, technical and other resources than the Company. There can be no assurance that the Company will be able to compete successfully with its existing competitors or will be able to compete successfully with new competitors. FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating results have fluctuated significantly in the past and will significantly fluctuate in the future due to several factors, some of which are outside the control of the Company, including fluctuating market demand for, and declines in, the average selling prices of the Company's products, timing of significant orders from OEM customers, 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 -4- 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 will again 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 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 A LIMITED NUMBER OF OEM CUSTOMERS. Due largely to its shift from board-level products to standalone remote access products, the Company's customer base has been expanding and diversifying, and the Company expects this trend to continue. However, a substantial portion of the Company's sales, virtually all of which were attributable to sales of board-level products, has been derived from a limited number of OEM customers.. The Company's OEM customers' orders are affected by factors such as new product introductions, product life cycles, inventory levels, manufacturing strategy, contract awards, competitive conditions and general economic conditions. The Company's agreements with OEM customers typically do not require minimum purchase quantities. A significant reduction in orders from any of the Company's OEM customers could have a material adverse effect on the Company's business, operating results and financial condition. The Company's sales to any single OEM customer are also subject to significant variability from quarter to quarter. Such fluctuations may have a material adverse effect on the Company's operating results. In addition, there can be no assurance that the Company will become a qualified supplier for new OEM customers or that the Company will remain a qualified supplier with existing OEM customers. EXPANDED DISTRIBUTION REQUIRED FOR REMOTE ACCESS PRODUCTS. Although to date a substantial percentage of the Company's sales has been made to OEM customers through the Company's direct sales force, the Company expects that an increasing percentage of its revenues will be derived from sales of its netXpand products to end users. The Company sells its netXpand products through distributors and, to date, has signed agreements with over 42 distributors worldwide. Distributors generally offer products of several different companies, including products that may compete with the Company's products. Accordingly, these distributors may give higher priority to products of other suppliers, thus reducing their efforts to sell the Company's products. Agreements with distributors are generally terminable at the distributor's option. A reduction in sales effort or termination of a distributor's relationship with the Company may have a material adverse effect on future operating results. Use of distributors also entails the risk that distributors will build up inventories in anticipation of substantial growth in sales. If such growth does not occur as anticipated, these distributors may substantially decrease the amount of product ordered in subsequent quarters. Such fluctuations could contribute to significant variations in the Company's future operating results. In addition, distributors generally have stock rotation rights and price protection on unsold merchandise, which may adversely impact the Company's profit margins. -5- DEPENDENCE ON SUPPLIERS. The chipsets used in the Company's products are currently available only from Motorola. The inability to obtain sufficient key components as required, or to develop alternative sources if and as required in the future, could result in delays or reductions in product shipments which, in turn, could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON CONTRACT MANUFACTURER. In December 1996 the Company sold all of its manufacturing operations to XeTel Corporation (XeTel), a contract manufacturing company headquartered in Austin, Texas. At the same time the Company and XeTel entered into an exclusive manufacturing service agreement under which XeTel is to manufacture all of the Company's products until at least December 2000. The Company is dependent on XeTel's ability to manufacture the Company's products according to specifications and in required volumes on a timely basis. The failure of XeTel to perform its obligations under the manufacturing service agreement could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON 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 life of, any of its key employees. The loss of the services of any key employees could adversely affect the Company's business and operating results. The Company's success also depends on its ability to continue to attract and retain additional highly talented personnel. Competition for qualified personnel in the networking industry is intense. There can be no assurance that the Company will be successful in retaining its key employees or that it can attract or retain additional skilled personnel as required. 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 could be subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, announcements of technological innovations or new products by the Company or its competitors, general conditions in the computer and communications industries, and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. ANTI-TAKEOVER PROVISIONS. The Company's charter provides for 2,000,000 shares of authorized but unissued Preferred Stock, the terms of which may be fixed by the Board of Directors, who also have the right to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders of the -6- Company. The rights of the holders of the Company's capital stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of such Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire control of the outstanding voting stock of the Company. Accordingly, such provisions could delay or prevent a change of control of the Company. INDUSTRY BACKGROUND: Significant changes in computer-based information systems have occurred over the last decade. Historically, information stored in computer databases could only be accessed by terminals or personal computers emulating terminals directly connected to a central or host computer. Remote users wishing to access information over the public switched telephone network used a modem to dial from their terminal or computer into another modem that was usually connected directly to the central or host computer. Beginning in the late 1980s, the following factors changed the nature of and increased the demand for remote network access. GROWTH OF THE INTERNET AND ON-LINE SERVICES. The number of users of the Internet and on-line services such as America Online, CompuServe and Prodigy has grown rapidly in recent years. According to International Data Corporation (IDC) it is estimated that the number of users linked to the Internet has grown from less than 2 million in 1992 to, approximately 45 million today. This growth is due to increased use of electronic mail and the proliferation of databases and other information platforms such as the World Wide Web. DEVELOPMENT OF DISTRIBUTED, CLIENT /SERVER COMPUTING. With the development of LANs it became possible for information to be stored on a number of computers that were connected to each other and located within a building or campus. Simultaneously, the advent of new communications products such as hubs, bridges and routers allowed multiple LANs to be integrated into distributed, enterprise- wide computer networks. To take advantage of these distributed computer networks, products utilizing client/server architecture, including relational databases, e-mail and file and printer sharing were introduced to collect, retrieve and distribute information. Distributed computing and client/server- based software are now being used on a corporate enterprise-wide and departmental basis to run critical processes and to provide the primary means for corporate communications. GROWTH IN MOBILE, REMOTE AND HOME OFFICES. Corporations, government agencies, universities and other organizations are increasingly looking to control costs while providing their employees with access to essential information and resources to perform their jobs efficiently and effectively from any location. The proliferation of notebook and home computers is allowing a newly created remote workforce to work from home or on the road. To remain productive, these users must be able to access their cooperative distributed networks from remote locations. TECHNOLOGICAL ADVANCES. Advances in modem technology such as the V.34 communications standard and switched digital service technology, such as ISDN and Frame Relay, are helping to increase the speed of network communication, which is a key user requirement for remote network access. Additionally, as these technologies become more mature, the retail prices for -7- products utilizing these technologies generally decline, thereby making the products more economically accessible to a larger portion of computer users. The above factors have created an enormous growth in the number of remote users seeking to access information on the corporate network or to connect to the Internet and on-line services through network access providers. As a result, the need for hardware and software products to support, expand and enhance remote network access has created a number of rapidly growing markets. Early remote connectivity solutions have typically followed three principal computing oriented approaches: host-oriented terminal emulation, PC remote control software and application-specific solutions. Terminal emulation products allow remote workstations to simulate a local "dumb" terminal session with a mainframe. These products are better suited to a character-based centralized system and not the graphical client server systems that are predominant today. Remote control software products allow a dial-in user to take control of a PC on the network and remotely view the networked PC's screen. Like terminal emulation, remote control software works best with character-based computing. In addition, remote control solutions present both network security and management problems as the controlled PC typically has complete access to all the resources of the network and the network manager is typically unable to identify an unauthorized remote user. Application-specific solutions overcome the limitations of terminal emulation by enabling users to access a single network application as a specialized remote client. Examples of this type of solution include electronic mail programs that offer remote versions. However, these application-specific products provide an incomplete remote access solution for users who require access to other resources or applications on the enterprise network. Today's solutions use a communications-oriented approach where the network is extended to users through the combination of hardware and software that lets users expand their network using analog, digital or leased circuits. These solutions have typically used expensive router products to connect branch offices to networks using leased lines. But more recently introduced products allow users to establish lower-cost dial-up connections that provide multiprotocol, multiplatform routing and routing-related communications technologies and hardware that address performance and security requirements of remote network access. However, these products are typically designed to principally provide either routing or remote access functions. PRODUCTS The Company manufactures data communications products