-----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, GdN+mNF8djfI+qNcWRVP1SBYEUpM1DMDzkk1ZB05eoxMfJxQuw1JKToWR34E2Xql Cs/trvgKTixaDzJOSnizYw== 0001144204-05-006486.txt : 20050302 0001144204-05-006486.hdr.sgml : 20050302 20050302153140 ACCESSION NUMBER: 0001144204-05-006486 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050131 FILED AS OF DATE: 20050302 DATE AS OF CHANGE: 20050302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBE INC CENTRAL INDEX KEY: 0000087050 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 941517641 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08419 FILM NUMBER: 05654143 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-Q 1 v13803_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005 [ ] Transition report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from _______ to ________ Commission file number 0-8419 SBE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-1517641 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2305 Camino Ramon, Suite 200, San Ramon, California 94583 --------------------------------------------------------- (Address of principal executive offices and zip code) (925) 355-2000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act) Yes ___ No _X_ The number of shares of registrant's common stock outstanding as of January 31, 2005 was 5,199,538. SBE, INC. INDEX TO JANUARY 31, 2005 FORM 10-Q PART I FINANCIAL INFORMATION ITEM 1 Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2005 (unaudited) and October 31, 2004 (audited)............3 Condensed Consolidated Statements of Operations for the three months ended January 31, 2005 and 2004 (unaudited)...............4 Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2005 and 2004 (unaudited)...............5 Notes to Condensed Consolidated Financial Statements......................6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.........................10 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk.................................................24 ITEM 4 Controls and Procedures.....................................24 PART II OTHER INFORMATION [DAVE: HAVE YOU CHECKED TO SEE WHETHER YOU HAVE ANY ITEM 2 (SALES OF UNREGISTERED SECURITIES) DISCLOSURES?] ITEM 6 Exhibits and Reports on Form 8-K............................25 SIGNATURES....................................................................28 EXHIBITS......................................................................29 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SBE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) January 31, October 31, 2005 2004 -------- -------- (unaudited) Current assets: Cash and cash equivalents $ 1,564 $ 1,849 Trade accounts receivable, net 2,048 1,668 Inventories 1,638 1,926 Other 276 227 -------- -------- Total current assets 5,526 5,670 Property, plant and equipment, net 408 427 Capitalized software costs, net 41 48 Other 33 28 -------- -------- Total assets $ 6,008 $ 6,173 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 526 $ 856 Accrued payroll and employee benefits 377 391 Capital lease obligations - current portion 26 25 Other accrued expenses 260 459 -------- -------- Total current liabilities 1,189 1,731 Capital lease obligations, net of current portion 146 139 -------- -------- Total liabilities 1,335 1,870 -------- -------- Commitments (note 6) Stockholders' equity: Common stock 16,068 15,755 Deferred compensation (120) -- Accumulated deficit (11,275) (11,452) -------- -------- Total stockholders' equity 4,673 4,303 -------- -------- Total liabilities and stockholders' equity $ 6,008 $ 6,173 ======== ======== See notes to condensed consolidated financial statements. -3- SBE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three months ended January 31, 2005 2004 ------- ------- Net sales $ 2,815 $ 2,970 Cost of sales 1,230 1,325 ------- ------- Gross profit 1,585 1,645 ------- ------- Product research and development 473 505 Sales and marketing 559 489 General and administrative 369 364 Loan reserve (benefit) -- (239) ------- ------- Total operating expenses 1,401 1,119 ------- ------- Operating income 184 526 Interest and other income (expense) (2) 1 ------- ------- Income before income taxes 182 527 Provision for income taxes 5 -- ------- ------- Net income $ 177 $ 527 ======= ======= Basic earnings per share $ 0.03 $ 0.11 ======= ======= Diluted earnings per share $ 0.03 $ 0.09 ======= ======= Shares used in per share computations: Basic 5,136 4,888 ======= ======= Diluted 5,869 6,120 ======= ======= See notes to condensed consolidated financial statements. -4- SBE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three months ended January 31, -------------------- 2005 2004 ------- ------- Cash flows from operating activities: Net income $ 177 $ 527 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization: Property and equipment 56 53 Capitalized software costs 16 11 Amortization of intellectual property -- 102 Changes in operating assets and liabilities: Trade accounts receivable (380) (1,459) Inventories 288 (184) Other assets (53) (300) Trade accounts payable (330) 721 Other current liabilities (98) (109) Other non-current liabilities 7 (124) ------- ------- Net cash used in operating activities (317) (762) ------- ------- Cash flows from investing activities: Purchases of property and equipment (38) (29) Purchased software (9) -- ------- ------- Net cash used in investing activities (47) (29) ------- ------- Cash flows from financing activities: Repayment of stockholder note -- 142 Proceeds from issuance of common stock and warrants -- 130 Proceeds from stock plans 79 126 ------- ------- Net cash provided by financing activities 79 398 ------- ------- Net decrease in cash and cash equivalents (285) (393) Cash and cash equivalents at beginning of period 1,849 1,378 ------- ------- Cash and cash equivalents at end of period $ 1,564 $ 985 ======= ======= SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Non-cash stock portion of Antares purchase price $ 114 $ -- ======= =======