designed to allow the connection of LANs to external Wide Area Networks (WANs). The Company began shipping its netXpand products to meet the growing demand for remote access data communications products in September 1995. REMOTE ACCESS PRODUCTS. The products for the Company's family of netXpand remote access products are netXpand SoHo, Central and Routeman. SoHo (Small office, Home office) is a remote access product which can serve either as an access server or a branch office router. Central is a larger version of SoHo with more WAN interfaces and Routeman is a smaller less -8- expensive version of SoHo. The products have been designed to provide cost- effective internetworking capabilities to the broadest range of end-users, the users of UNIX and Novell, Artisoft and Windows NT networking products. These products allow users to access remote networks' resources as full network clients or nodes. Applications appear the same to users as they do when directly connected to the enterprise network, except that the speed of computing through the remote access connection may be reduced as a result of the speed limitations of telephone connections. The Company's remote access products support up to 10 wide area network interfaces at speeds up to T1/E1(1.5mbs). The products feature full routing for Novell IPX and TCP/IP (Transmission Control Protocol, Internet Protocol); other protocols are transparently bridged with filtering. The products use Windows- based configuration tools, are SNMP manageable and support PAP, CHAP and direct callback security. The remote access products list from $599 to $2,499 with various software configurations available. INTELLIGENT COMMUNICATIONS CONTROLLER PRODUCTS. Intelligent communications controller products are used to provide connectivity between a system, such as a mini-computer or bridge/router and a local or wide area network. Communication controller products enable computers to exchange data in much the same way as the telephone system allows people to converse with one another. As computers become more pervasive in all areas of society, computer users are demanding greater productivity, efficiency and lower costs in their computer systems, which has led to the sharing of databases, software applications and computer peripheral equipment. Communications controllers have become a central component to connecting networks and computers to deliver information more efficiently. The Company's communications products target all four major protocol communications technologies for each of the bus architectures: Fiber Distributed Data Interface (FDDI), Token Ring, Ethernet and high speed serial communications. The latter is a growing wide-area networking technology that enables computers to talk to one another using telephone lines. FDDI, Token Ring and Ethernet are local area networking technologies that offer a wide range of speed and reliability options. The Company's strategy for its intelligent controller products is to expand its offerings to more segments of the market by adding software interfaces, improved performance and new technologies that will provide lower-cost solutions for high speed, high volume communications. SINGLE-BOARD COMPUTER PRODUCTS. The Company supplies high performance single- board computers (SBC) for Multibus(*) and VMEbus architectures. An SBC manages and processes the data that passes between the boards within a computer system. The Company's SBC products provide a high-speed interface for linking to peripherals and intelligent I/O controllers that accommodate plug-on modules for many industrial applications. CUSTOM PRODUCTS. The Company has developed several products specifically for single customer applications. These products typically have proprietary functions that meet specific application needs of the customer. The Company does not seek new custom relationships unless the products have significant sales potential. INTEGRATED CIRCUITS. The Company has designed a number of proprietary integrated circuits that are used on many SBE products. The Company has a small group of customers that purchase - ---------------------- * Multibus is a Trademark of Intel Corporation. -9- some of these proprietary chips for their applications. This line of business is not being actively pursued by the Company. SOFTWARE PRODUCTS. The Company supplies software products that operate various communications protocols for certain communications controller products including X.25 for serial communications, SMT (Station Management) for FDDI and TCP/IP for Ethernet applications. Real-time operating systems for Motorola's 68000 family are also supported. The Company's software products are principally bundled with the hardware platform based upon the customer's application requirement. -10- The following table shows sales by major product type as a percentage of total sales for fiscal 1996, 1995 and 1994. Year Ended October 31, (percentage of annual sales) 1996 1995 1994 ---------------------------------------- Communication Controllers 73% 72% 62% netXpand Remote Access 15 3 -- Single Board Computer 4 9 9 Integrated Circuits 1 3 10 Custom -- 1 11 Other 7 12 8 ---------------------------------------- 100% 100% 100% ---------------------------------------- ---------------------------------------- DISTRIBUTION, SALES AND MARKETING The Company markets its netXpand remote access products through multiple indirect distribution channels worldwide, including distributors, manufacturers' representatives, value-added resellers and certain OEM partners. The Company had relationships with over 70 distributors and value-added resellers as of October 31, 1996. Approximately half of the Company's distributors and resellers operate outside the United States. The Company actively supports its indirect channel marketing partners with its own sales and marketing organization. SBE's sales staff solicits prospective customers, provides technical advice with respect to SBE products and works closely with marketing partners to train and educate their staffs on how to sell, install and support the netXpand product line. The Company has focused its sales and marketing efforts principally in the United States and Asia, including Japan. International sales for the netXpand product line represented 70 percent of total netXpand sales in fiscal 1996 and 92 percent for fiscal 1995. The Company expects that, in the future, domestic sales will represent a greater percentage of total netXpand sales. All of the Company's international sales are negotiated in U.S. dollars. The Company provides most of its distributors and resellers with product return rights for stock balancing or product evaluation. Stock balancing permits distributors to return products for credit, within specified limits and subject to purchasing additional products. The Company believes that it has adequate reserves to cover product returns although there can be no assurance that the Company will not experience significant returns in the future. The Company primarily markets its intelligent communications controller products to OEMs and systems integrators. The Company sells its products both domestically and internationally using a direct sales force as well as through independent manufactures' representatives. The Company also sells certain products directly to end-users. During 1993 the Company established a channel partnership arrangement with Hewlett Packard (HP). This arrangement provides the Company's direct sales force access to HP customers that require VME high speed serial and EISA communications controllers. The Company believes that it has successfully positioned itself as a leading supplier of VME high speed serial and EISA communications controllers to HP -11- workstations. The Company believes that its direct sales force is well suited to differentiate the Company's communications controller products from those of its competitors. The Company conducts its sales and marketing activities from its principal offices in San Ramon, California. The Company's direct sales force is based in five locations in the United States. The Company's intelligent communications controller sales are concentrated among a small number of customers and, consequently, the timing of significant orders from major customers causes the Company's operating results to fluctuate. RESEARCH AND DEVELOPMENT The Company's product development efforts are focused principally on its strategic businesses, remote internetworking and intelligent communications controllers. The Company's experience in high-speed data communication creates opportunities to leverage its engineering investments and develop additional integrated products for simpler, more innovative communications solutions for customers. The development of new remote internetworking products, high performance communications controllers and communications-related software is critical to attracting new and retaining existing customers During the past two years, the Company has developed communications products based on PCIbus, VMEbus and EISA architecture. The Company has also redesigned and upgraded certain communications products to improve the products' performance and lower the products' manufacturing costs. In addition, the Company has acquired or licensed certain hardware products that have been integrated principally through the addition of software into the Company's product line. During fiscal 1996 the Company focused the majority of its development efforts on the netXpand remote access product line and it expects to continue this focus in 1997. The new products will leverage existing product designs and incorporate more sophisticated routing software. Information relating to accounting for research and development costs is included in Note 1 of the Notes to the Consolidated Financial Statements on Page 33 of this document. Also see the section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on Pages 16 through 20 of this document. SOURCES AND AVAILABILITY OF RAW MATERIALS The Company does not use raw materials in any of its products or production activity. Products are constructed from components which are generally available as needed from a variety of suppliers. The Company believes that it currently possesses adequate supply channels. An interruption in its existing supplier relationships or delays by some suppliers could result in production delays and may have a material adverse effect on the Company's operations. Certain parts used in the Company's products are purchased from a single supplier (see Risk Factors "Dependence on Suppliers"). New state-of-the-art high technology parts are normally available only from a single supplier when first introduced into the market. These components generally become available from alternative suppliers over time. Although the Company has rarely experienced any significant problems in obtaining sole-source components, the Company -12- has sought to establish a close relationship with sole-source suppliers and if necessary build up an inventory of such components. The Company in December 1996 sold all of its manufacturing assets and entered into an contract manufacturing agreement with XeTel Corporation to supply manufacturing services. The Company believes that XeTel may be able to provide lower prices and a more efficient and timely product delivery then the Company could produce with its previous manufacturing resources. COMPETITION The market for remote access products is highly competitive. Many of the Company competitors have greater financial resources and are more established than the Company. The Company competes directly with traditional vendors of terminal servers, modems, remote control software, terminal emulation software and application-specific remote access solutions, such as Shiva, Ascend Communications, Bay Networks, Livingston Enterprises, Inc. and Microcom, Inc. The Company also competes with suppliers of routers, hubs and other data communications products, such as Cisco and 3Com. In addition the Company may encounter increased competition from operating system and network operating system vendors, such as Microsoft and Novell, to the extent that such vendors include full remote access or routing capabilities in their products. The Company believes it can compete successfully in the remote access market by (1) providing low-cost hardware and easy-to-use software, suited specifically to the needs of the non-sophisticated user: (2) developing distribution channels that provide close sales and support to end users; (3) providing economical, accessible support services; (4) expanding into the Asia-Pacific markets. By focusing on the above factors the Company believes that it can successfully compete within the remote access market, although there can be no assurance to that effect. Competition within the intelligent communications controller market is fragmented principally by application segment. The Company's VMEbus communications controllers compete primarily with products from Motorola, Interphase Corp., CMC, a Rockwell Company, Themis Computers, Network Peripherals, Performance Technologies and various other companies on a product- by-product basis. To compete in this market the Company emphasizes the functionality, support, quality and price of its product in relation to its competitors as well as the Company's ability to customize the product or software to exactly meet the customer needs. Competition within the EISAbus communications controller market is also fragmented among various companies providing different applications. The Company's EISAbus-based products are targeted to potential customers using Hewlett Packard (HP) 9000 workstations. Currently, the Company's EISAbus products face nominal competition in this market. Additionally, the Company competes with the internal engineering resources of its customers. As its customers become successful with their products they examine methods to reduce costs and integrate functions. To compete with the internal engineering resources of its customers, the Company works jointly with their engineering staff 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 -13- products. The Company does not currently hold any patents and relies on a combination of copyright, trademark, trade secret laws and contractual provisions to establish and protect proprietary rights in its products. The Company typically enters into confidentiality agreements with its employees, strategic partners, indirect channel marketing partners and suppliers and limits access to the distribution of its proprietary information. BACKLOG On January 1, 1997, the Company had a backlog of orders of approximately $3.6 million for shipment within the next twelve months. On January 1, 1996, the Company had a backlog of orders of approximately $2.4 million for shipment within the next twelve months. Since recorded sales orders are subject to changes in customer delivery schedules, cancellation, or price changes, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding fiscal period and is not considered firm. EMPLOYEES On January 2, 1997, the Company had 55 employees. None of the Company's employees is represented by a labor union and the Company has experienced no work stoppages. The Company's management believes its employee relations are good. The Company's management believes that the Company's future success will depend, in part, on its ability to attract and retain qualified technical, marketing and management personnel. Such experienced personnel are in great demand and the Company must compete for their services with other firms, many of which have greater financial resources than the Company. ITEM 2. PROPERTIES In April 1993 the Company relocated its engineering, manufacturing and administrative headquarters to 63,000 square feet of leased space in a building located in San Ramon, California. The lease was amended in June 1995 to extend its term from seven years to thirteen years. The lease contains an option to increase the leased space by 10,000 square feet. The Company expects that the facility will satisfy its anticipated needs through the foreseeable future. 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 office and manufacturing space to XeTel for a four year term with options 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 -14- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER MATTERS. Fiscal quarter ended -------------------------------------------------------- 1996 January 31 April 30 July 31 October 31 - ---------------------------------------------------------------------- High $14.25 $12.50 $12.25 $6.63 Low 11.00 5.75 5.75 3.88 1995 High $10.50 $15.75 $14.25 $16.00 Low 7.00 8.75 10.75 10.75 SBE. common stock is quoted on the Nasdaq National Market under the symbol SBEI. The above table sets forth the high and low closing sales prices for 1996 and 1995 for the quarters indicated. The Company has not paid cash dividends on its common stock and anticipates that for the foreseeable future it would retain earnings for use in its business. Additionally, the Company is currently prohibited from paying dividends by its credit line agreement. As of December 31, 1996, SBE. had approximately 756 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except for per share amounts and number of employees) For years ended October 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------- Net sales $13,350 $19,368 $22,337 $26,732 $28,057 Net (loss) income (9,625) (4,568) 1,336 2,461 2,565 Net (loss) income per share ($4.51) ($2.22) $0.63 $1.18 $1.24 Product research and development 5,084 6,900 4,769 4,739 4,455 Working capital 2,049 7,644 7,436 6,608 4,563 Total assets 7,894 14,978 17,665 16,563 14,325 Long-term obligations 757 1,218 410 44 39 Shareholders' equity 3,981 12,108 15,864 14,889 12,001 Shares outstanding 2,233 2,074 2,035 2,005 1,922 Number of employees 92 173 165 148 147 -15- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION AND THE SECTION ENTITLED "BUSINESS" (PARTICULARLY "BUSINESS-RISK FACTORS.") For the last decade, the Company has specialized in the development of communication controller data communications products and industrial computer equipment. In the early 1990s, the Company determined that a large opportunity existed in the emerging remote LAN market for affordable remote access router products. To seize that opportunity, the Company has invested significant resources in developing netXpand, a line of standalone remote LAN access server/router products. In addition, the Company began and is continuing to restructure its existing sales and marketing channels and adding new sales channels to access customers for its netXpand products. The Company also has added certain key management personnel to better serve this emerging market. The Company began shipping its netXpand products in September 1995. Sales of these products constituted over 15 percent of net sales for fiscal year 1996. The Company expects the netXpand product line to constitute an increasing percentage of net sales in future periods; however, there can be no assurance to that effect. The netXpand products are targeted at the high-growth, price- sensitive sectors of the internetworking market. Based upon market information supplied by market research firms, the Company expects these segments to grow at a compounded annual rate in excess of 35 percent in the United States and at a greater rate in international markets. However, there can be no assurance that the market will grow at this rate, if at all, or that the Company will be successful in achieving widespread market acceptance of its netXpand products. The Company intends to continue to support and expand its existing communication controller business by developing new products for strategic customer accounts and by focusing on emerging technologies that can be leveraged into the sales channels the Company is developing for its netXpand remote LAN access products. The communication controller portion of the Company's business is characterized by a concentration of sales to a small number of customers and consequently the timing of significant orders from major customers and their product cycles cause fluctuations in the Company's operating results. Over the last eight quarters, the Company has invested significant resources in the development of new products and sales channels. The Company expects that sales of netXpand products may reduce the concentration of its customer base and provide significant sales growth as the Company develops its sales channels. There are numerous risks associated with the sale of netXpand products and therefore the Company cannot determine whether or not it will be successful in the distribution of netXpand products. Primarily as a result of this investment in netXpand products combined with decreased sales of communication controller products attributable to the decline in business with America Online, Cisco Systems, GTE Spacenet Services and Siemens, the Company has incurred substantial operating losses in fiscal 1996 and fiscal 1995. RESULTS OF OPERATIONS -16- The following table sets forth, as a percentage of net sales, certain consolidated statements of operations data for the fiscal years ended October 31, 1996, 1995 and 1994. These operating results are not necessarily indicative of Company's operating results for any future period.
YEAR ENDED OCTOBER 31, ---------------------- 1996 1995 1994 Net sales 100% 100% 100% Cost of sales 62 49 44 -- -- -- Gross profit 38 51 56 Operating expenses: Product research and development 38 36 21 Sales and marketing 34 26 12 General and administrative 24 20 16 Restructuring and other 14 -- ---- ---- ---- Total operating expenses 110 82 50 ---- ---- ---- Operating (loss) income (72) (31) 6 Interest and other (expense) income, net -- (1) 2 ---- ---- ---- Income (loss) before taxes (72) (32) 8 (Benefit) provision for income taxes -- (8) 2 ---- ---- ---- Net (loss) income (72)% (24)% 6% ---- ---- ---- ---- ---- ----
NET SALES Net sales for fiscal 1996 were $13.4 million, a 31 percent decrease from fiscal 1995. Net sales for fiscal 1995 were $19.4 million, a 13 percent decrease from fiscal 1994. These decreases were primarily attributable to lower sales of the Company's board-level products to certain large customers. Sales to individual customers in excess of 10 percent of net sales of the Company included sales to Tandem Computers of $2.7 million in fiscal 1996 and sales to America Online and Tandem Computers of $3.1 million and $2.8 million, respectively, in fiscal 1995. Sales to Cisco Systems and G.E. Capital Spacenet Services, respectively, accounted for $4.6 million and $2.5 million of sales in fiscal 1994. There were no sales to America Online in 1996 or to Cisco in fiscal 1996 and fiscal 1995. Partially offsetting the lower sales of board level products, sales of netXpand remote access/router products increased by $1.5 million from fiscal 1995 to fiscal 1996 to approximately 15 percent of total sales in fiscal 1996. The Company expects to continue to experience fluctuation in communication controller product sales as large customers' needs change. International sales constituted 26 percent, 11 percent and 4 percent of net sales in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The increase in international sales is primarily attributable to increased sales of VME communication controller products to a large customer in Korea and sales of netXpand products in Taiwan and Japan. Sales of VMEbus-based communications products through the Company's Channel Partner relationship with Hewlett Packard constituted 11 percent, 27 percent and 13 percent of net sales in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. No customer within this channel, other than America Online during fiscal 