See notes to condensed consolidated financial statements. -5- SBE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. INTERIM PERIOD REPORTING: These condensed consolidated financial statements of SBE, Inc. are unaudited (other than the balance sheet as of October 31, 2004), and include all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three month period ended January 31, 2005 are not necessarily indicative of expected results for the full 2005 fiscal year. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended October 31, 2004. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as certain disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates and judgments made by us include matters such as warranty obligations, indemnification obligations, collectibility of accounts receivable, realizability of inventories and recoverability of capitalized software and deferred tax assets. 2. INVENTORIES: Inventories comprise the following (in thousands): January 31, October 31, 2005 2004 -------- -------- Finished goods $ 1,055 $ 1,343 Parts and materials 583 583 -------- -------- $ 1,638 $ 1,926 ======== ======== 3. NET INCOME PER SHARE: Basic net income per common share for the three month periods ended January 31, 2005 and 2004 was computed by dividing the net income for the relevant period by the weighted average number of shares of common stock outstanding. Common stock -6- equivalents for the three month periods ended January 31, 2005 and 2004 were 733,000 and 1,232,000, respectively, and have been included in the calculation of diluted net income per share. Three months ended January 31, 2005 2004 ----------- ----------- (in thousands, except BASIC per share amounts) Weighted average number of common shares outstanding 5,136 4,888 ----------- ----------- Number of shares for computation of net income per share 5,136 4,888 =========== =========== Net income $ 177 $ 527 =========== =========== Net income per share $ 0.03 $ 0.11 =========== =========== DILUTED Weighted average number of common shares outstanding 5,136 4,888 Shares issuable pursuant to options granted under stock option plans and warrants granted, less assumed repurchase at the average fair market value for the period 733 1,232 ----------- ----------- Number of shares for computation of net income per share 5,869 6,120 =========== =========== Net income $ 177 $ 527 =========== =========== Net income per share $ 0.03 $ 0.09 =========== =========== 4. STOCK BASED COMPENSATION: On January 31, 2005, we had two stock-based employee compensation plans and one stock-based director compensation plan. We account for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost has been recognized in net income for the stock option plans. Had compensation cost for our stock option plans been determined based on the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, our net income and income per share would have been as follows -7- Three Months Ended January 31, 2005 2004 ------- ------- (in thousands, except per share amounts) Net income, as reported $ 177 $ 527 Add: Total stock-based compensation expense (benefit) included in the net income determined under the recognition and measurement principles of APB Opinion 25 -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (640) (414) ------- ------- Pro forma net income (loss) $ (463) $ 113 ======= ======= Net income (loss) per share: Basic - as reported $ 0.03 $ 0.11 ======= ======= Basic - pro forma $ (0.09) $ 0.02 ======= ======= Diluted - as reported $ 0.03 $ 0.09 ======= ======= Diluted - pro forma $ (0.09) $ 0.02 ======= ======= Options to purchase 397,500 shares of common stock were granted in the quarter ended January 31, 2005. The assumption regarding the annual vesting of stock options was 25% per year for options granted during the quarter. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumption used for grants in 2005: Dividend yield of 0%; expected volatility of 76.29%; risk-free interest rate of 3.0%; and expected life of five years. In December 2004, the FASB issued SFAS No. 123R that amends SFAS No. 123 Accounting for Stock-Based Compensation, to require public entities (other than those filing as small business issuers) to report stock-based employee compensation in their financial statements. SFAS No. 123R will require us to expense the fair value of unvested options and future grants of options over the remaining vesting period. Unless modified, we will be required to comply with the provisions of SFAS No. 123R as of the first interim period that begins after June 15, 2005 (August 1, 2005 for us). We currently do not record compensation expense related to our stock-based employee compensation plans in our financial statements. 5. CONCENTRATION OF RISK: In the first three months of fiscal 2005 and 2004, most of our sales were attributable to sales of wireless communications products and were derived from a limited number of Original Equipment Manufacturer (OEM) customers. Sales to The Hewlett-Packard Company ("HP") accounted for 36% and 44% of our net sales in the first three months of fiscal 2005 and 2004, respectively, and sales to Data Connection Limited and Nortel Networks accounted for 15% and 14% of our net -8- sales for the quarter ended January 31, 2005, respectively. No other customer accounted for more than 10% of our net sales in either quarter. The three customers combined accounted for 60% of our accounts receivable at January 31, 2005. A significant reduction in orders from any of our OEM customers, or a failure to collect outstanding accounts receivable from any of our OEM customers, could have a material adverse effect on our business, operating results, financial condition and cash flows. 6. WARRANTY OBLIGATIONS AND OTHER GUARANTEES: The following is a summary of our agreements that we have determined are within the scope of Financial Accounting Standards Board ("FASB") Interpretation("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. We accrue the estimated costs to be incurred in performing warranty services at the time of revenue recognition and shipment of the products to our customers. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, the warranty accrual will increase, resulting in decreased gross margin. The following table sets forth an analysis of our warranty reserve (in thousands): January 31, January 31, 2005 2004 ---- ---- Warranty reserve at beginning of period $ 20 $ 58 Less: Cost to service warranty obligations (4) (17) Plus: Increases to reserves 4 -- ---- ---- Total warranty reserve included in other accrued expenses $ 20 $ 41 ==== ==== We have agreed to indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors' and officers' liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and have no liabilities recorded for these agreements as of January 31, 2005 and October 31, 2004, respectively. We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These -9- indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of January 31, 2005 and October 31, 2004, respectively. As discussed below, we are the secondary guarantor on the sublease of our previous headquarters. We believe we will have no liabilities on this guarantee and have not recorded a liability at January 31, 2005. 7. LOAN TO OFFICER On November 6, 1998, we made a loan to our retiring president and CEO, which was used by him to exercise an option to purchase 139,400 shares of our common stock and pay related taxes. The loan, as amended, was collateralized by shares of our common stock, bore interest at a rate of 2.48% per annum, and was due on December 14, 2003. On October 31, 2002, we determined that it was probable that we would be unable to fully recover the balance of the loan on its due date of December 14, 2003. Accordingly, a valuation allowance of $474,000 was recorded against the loan at October 31, 2002. During the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan and as a result, we recognized a benefit of $235,000 related to the reversal of the loan impairment charge taken by us in fiscal 2002. During the first quarter of fiscal 2004, the officer repaid the remaining loan balance in full and as a result, we recorded a benefit of $239,000 relating to the reversal of the remaining loan impairment charge. 8. DEFERRED COMPENSATION On January 1, 2005, the Company's retiring President and Chief Executive Officer was awarded options to purchase 75,000 shares of the Company's stock at a price of $4.00 per share (closing price on December 31, 2004). The fair value of this option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is included as deferred compensation on the balance sheet. The $120,000 deferred compensation is amortized to general and administrative expense at the rate of $8,000 per month over the 15 month vesting period ending March 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are -10- not the exclusive means of identifying such statements. Readers are cautioned that the forward-looking statements reflect our analysis only as of the date hereof, and we assume no obligation to update these statements. Actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those risks and uncertainties set forth under the caption "Risk Factors" below. The following discussion should be read in conjunction with the Financial Statements and the Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in our Form 10-K for the fiscal year ended October 31, 2004. RISK FACTORS In addition to the other information in this Quarterly Report on Form 10-Q, stockholders or prospective investors should carefully consider the following risk factors: RISKS RELATED TO OUR BUSINESS WE DEPEND UPON A SMALL NUMBER OF OEM CUSTOMERS. THE LOSS OF ANY OF THESE CUSTOMERS, OR THEIR FAILURE TO SELL THEIR PRODUCTS, WOULD LIMIT OUR ABILITY TO GENERATE REVENUES. IN PARTICULAR, WE EXPECT HP WILL CEASE TO BE A SIGNIFICANT CUSTOMER OF OURS IN FISCAL 2005, AND OUR SUCCESS DEPENDS ON BEING ABLE TO REPLACE NET SALES PREVIOUSLY ATTRIBUTABLE TO HP WITH SALES TO OTHER CUSTOMERS. In the first quarter of fiscal 2005 and 2004, sales of Versa Module Europa ("VME") products to The Hewlett-Packard Company ("HP") accounted for 36% and 44%, respectively, of our net sales. We shipped the final $1.0 million of the last order for VME products to HP in the first fiscal quarter of fiscal 2005. Our success depends on being able to replace net sales previously attributable to HP