1995, represented more than 5% of total sales. The Company expects that future sales through the HP channel will continue; however, sales through this channel will be subject to significant variability from quarter to quarter. GROSS PROFIT -17- Gross profit as a percentage of sales was 38 percent, 51 percent and 56 percent in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The decrease from fiscal 1995 to fiscal 1996 was primarily attributable to lower sales and increased fixed manufacturing costs. The Company in fiscal 1995 added significant manufacturing capacity in anticipation of netXpand sales increases. The costs for the additional capacity included the cost of leasing high speed placement and testing equipment, facility lease costs and depreciation. In late fiscal 1996 the Company concluded that it would not be able to maintain a production facility that would allow it to be competitive with the production costs of its competitors; therefore, in December 1996 the Company sold its manufacturing assets and operations to XeTel Corporation, a contract manufacturing company ("XeTel") with headquarters in Austin, Texas. The Company also entered into a contract to purchase manufacturing services from XeTel, which may decrease the volatility of the quarterly cost of sales as a percentage of sales. The decrease in gross profit as a percentage of sales from fiscal 1994 to fiscal 1995 was primarily attributable to higher manufacturing overhead costs incurred in connection with expanding manufacturing capacity for the new NETXPAND products. PRODUCT RESEARCH AND DEVELOPMENT Product research and development expenses net of capitalized software costs were $5.1 million in fiscal 1996, $6.9 million in fiscal 1995 and $4.8 million in fiscal 1994, representing 38 percent, 36 percent and 21 percent of sales, respectively. The decrease in research and development spending from fiscal 1995 to fiscal 1996 was a result of the completion of the base netXpand product line and a corresponding decrease in third party consulting costs associated with the launch of the netXpand products. The increases in net research and development expenses from fiscal 1994 to fiscal 1995 as a percentage of sales was primarily attributable to additional staff, consulting costs and contract professional expenses relating to development of the netXpand product line. The Company expects that product research and development expenses will decrease as a percent of sales as the Company focuses its resources on improving its netXpand product line and enhancing its traditional board-level products. The Company capitalized software development costs of $1.5 million and $230,000 in fiscal 1995 and fiscal 1994, respectively, in accordance with Statement of Financial Accounting Standards No. 86. There were no such costs capitalized in fiscal 1996. The amounts capitalized represented 22 percent and 5 percent, respectively, of gross product research and development expenditures in fiscal 1995 and fiscal 1994. The increase in software costs capitalized in fiscal 1995 was due to software development related to the netXpand product line. Those costs are being amortized over a three year period. SALES AND MARKETING Sales and marketing expenses for fiscal 1996 were $4.6 million, down from $5.0 million in fiscal 1995. Sales and marketing expenses decreased due to lower sales and commission expenses and the completion of one time costs associated with product launch of the netXpand product line. Sales and marketing expenses for fiscal 1994 were $2.7 million, representing a significantly lower level of marketing costs prior to the introduction of the netXpand product line. The Company expects sales and marketing expenses to decrease as a percentage of total sales for the foreseeable future. GENERAL AND ADMINISTRATIVE General and administrative expenses for fiscal 1996 decreased 20 percent from fiscal 1995 to $3.1 million. General and administrative expenses for fiscal 1995 were $3.9 million, a 7 percent increase -18- from fiscal 1994. The decrease from fiscal 1995 to fiscal 1996 represents decreases in consulting, accounting and other administrative costs. The increase from fiscal 1994 to fiscal 1995 was primarily attributable to recruiting costs and consulting expenses related to the transition of the Company into the emerging remote access markets. RESTRUCTURING COSTS AND OTHER. The Company incurred nonrecurring charges in fiscal 1996 for severance costs, disposition of certain assets related to a reorganization of the Company and writedown of capitalized software costs. Additionally, in fiscal 1995 the Company recorded a nonrecurring charge to write off an equity investment in a strategic software partner and to record realized losses on the liquidation of investments. INTEREST AND OTHER INCOME (EXPENSE), NET Interest income, net, decreased in fiscal 1996 from fiscal 1995 and fiscal 1994 due to lower investment balances. Interest expense for fiscal 1996 increased from fiscal 1995 due to interest on outstanding borrowings. INCOME TAXES The Company did not record any significant tax expense in fiscal 1996 as a result of not being able to realize any benefit from its net operating losses and unused tax credits. The Company's effective tax rate was (27) percent and 26 percent in fiscal 1995 and fiscal 1994, respectively. The Company's operating losses in fiscal 1995 enabled it to realize a $1.7 million tax benefit, all of which was realized as a carryback against prior taxes paid. The Company has recorded a valuation allowance in fiscal 1996 and 1995 for certain deferred tax assets due to the uncertainty of realization. This valuation allowance increased from approximately $948,000 in fiscal 1995 to $4.3 million in fiscal 1996. In the event of future taxable income, the Company's effective income tax rate in future periods could be lower then the statutory rate as such tax assets are realized. NET (LOSS) INCOME As a result of the factors discussed above, the Company recorded net losses of $9.6 million and $4.6 million in fiscal 1996 and fiscal 1995, respectively, and net income of $1.3 million in fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES At October 31, 1996, the Company had cash and cash equivalents of $41,061, as compared to $857,206 at October 31, 1995. In fiscal 1996 $2.9 million of cash was used in operating activities, principally as a result of the $9.6 million loss, the loss for fiscal 1996 was offset by; $1.8 million refund of federal income taxes, $1.3 million reduction in accounts receivable, $1.7 million in depreciation and amortization charges, $1.0 million in customer advances, $794,000 writedown of capitalized software, and $434,498 of other non cash charges. Working capital at October 31, 1996 was $2.0 million, as compared to $7.6 million at October 31, 1995. In fiscal 1996 the Company purchased $385,236 of fixed assets, consisting primarily of computer and manufacturing equipment. The Company expects capital expenditures during fiscal 1997 to be similar to fiscal 1996 levels. -19- The Company received $387,869 in fiscal 1996 from employee stock option exercises and stock purchase plan purchases, an increase of 35 percent from fiscal 1995 amounts. As of October 31, 1996 the Company was in default on the minimum profitability covenant of its $2.0 million credit line, as amended. The Company received a letter of forbearance from the bank that provided for a revised credit limit of $1.0 million with borrowings limited to 65 percent of adjusted accounts receivable balances and for other revised covenants. These revised covenants specified minimum monthly profitability levels, a minimum tangible net worth of $4.0 million and a minimum debt ratio of 1.0:1.0. As of December 15, 1996 the credit line was canceled and the Company entered into a new working capital credit facility for $500,000 that expires on May 15, 1997. Borrowings under the new line bear interest at the bank's prime rate plus two percent and are collateralized by accounts receivable and other assets. Borrowings are limited to 75 percent of adjusted accounts receivable balances and the Company is required to maintain minimum tangible net worth of $4.0 million, a minimum debt ratio of 0.7:1.0, a quick ratio of cash, investments and accounts receivable to current liabilities of 1.0:1.0. The line of credit also prohibits the payment of cash dividends without the consent of the bank. As discussed above in "Business" the Company sold all the assets of its manufacturing operation to XeTel Corporation, for $1.6 million. Additionally, the Company entered into a multi-year exclusive agreement to purchase manufacturing services from XeTel and to sublease a portion of its San Ramon facility to XeTel. As a result of the sale, the Company expects to report a gain on the sale of these assets, net of expenses, in the first quarter of 1997. Based on the current operating plan, the Company anticipates that it may require additional working capital in excess of its working capital line of credit to meet operating requirements. The additional working capital is required to support the expansion of sales of the netXpand product line through planned sales channel expansion and marketing programs as well as accounts receivable and inventory growth. The Company is currently seeking additional capital through an increase of credit facilities. If the Company does not receive sufficient increases in credit facilities, it may seek alternative sources of financing, including equity sales, or it may reduce overall expense and capital expenditure levels. There can be no assurance that the Company will be successful in obtaining additional working capital or in expanding its netXpand business. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required under Item 8 are provided under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -20- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS Information concerning the Company's directors is incorporated by reference to the information in the section captioned "Nominees" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 8 1997 (the "1997 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. 58 President and Chief Executive Officer, and Chairman Timothy J. Repp 36 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Michael R. Coker 48 Vice President, Sales and Marketing Mr. Heye has been President and Chief Executive Officer of the Company since November 1991. From 1989 to November 1991, he served as Executive Vice President of Ampex Corporation, a manufacturer of high-performance scanning recording systems and President of Ampex Video Systems Corporation, a wholly- owned subsidiary of Ampex Corporation and a manufacturer of professional video recorders and editing systems for the television industry. From 1986 to 1989 Mr. Heye was Executive Vice President of Airborn, Inc., a manufacturer of components for the aerospace and military markets. Prior to 1986 Mr. Heye served in various senior management positions at Texas Instrument, Inc. in the U.S. and overseas, including, Vice President and General Manager of Consumer Products and President of Texas Instruments Asia, Ltd. headquartered in Tokyo, Japan. Mr. Repp has served as Vice President, Finance and Chief Financial Officer since January 1992. He joined the Company in January 1991 as Controller. From 1987 until 1990, he was assistant controller at Grubb and Ellis, a national real estate firm and prior to 1987 he was an audit manager at Coopers and Lybrand, an international accounting firm. Mr. Coker has been Vice President, Sales since March 1996. From January 1993 until February 1996, he was President and Chief Executive Officer of Syskonnect, a provider of networking communication equipment. From October 1983 to December of 1993, Mr. Coker served in -21- 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. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference to the section entitled "Executive Compensation" appearing in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" appearing in the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. -22- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Report: (a) FINANCIAL STATEMENTS (SEE ITEM 8). Page ---- Report of Independent Accountants 27 Consolidated Balance Sheets at October 31, 1996 and 1995 28 Consolidated Statements of Operations for fiscal years 1996, 1995, and 1994 29 Consolidated Statements of Shareholders' Equity for fiscal years 1996, 1995 and 1994 30 Consolidated Statements of Cash Flows for fiscal years 1996, 1995, and 1994 31 Notes to Consolidated Financial Statements 32 (b) FINANCIAL STATEMENT SCHEDULE Schedule II - Valuations and Qualifying Accounts 42 All other schedules are omitted as the required information is not applicable or has been included in the consolidated financial statements or the notes thereto. -23- (c) Exhibits Exhibit Sequential Number Description Page No. ------ ----------- -------- (a) 3.1 Articles of Incorporation, as amended --- (a) 3.2 Certificate of Determination --- 10.1 1996 Incentive Stock Option Plan 43 (b) 10.2 1991 Non-Employee Directors' Stock Option Plan, as amended --- (f) 10.3 1992 Employee Stock Purchase Plan, as amended --- (c) 10.4 Lease for 4550 Norris Canyon Road, San Ramon, California dated November 2, 1992 between the Company and PacTel Properties --- (d) 10.5 Amendment dated June 6, 1996 to lease for 4550 Norris Canyon Road, San Ramon, California, between the Company and CalProp L.P. (assignee of PacTel Properties) --- (e) 10.6 Asset Purchase Agreement between XeTel Corporation and SBE, Inc. dated as of December 6, 1996 --- 11.1 Statement re computation of per share earnings 58 24.1 Consent of Coopers & Lybrand, Independent Public Accountants 59 27.1 Financial Data Schedule 60 (d) REPORTS ON FORM 8-K The Company filed a Report on Form 8-K, dated August 29, 1996, disclosing the sale of 167 shares of Series A Preferred Stock for net proceeds of approximately $1.1 million. -24- Explanations for letter footnotes: - -------------------------------------------------------------------------------- (a) Filed as an exhibit to the current report on Form 8-K dated August 29, 1996 and incorporated herein by reference. (b) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1991 and incorporated herein by reference. (c) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1993 and incorporated herein by reference. (d) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1995 and incorporated herein by reference. (e) Filed as an exhibit to the current report on Form 8-K dated December 6, 1997 and incorporated herein by reference -25- SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SBE, Inc. (Registrant) Dated: January 28, 1997 By: /s/ Timothy J. Repp ---------------------- Timothy J. Repp Chief Financial Officer and Vice President of Finance Pursuant to the requirements for the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities indicated, as of January 28, 1997. Signature Title --------- ----- /s/ William B. Heye, Jr. - ------------------------ William B. Heye Jr. Chief Executive Officer, President and Chairman of the Board, (Principal Executive Officer) /s/ Timothy J. Repp - ------------------- Timothy J. Repp Chief Financial Officer, Vice President of Finance (Principal Financial and Accounting Officer) /s/ Raimon L. Conlisk - --------------------- Raimon L. Conlisk Director /s/ George E. Grega - ------------------- George E. Grega Director -26- Report of Independent Accountants To the Board of Directors and Shareholders SBE, Inc. San Ramon, California We have audited the consolidated financial statements of SBE, Inc. and subsidiary as of October 31, 1996 and 1995 and for each of the three years in the period ended October 31, 1996. We have also audited the financial statement schedule listed in Item 14(b) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SBE, Inc. and subsidiary as of October 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. San Francisco, California December 16, 1996 -27- SBE, INC. CONSOLIDATED BALANCE SHEETS October 31 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 41,061 $ 857,206 Trade accounts receivable, net 2,043,959 3,387,732 Inventories 2,741,356 2,611,413 Income tax recoverable 8,990 1,836,315 Deferred income taxes 291,275 224,681 Other 78,118 377,733 ------------ ------------ Total current assets 5,204,759 9,295,080 Property, plant and equipment, net 2,070,389 3,329,913 Deferred income taxes 27,083 654,319 Capitalized software costs, net 551,168 1,656,419 Other 40,700 41,968 ------------ ------------ Total assets $ 7,894,099 $ 14,977,699 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank line of credit $ 980,340 $ --- Trade accounts payable 1,084,813 940,888 Accrued payroll and employee benefits 261,726 593,106 Customer advances 617,453 --- Other 211,856 117,410 ------------ ------------ Total current liabilities 3,156,188 1,651,404 Deferred tax liabilities 318,358 879,000 Deferred rent 438,939 339,134 ------------ ------------ Total liabilities 3,913,485 2,869,538 ------------ ------------ Commitments (Note 8). Shareholders' equity: Preferred stock (no par value); authorized 2,000 shares; issued 167 shares; outstanding 113 shares at October 31, 1996; none issued at October 31, 1995 750,460 --- Common stock (no par value); authorized 6,000,000 shares; issued and outstanding 2,232,858 and 2,074,254 shares at October 31, 1996 and 1995, respectively 8,426,315 7,679,819 Retained earnings (deficit) (5,196,161) 4,428,342 ------------ ------------ Total shareholders' equity 3,980,614 12,108,161 ------------ ------------ Total liabilities and shareholders' equity $ 7,894,099 $ 14,977,699 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of the consolidated financial statements. -28- SBE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 31 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Net sales $ 13,350,228 $ 19,367,776 $ 22,336,777 Cost of sales 8,277,879 9,566,784 9,838,663 ------------ ------------ ------------ Gross profit 5,072,349 9,800,992 12,498,114 Product research and development 5,083,707 6,900,420 4,769,306 Sales and marketing 4,605,275 4,961,438 2,656,240 General and administrative 3,137,132 3,929,544 3,683,237 Restructuring costs 960,747 --- --- Write-off of prepaid offering costs 105,000 --- --- Writedown of software costs 794,018 --- --- ------------ ------------ ------------ Total expenses 14,685,879 15,791,402 11,108,783 Operating (loss) income (9,613,530) (5,990,410) 1,389,331 Interest income 34,486 342,463 407,937 Interest expense (43,859) (14,783) (1,217) Write-off of equity investment --- (330,000) --- Loss on sale of investments --- (293,797) --- ------------ ------------ ------------ (Loss) income before income taxes (9,622,903) (6,286,527) 1,796,051 Provision (benefit) for income taxes 1,600 (1,718,556) 459,743 ------------ ------------ ------------ Net (loss) income $ (9,624,503) $ (4,567,971) $ 1,336,308 ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) income per common share $ (4.51) $ (2.22) $ 0.63 ------------ ------------ ------------ Weighted average common shares 2,131,593 2,054,570 2,107,582 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. -29- SBE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock Shares Amount Shares Amount ----------- ----------- ----------- ---------- Balances, October 31, 1993 --- --- 2,005,131 $7,229,409 Stock issued in connection with stock option plan --- --- 18,209 86,221 Stock issued in connection with stock purchase plan --- --- 11,502 77,063 Unrealized losses on investments --- --- --- --- Net income --- --- --- --- ------------ ------------ ----------- ----------- Balances, October 31, 1994 --- --- 2,034,842 7,392,693 Stock issued in connection with stock option plan --- --- 21,543 166,454 Stock issued in connection with stock purchase plan --- --- 17,869 120,672 Unrealized losses on investments --- --- --- --- Net loss --- --- --- --- ------------ ------------ ----------- ----------- Balances, October 31, 1995 --- --- 2,074,254 7,679,819 Stock issued in connection with preferred stock offering 167 $1,109,087 --- --- Stock retired/issued in connection with conversion to common stock (54) (358,627) 104,719 358,627 Stock issued in connection with stock option plans --- --- 35,283 221,939 Stock issued in connection with stock purchase plan --- --- 18,602 165,930 Net loss --- --- --- --- ------------ ------------ ----------- ----------- Balances, October 31, 1996 113 $750,460 2,232,858 $8,426,315 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- Unrealized Losses Retained on Investments Earnings (Deficit) Total --------------- ----------------- ------------ Balances, October 31, 1993 --- $7,660,005 $14,889,414 Stock issued in connection with stock option plan --- --- 86,221 Stock issued in connection with stock purchase plan --- --- 77,063 Unrealized losses on investments $(525,370) --- (525,370) Net income --- 1,336,308 1,336,308 ------------ ------------ ----------- Balances, October 31, 1994 (525,370) 8,996,313 15,863,636 Stock issued in connection with stock option plan --- --- 166,454 Stock issued in connection with stock purchase plan --- --- 120,672 Unrealized losses on investments 525,370 --- 525,370 Net loss --- (4,567,971) (4,567,971) ------------ ------------ ----------- Balances, October 31, 1995 --- 4,428,342 12,108,161 Stock issued in connection with preferred stock offering --- --- 1,109,087 Stock retired/issued in connection with conversion to common stock --- --- --- Stock issued in connection with stock option plans --- --- 221,939 Stock issued in connection with stock purchase plan --- --- 165,930 Net loss --- (9,624,503) (9,624,503) ------------ ------------ ----------- ------------ ------------ ----------- Balances, October 31, 1996 $ --- $(5,196,161) $3,980,614 ------------ ------------ ----------- ------------ ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements. -30-
SBE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended October 31 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net (loss) income $ (9,624,503) $ (4,567,971) $ 1,336,308 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation and amortization 1,659,787 1,312,061 1,115,173 Restructuring costs 329,498 --- --- Write-off of prepaid offering costs 105,000 --- --- Writedown of capitalized software 794,018 --- --- Write-off of equity investment --- 330,000 --- Loss on sale of investments --- 293,797 7,730 Deferred taxes --- 10,178 199,822 Other --- 955 9,010 Changes in assets and liabilities: Decrease (increase) in trade accounts receivable 1,343,773 56,465 (8,392) (Increase) decrease in inventories (129,943) (563,621) 92,316 Decrease (increase) in income tax recoverable 1,827,325 (1,776,485) --- Decrease (increase) in other assets 195,883 30,355 (160,880) Increase (decrease) in trade accounts payable 143,925 138,613 256,782 Decrease in income taxes payable --- --- (26,201) Increase (decrease) in other current liabilities 380,519 122,174 (502,289) Increase in noncurrent liabilities 99,805 218,725 76,048 ------------ ------------ ------------ Net cash (used) provided by operating activities (2,874,913) (4,394,754) 2,395,427 ------------ ------------ ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (385,236) (1,802,826) (772,899) Proceeds from sale of fixed assets 8,208 2,729 2,000 Capitalized software costs (41,500) (1,486,967) (230,000) Proceeds from sale of investments --- 5,936,416 974,522 Purchase of investments --- (250,585) (2,163,595) ------------ ------------ ------------ Net cash (used) provided by investing activities (418,528) 2,398,767 (2,189,972) ------------ ------------ ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from borrowings on line of credit 5,528,595 --- --- Repayment of borrowings on line of credit (4,548,255) Proceeds from sale of preferred stock 1,109,087 --- --- Proceeds from stock plans 387,869 287,126 163,284 Principal payments on capital lease obligations --- --- (26,466) ------------ ------------ ------------ Net cash provided by financing activities 2,477,296 287,126 136,818 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (816,145) (1,708,861) 342,273 Cash and cash equivalents at beginning of year 857,206 2,566,067 2,223,794 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 41,061 $ 857,206 $ 2,566,067 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 43,859 $ 14,783 $ 1,217 ------------ ------------ ------------ Income taxes $ 417 $ 33,824 $ 447,590 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. -31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS SEGMENT 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. During 1996 the Company invested significant resources in developing netXpand, a line of standalone remote LAN access server/router products. As a result of this investment and decreased sales attributable to the shift in product focus, the Company incurred substantial operating losses in fiscal 1996. As a result of the losses the Company restructured its operations and reduced expense levels to improve operating results. In connection with the restructuring, charges of $960,747 were recorded, primarily related to severance, asset writedowns and facility lease termination costs. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Based on the current operating plan, the Company anticipates that it may require additional working capital in excess of its working capital line of credit to meet operating requirements. The additional working capital is required to support the expansion of sales of the netXpand product line through planned sales channel expansion and marketing programs as well as accounts receivable and inventory growth. The Company is currently seeking additional capital through an increase of credit facilities. If the Company does not receive sufficient increases in credit facilities, it may seek alternative sources of financing, including equity sales, or it may reduce overall expense and capital expenditure levels. There can be no assurance that the Company will be successful in obtaining additional working capital or in expanding its netXpand business. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers all highly liquid investments readily convertible into cash with an original maturity of three months or less upon acquisition by the Company to be cash -32- equivalents. Substantially all of its cash and cash equivalents are held in one large financial institution. INVESTMENTS: The Company classifies its investments as "available for sale," and therefore records the investment at fair market value with any unrealized losses or gains reflected as a separate component of shareholders' equity. The Company had no investments as of October 31, 1996 and 1995. During fiscal 1995, the Company sold all of its investments for proceeds of $5,936,416 and realized losses of $293,797. For purposes of determining realized losses, the cost of investments is based upon the specific identification method. INVENTORIES: Inventories are stated at the lower of cost, using the first-in, first-out method, or market value. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost. The Company provides for depreciation by charges to expense, which are sufficient to write off the costs of the assets over their estimated useful lives of three to eight years, on a straight-line basis. Leasehold improvements are amortized over the lesser of their useful lives or the remaining term of the related leases. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the asset and allowance for depreciation accounts and any gain or loss on such sale or disposal is credited or charged to income. Maintenance, repairs and minor renewals are charged to expense as incurred. Expenditures which substantially increase an asset's useful life are capitalized. CAPITALIZED SOFTWARE COSTS: Capitalized software costs consist of costs to purchase software and to internally develop software. Capitalization of software costs begins upon the establishment of technological feasibility. All capitalized software costs are amortized over related sales on a per-unit basis with a minimum amortization based on a straight-line method over a three-year useful life. The Company evaluates the estimated net realizable value of each software product and records provisions to the asset value of each product for which the net book value is in excess of the net realizable value. REVENUE RECOGNITION AND WARRANTY COSTS: The Company records product sales at the time of product shipment. Warranty costs are not significant; however, the Company provides a reserve for estimated warranty costs at the time of sale and periodically adjusts such amounts to reflect actual expenses. The Company's sales transactions are negotiated principally in US dollars. -33- 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, 1996, 1995 and 1994, direct costs incurred under R&D contracts were $42,543, $112,868 and 382,397 respectively and reimbursements earned were $73,852, $221,120 and 439,000 respectively. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. Under SFAS No. 109 the Company provides a deferred tax expense or benefit equal to the change in the deferred tax asset or liability during the year. Deferred income taxes represent future net tax effects resulting from temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded against net deferred tax assets, where in the opinion of management realization is uncertain. NET INCOME (NET LOSS) PER COMMON SHARE: Net income per common share for the year ended October 31, 1994 was computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents relate to stock options. Common stock equivalents are excluded from the net loss per common share (LPS) calculation for the years ended October 31, 1996 and 1995, as they have the effect of decreasing LPS. The difference between primary and fully diluted net income (loss) per share was not significant in any year. ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), was issued and is effective for the Company's 1997 fiscal year. The Company intends to continue to account for employee stock options in accordance with APB Opinion No. 25 and, accordingly, will comply with the pro forma and other disclosures required by SFAS No. 123 beginning in fiscal 1997. RECLASSIFICATIONS: Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation with no effect on net income as previously reported. -34- 2. INVENTORIES Inventories at October 31, 1996 and 1995 are comprised of the following: 1996 1995 - ----------------------------------------------------------------------- Finished goods $ 750,508 $ 841,453 Subassemblies 174,620 299,315 Parts and materials 1,816,228 1,470,645 ------------ ------------ $ 2,741,356 $ 2,611,413 ------------ ------------ ------------ ------------ 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at October 31, 1996 and 1995 are comprised of the following: 1996 1995 - ------------------------------------------------------------------- Machinery and equipment $ 6,988,575 $ 7,462,268 Furniture and fixtures 1,078,008 1,091,935 Leasehold improvements 519,309 519,309 ------------ ------------ 8,585,892 9,073,512 Less accumulated depreciation and amortization 6,515,503 5,743,599 ------------ ------------ $ 2,070,389 $ 3,329,913 ------------ ------------ ------------ ------------ Depreciation and amortization expense totaled $1,307,054, $1,251,513 and $979,430 for the years ending October 31, 1996, 1995 and 1994, respectively. 4. BANK FACILITY: The Company had a line of credit for $4.0 million which expired on April 30, 1996. On April 29, 1996 the Company modified the agreement to extend the term to April 30, 1997 to decrease the borrowing base to $2.0 million and to modify certain covenants. As of October 31, 1996 the Company was in default on the minimum profitability covenant of its credit line, as amended. The Company has received a letter of forbearance from the Bank that provides for a revised credit limit of $1.0 million with borrowings limited to 65 percent of adjusted accounts receivable balances and for other revised covenants. These revised covenants specify minimum monthly profitability levels, a tangible net worth of $4,000,000 and a minimum debt ratio of 1.0:1.0. As of October 31, 1996 borrowings under this agreement approximate fair market value due to the short term maturity of the credit line. As of December 15, 1996 the credit line was canceled and the Company has entered into a new working capital credit facility for $500,000 which expires on May 15, 1997. Borrowings under the new line bear interest at the bank's prime rate plus two percent and are collateralized by accounts receivable and other assets. Borrowings are limited to 75 percent of adjusted accounts receivable balances and the Company is required to maintain minimum tangible net worth of $4.0 million, a minimum debt ratio of 0.7:1.0, a minimum quick ratio of cash, investments and accounts receivable to current liabilities of 1.0:1.0. Additionally, the line of credit also prohibits the payment of cash dividends without the consent of the bank. -35- 5. CONVERTIBLE PREFERRED STOCK On July 10, 1996, the Company issued and sold 167 shares of Series A Preferred Stock ("Series A Preferred") for net proceeds of approximately $1.1 million The issuance of Series A Preferred was exempt, pursuant to Regulation S promulgated under the Securities Act of 1933, as amended (the "Act"), from registration requirements under the Act. Each share of Series A Preferred is convertible into the number of shares of Common Stock of the Company ("Common Stock") equal to $7,500 divided by the Conversion Price. The applicable Conversion Price is lesser of $6.675 or 75 percent of the average closing bid price of the Common Stock for the five consecutive trading days immediately prior to conversion; provided however, that the Series A Preferred, taken as a whole, may not at any time convert into 16.7 percent or more of the Company's outstanding Common Stock (measured on July 10, 1996 and on the date of conversion). The Series A Preferred will automatically convert into Common Stock when the average closing bid price of the Common Stock over a five trading day period is equal to or greater than $13.35. In addition, all unconverted shares of Series A Preferred will be converted automatically upon the earlier to occur of July 10, 1998 and the written consent of the holders of two thirds of the then outstanding Series A Preferred. Holders of Series A Preferred are also entitled to certain dividend rights and liquidation preferences. The shares of Series A Preferred have no voting rights. As of December 4, 1996 all outstanding shares of Series A Preferred had been converted into Common Stock. 6. INCOME TAXES The components of the provision for income taxes for the years ended October 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Federal: Current --- $(1,731,734) $ 196,270 Deferred --- 10,178 199,822 State: Current $ 1,600 3,000 63,651 Deferred --- --- --- --------- ----------- ---------- Total provision (benefit) for income taxes $ 1,600 $(1,718,556) $ 459,743 --------- ----------- ---------- --------- ----------- ----------
The effective income tax rate differs from the statutory federal income tax rate for the following reasons: 1996 1995 1994 - -------------------------------------------------------------------------------- Statutory federal income tax rate (34.0)% (34.0)% 34.0% State taxes, net of federal income tax benefit --- --- 4.3 Change in valuation allowance 34.0% 12.2 --- Tax credits (5.0) (8.9) Nontaxable interest income (0.7) (3.5) Other, net 0.2 (0.3) ---- ----- ---- 0.0% (27.3)% 25.6% ---- ----- ---- ---- ----- ---- -36- Significant components of the Company's deferred tax balances as of October 31, 1996 and 1995 are as follows: 1996 1995 - ------------------------------------------------------------------------------- Deferred tax assets: Current Accrued employee benefits $ 77,000 $ 103,000 Inventory allowances 136,000 278,000 Allowance for doubtful accounts 42,000 51,000 Warranty accruals 37,000 31,000 Other reserves not currently deductible 4,000 Noncurrent Deferred rent 179,000 134,000 R&D credit carryforward 706,000 695,000 Alternative minimum tax carryforward 143,000 143,000 Operating loss carryforward 3,136,000 184,000 Investments 130,000 130,000 Capital loss carryforward 74,000 74,000 ----------- ------------ Total deferred tax assets 4,591,000 1,827,000 ----------- ------------ Deferred tax liabilities: Noncurrent Depreciation (96,000) (234,000) Capitalized software costs (223,000) (645,000) ----------- ------------ Total deferred tax liabilities (319,000) (879,000) ----------- ------------ Deferred tax asset valuation allowance (4,341,000) (948,000) ----------- ------------ Net deferred tax assets $ --- $ --- ----------- ------------ ----------- ------------ A valuation allowance was established to offset certain deferred tax assets due to management's uncertainty of realizing the benefit of these items. The net increase in the valuation allowance was $3.4 million and $769,374 for the years ended October 31, 1996 and 1995, respectively. The Company has research and experimentation tax credit carryforwards of $706,000 for federal and state tax purposes. These carryforwards expire in the periods ending 2007 through 2011. The Company has a net operating loss carryforward for federal and state income tax purposes of approximately $8.4 million and $7.2 million, respectively, which expire in periods ending 1999 through 2011. -37- 7. CAPITALIZED SOFTWARE COSTS Software costs at October 31, 1996 and 1995 comprise the following: 1996 1995 - -------------------------------------------------------------------------------- Purchased software $109,116 $ 195,000 Internally developed software 805,333 1,521,967 -------- ---------- 914,449 1,716,967 Less accumulated amortization 363,281 60,548 -------- ---------- $551,168 $1,656,419 -------- ---------- -------- ---------- The Company capitalized $41,500 and $120,000 of purchased software costs in 1996 and 1995, respectively. Additionally, $1,366,967 of internally developed software costs were capitalized in 1995. Amortization of capitalized software costs totaled $352,733, $60,548 and $135,743 for the years ended October 31, 1996, 1995 and 1994, respectively. Additionally, the Company recorded a writedown of its capitalized software costs of $794,000 during fiscal year 1996. The carrying value of the asset was reduced due to the uncertainty of the future realization of the asset, because of slower than expected sales of netXpand products. 8. COMMITMENTS The Company leases all its buildings under noncancelable operating leases which expire at various dates through the year 2006. Future minimum lease payments under all operating leases with initial or remaining noncancelable lease terms in excess of one year at October 31, 1996 are as follows: Year ending October 31: 1997 $ 390,816 1998 379,449 1999 370,038 2000 385,353 2001 639,838 Thereafter 2,821,366 ---------- Total minimum lease payments $4,986,861 ---------- ---------- Under the terms of the San Ramon, California building lease, rent includes the lessor's operating costs and is offset by any 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, 1996, 1995 and 1994 was $822,835, $794,700 and $786,513, respectively. -38- 9. STOCK OPTION AND STOCK PURCHASE PLANS The Company has one employee stock option plan, its 1996 Incentive Stock Option Plan. Originally adopted as the 1987 Supplemental Stock Option Plan, this plan was amended and restated on January 18, 1996 and retitled the 1996 Incentive Stock Option Plan. Shares of common stock reserved under the plan are 1,130,000 shares and 930,000 shares as of October 31, 1996 and 1995, respectively. Stock options granted under the employee plan are exercisable over a maximum term of ten years from the date of grant, vest in various installments over this period and have exercise prices reflecting market value at the date of grant. Additionally, in 1991, shareholders approved a "Non-Employee Director Stock Option Plan" (the Plan). A total of 140,000 shares of common stock are reserved for issuance under this Plan. Options granted under the plan vest over a four-year period, expire five years after the date of grant and have exercise prices reflecting market value at the date of grant. In May 1996, due to the reduced market price of the Company's common stock, the Company offered employees the opportunity to have their options repriced to $8.93 in exchange for restrictions of certain rights under their option grant. At October 31, 1996 and 1995, 13,913 and 94,928 shares, respectively, were available for stock option grants under the employee plans and 59,000 and 74,000 shares, respectively, were available for grant under the Non-Employee Director Plan. A summary of the activity under the stock option plans is set forth below:
1991 Non-Employee 1996 Incentive Directors Stock Option Plan Stock Option Plan ----------------------------------------------------------------- Exercise Exercise Shares Price Shares Price - ------------------------------------------------------------------------------------------------------ Outstanding at October 31, 1993 266,547 2.50 - 17.25 24,000 5.25 - 13.00 Granted 78,931 5.50 - 12.50 20,000 8.50 Terminated (15,093) 7.13 - 10.50 --- --- Exercised (14,459) 2.50 - 5.50 (3,750) 5.25 --------------------------------------------------------------- Outstanding at October 31, 1994 315,926 3.75 - 17.25 40,250 5.25 - 13.00 Granted 275,907 7.50 - 14.50 20,000 9.50 Terminated (37,502) 7.00 - 14.50 --- --- Exercised (21,543) 3.75 - 13.25 --- --- --------------------------------------------------------------- Outstanding at October 31, 1995 532,788 4.13 - 17.25 60,250 5.25 - 13.00 Granted 513,998 4.38 - 10.50 15,000 7.75 Terminated (232,703) 5.31 - 12.00 --- --- Exercised (23,033) 4.25 - 10.25 (12,250) 5.25 --------------------------------------------------------------- Outstanding at October 31, 1996 791,050 3.75 - 10.50 63,000 $7.75 - 13.00 --------------------------------------------------------------- --------------------------------------------------------------- Exercisable at October 31, 1996 310,398 $4.13 - 8.93 22,000 $5.25 - 13.00 --------------------------------------------------------------- ---------------------------------------------------------------
-39- The Company has an Employee Stock Purchase Plan (the Purchase Plan) under which 100,000 shares of common stock have been reserved for issuance. The Purchase Plan allows participating employees to purchase, through payroll deductions, shares of the Company's common stock at 85 percent of the stock's fair market value at specified dates. At October 31, 1996, 92 employees were eligible to participate in the Purchase Plan and 33,249 common shares were available for issuance. In fiscal year 1996, 1995 and 1994, 18,602, 17,869 and 11,502 shares were issued under the Purchase Plan, respectively. 10. EMPLOYEE SAVINGS AND INVESTMENT PLAN The Company contributes a percentage of income before income taxes into an employee savings and investment plan. The percentage is determined annually by the board of directors. 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, 1996, 1995 and 1994, total expense under the above plan was $185,596, $202,228 and $169,116, respectively. 11. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company's trade accounts receivable are concentrated among a small number of customers, principally located in the United States. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains an allowance for doubtful accounts for potential credit losses and actual bad debt losses have not been material and have not exceeded management's expectations. Trade accounts receivable are recorded net of allowance for doubtful accounts of $105,000 and $130,000, at October 31, 1996 and 1995, respectively. Sales to individual customers in excess of 10 percent of net sales of the Company included sales to Tandem Computers of $2.7 million in fiscal 1996 and sales to America Online and Tandem Computers of $3.1 million and $2.8 million, respectively, in fiscal 1995. Sales to Cisco Systems and G.E. Capital Spacenet Services, respectively, accounted for $4.6 million and $2.5 million of sales in fiscal 1994. International sales accounted for 26 percent and 11 percent of total sales during fiscal 1996 and fiscal 1995, respectively. -40- 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands except First Second Third Fourth per share amounts) Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------- 1996: Net sales $3,993 $2,662 $2,909 $3,785 Gross profit 1,659 852 1,055 1,505 Net loss (1,989) (3,915) (2,124) (1,612) Net loss per share $(0.95) $(1.85) $(1.00) (0.72) 1995: Net sales $5,115 $4,768 $4,584 $4,901 Gross profit 2,910 2,418 2,174 2,299 Net loss (250) (1,583) (1,245) (1,490) Net loss per share $(0.12) $(0.77) $(0.60) $(0.72) The Company's fiscal 1996 fourth quarter reflects a $706,000 restructuring charge and the Company's fiscal 1995 fourth quarter reflects a $330,000 write-off of an equity investment. The Company has amended its financial statements for the three months ended April 30, 1995 to reflect a $650,000 writedown of capitalized software costs. This adjustment resulted from the capitalization of products that either did not achieve technological feasibility or were subsequently discontinued. The effect of this adjustment was to increase the second quarter net loss by $474,000, or $.23 per share. 13. SUBSEQUENT EVENT On December 6, 1996 the Company sold all the assets of its manufacturing operation to XeTel Corporation, a contract manufacturing company with headquarters in Austin, Texas, for $1.6 million. Additionally, the Company entered into a multi-year exclusive agreement to purchase manufacturing services from XeTel and subleased a portion of its San Ramon facility to XeTel. The Company expects to report a gain on the sale of these assets net of expenses in the first quarter of 1997. -41- SBE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 1996, AND 1995
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Balance Beginning Charged to costs End of Description of Period and expenses Deductions(a) Period - ------------------------------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 1996 Allowance for Doubtful Accounts 130,000 0 (25,000) 105,000 Allowance for Obsolete Inventory 531,014 212,778 (577,646) 166,146 Allowance for Warranty Claims 104,894 50,290 (64,736) 90,447 Allowance for the deferred tax asset 948,000 3,393,000 0 4,341,000 YEAR ENDED OCTOBER 31, 1995 Allowance for Doubtful Accounts 100,000 32,590 (2,590) 130,000 Allowance for Obsolete Inventory 272,677 486,991 (228,654) 531,014 Allowance for Warranty Claims 96,016 52,608 (43,730) 104,894 Allowance for the deferred tax asset 178,626 769,374 0 948,000
(a) Deductions represent activity charged to related asset or liability account. -42- EX-10.1 2 EXHIBIT 10.1 1996 INCENTIVE STOCK OPTION EXHIBIT 10.1 SBE, INC. 1996 INCENTIVE STOCK OPTION PLAN ADOPTED BY THE BOARD OF DIRECTORS ON JANUARY 18, 1996 APPROVED BY SHAREHOLDERS ON APRIL 16, 1996 AMENDED BY THE COMPENSATION COMMITTEE ON NOVEMBER 26, 1996 INTRODUCTION Originally adopted as the 1987 Supplemental Stock Option Plan, this plan was amended and restated on January 18, 1996 and retitled the 1996 Incentive Stock Option Plan (the "Plan"). -43- PURPOSES. The purpose of the Plan is to provide a means by which selected Employees of the Company and its Affiliates may be given an opportunity to purchase stock of the Company. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees of the Company, to secure and retain the services of new Employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (c) The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be Incentive Stock Options. DEFINITIONS. A. "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. B. "BOARD" means the Board of Directors of the Company. C. "CODE" means the Internal Revenue Code of 1986, as amended. D. "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. E. "COMPANY" means SBE, Inc., a California corporation. F. "CONTINUOUS STATUS AS AN EMPLOYEE" means the employment is not interrupted or terminated by the Company or any Affiliate. The Board, in its sole discretion, may determine whether Continuous Status as an Employee shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; PROVIDED, HOWEVER, that any such leave may not exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or (ii) transfers between locations of the Company or between the Company, Affiliates or its successor. G. "DIRECTOR" means a member of the Board. H. "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. I. "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. J. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. K. "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows: a) If the common stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market ("NASDAQ"), the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reporting in the Wall Street Journal or such other source as the Board deems reliable; b) If the common stock is quoted on the Nasdaq Small Cap Market or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the high bid and high asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; -45- c) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. L. "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. M. "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non- employee director" for purposes of Rule 16b-3. N. "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. O. "OPTION" means a stock option granted pursuant to the Plan. P. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. Q. "OPTIONED STOCK" means the common stock of the Company subject to an Option. (r) "OPTIONEE" means an Employee who holds an outstanding Option. R. "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury -46- regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. S. "PLAN" means this 1996 Incentive Stock Option Plan. T. "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. II. ADMINISTRATION. A. The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). B. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: 1. To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how the Option shall be granted; the provisions of each Option granted (which need not be identical), including the time or times such Option may be exercised in whole or in part; and the number of shares for which an Option shall be granted to each such person. 2. To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. -47- 3. To amend the Plan as provided in Section 11. 4. Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. C. The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Options to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then subject to Section 162(m) of the Code and are not expected to be so subject at the time of recognition of income resulting from such Option, or (ii) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code. III. SHARES SUBJECT TO THE PLAN. A. Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to Options shall not exceed in the aggregate one million one hundred thirty thousand (1,130,000) shares of the Company's common stock. If any -48- Option shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such Option shall again become available for the Plan. B. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. IV. ELIGIBILITY. A. Options may be granted only to Employees. B. No person shall be eligible for the grant of an Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. C. Subject to the provisions of Section 10 relating to adjustments upon changes in stock, no person shall be eligible to be granted options covering more than 150,000 shares of the Company's common stock in any calendar year. V. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: A. TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. -49- B. PRICE. The exercise price of each Option shall be not less than one hundred percent (100%) of the fair market value of the stock subject to the Option on the date the Option is granted. C. CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (1) in cash at the time the option is exercised, or (2) at the discretion of the Board or the Committee, either at the time of the grant or exercise of the Option, (a) by delivery to the Company of other common stock of the Company, (b) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. D. TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. E. VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. During the remainder of -50- the term of the Option (if its term extends beyond the end of the installment periods), the option may be exercised from time to time with respect to any shares then remaining subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. F. SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred under subsection 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. G. TERMINATION OF EMPLOYMENT. In the event an Optionee's Continuous Status as an Employee terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is determined by the Board, and unless otherwise expressly determined by the Board, only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term -51- of such Option as set forth in the Option Agreement). With respect to Incentive Stock Options, the Board shall determine such period of time (in no event to exceed three (3) months from the date of termination) when the Option is granted. If, at the date of termination of the term of the Option (as extended by the Board, if applicable), the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after such time, the Optionee does not exercise his or her, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. H. DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option, but only within twelve (12) months from the date of such termination (or such shorter period specified in the Option Agreement), and only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. I. DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised, at any time within twelve (12) months following the date of death (or such shorter period specified in the Option Agreement) (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the -52- Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. J. EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. K. WITHHOLDING. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. VI. COVENANTS OF THE COMPANY. A. During the terms of the Options, the Company shall keep available at all times the number of shares of stock required to satisfy such Options. B. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Options; PROVIDED, HOWEVER, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company -53- deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. VII. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. VIII. MISCELLANEOUS. A. The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest. B. Neither an Optionee nor any person to whom an Option is transferred under subsection 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. C. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Employee or Optionee any right to continue in the employ of the Company or any Affiliate or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee or Optionee with or without cause. D. To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which -54- exceed such limit (according to the order in which they were granted) shall not be treated as Incentive Stock Options. IX. ADJUSTMENTS UPON CHANGES IN STOCK. A. If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding Options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding Options. -55- B. In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation shall assume any Options outstanding under the Plan or shall substitute similar Options for those outstanding under the Plan, or (ii) such Options shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Options, or to substitute similar options for those outstanding under the Plan, then, with respect to Options held by persons then performing services as Employees, the time during which such Options may be exercised shall be accelerated and the Options terminated if not exercised prior to such event. X. AMENDMENT OF THE PLAN. A. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: a) Increase the number of shares reserved for options under the Plan; b) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or c) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. -56- B. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Optionees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Options granted under it into compliance therewith. C. Rights and obligations under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Option was granted and (ii) such person consents in writing. XI. TERMINATION OR SUSPENSION OF THE PLAN. A. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on January 17, 2006. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. B. Rights and obligations under any Option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Option was granted. XII. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California. -57- EX-11.1 3 EXHIBIT 11.1 STATEMENT RECOMPUTATION Exhibit 11.1 SBE, INC. COMPUTATION OF EARNINGS PER SHARE FOR THE THREE YEARS ENDED OCTOBER 31
YEARS ENDED OCTOBER 31 ---------------------- 1996 1995 1994 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Net (loss) income ($9,624,503) ($4,567,971) $1,336,308 Average number of common shares outstanding during the year 2,131,593 2,054,570 2,021,143 Assumed issuance of stock under the employee and non-employee stock option plans (a) (a) 77,932 ------------------------------------------- Weighted average common shares 2,131,593 2,054,570 2,099,075 ------------------------------------------- Primary (loss) earnings per share ($4.51) ($2.22) $0.64 ------------------------------------------- ------------------------------------------- FULLY DILUTED EARNINGS PER SHARE: Average number of common shares outstanding during the year 2,131,593 2,054,570 2,021,143 Assumed issuance of stock under the employee and non-employee stock option plans (a) (a) 86,439 ------------------------------------------- Weighted average common shares 2,131,593 2,054,570 2,107,582 ------------------------------------------- Fully diluted (loss) earnings per share ($4.51) ($2.22) $0.63 ------------------------------------------- -------------------------------------------
(a) In loss years common share equivalents would have an anti dilutive effect on (loss) per share and therefore have been excluded. -58- EX-24.1 4 EXHIBIT 24.1 ACCOUNTANTS CONSENT Exhibit 24.1 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 December 16, 1996, on our audits of the consolidated financial statements and financial statement schedule of the Company as of October 31, 1996 and 1995 and for the years ended October 31, 1996, 1995 and 1994, which report is included in this 1996 Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. San Francisco, California January 28, 1997 -59- EX-27.1 5 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 12-MOS OCT-31-1996 OCT-31-1996 41,061 0 2,043,959 0 2,741,356 5,204,759 2,070,389 0 7,894,099 3,156,198 0 0 750,460 8,426,315 (5,196,161) 7,894,099 13,350,228 13,350,228 8,277,879 14,685,879 0 0 43,859 (9,622,903) 1,600 0 0 0 0 (9,624,503) (4.51) 0
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