with sales to other customers. We can provide no assurance that we will succeed in obtaining new orders from existing or new customers sufficient to replace or exceed the net sales previously attributable to HP. Even after HP ceases to be a customer, we expect to continue to depend on sales to a small number of OEM customers, including Data Connection Limited and Nortel Networks. Sales to Data Connection Limited and Nortel Networks accounted for 15% and 14% of our net sales for the quarter ended January 31, 2005, respectively. There can be no assurance that we will become a qualified supplier with new OEM customers or that we will remain a qualified supplier with existing OEM customers. Orders by our OEM customers are affected by factors such as new product introductions, product life cycles, inventory levels, manufacturing strategies, contract awards, competitive conditions and general economic conditions. Our sales to any single OEM customer are also subject to significant variability from quarter to quarter. Such fluctuations may have a material adverse effect on our operating results. A significant reduction in orders from any of our OEM customers, would have a material adverse effect on our operating results, financial condition and cash flows. -11- Three customers, HP (29%), Data Connection Limited (20%) and Spectel, Inc. (11%), combined accounted for 60% of our accounts receivable at January 31, 2005. A significant reduction in orders from any of our OEM customers, or a failure to collect outstanding accounts receivable from any of our OEM customers, could have a material adverse effect on our business, operating results, financial condition and cash flows. OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL OR USE OUR EXISTING CREDIT LINE WITH A BANK. The development and marketing of our products is capital-intensive. While we believe that our existing cash balances and our anticipated cash flow from operations will satisfy our working capital needs for the next 12 months, we cannot assure that this will be the case. Declines in our sales or a failure to keep expenses in line with revenues could require us to seek additional financing or force us to draw down on our existing line of credit with a bank in fiscal 2005. In addition, should we experience a significant growth in customer orders or wish to make strategic acquisitions of business or assets, we may be required to seek additional capital to meet our working capital needs. There can be no assurance that additional financing, if required, will be available on reasonable terms or at all. To the extent that additional capital is raised through the sale of additional equity or convertible debt securities, the issuance of such securities could result in additional dilution to our stockholders. BECAUSE OF OUR DEPENDENCE ON SINGLE SUPPLIERS FOR SOME COMPONENTS, WE MAY BE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF SUCH COMPONENTS, OR WE MAY BE REQUIRED TO PAY HIGHER PRICES OR TO PURCHASE COMPONENTS OF LESSER QUALITY. The chipsets used in most of our products are currently available only from Motorola. In addition, certain other components are currently available only from single suppliers. Suppliers may discontinue or upgrade some of the components used in our products, which could require us to redesign a product to incorporate newer or alternative technology. The inability to obtain sufficient key components as required, or to develop alternative sources if and as required in the future, could result in delays or reductions in product shipments or margins that, in turn, would have a material adverse effect on our business, operating results, financial condition and cash flows. If enough components are unavailable, we may have to pay a premium in order to meet customer demand. Paying premiums for parts, building inventories of scarce parts and obsolesce of existing inventories could lower or eliminate our profit margin, reduce our cash flow and otherwise harm our business. To offset potential component shortages, we have in the past, and may in the future, carry an inventory of these components. As a result, our inventory of components parts may become obsolete and may result in write-downs. IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE, WAN AND LAN ADAPTERS, TOE AND STORAGE PRODUCTS, WE MAY LOSE SALES AND OUR REPUTATION MAY BE HARMED The markets for our products are characterized by rapidly changing technologies, evolving industry standards and frequent new product introductions. Our future success will depend on our ability to enhance our existing products and to introduce new products and features to meet and adapt to changing customer requirements and emerging technologies such as Voice over IP ("VoIP"), 3G Wireless ("Third Generation Wireless Services") SATA ("Serial ATA"), SAS -12- ("Serial Attached SCSI"), Internet Small Computer System Interface ("iSCSI") , Gigabit Ethernet, 10 Gigabit Ethernet and TCP/IP Offload Engine ("TOE"). There can be no assurance that we will be successful in identifying, developing, manufacturing and marketing new products or enhancing our existing products. In addition, there can be no assurance that services, products or technologies developed by others will not render our products noncompetitive or obsolete. We have focused a significant portion of our research and development, marketing and sales efforts on HighWire, WAN and LAN adapters, Encryption, iSCSI and TOE products. The success of these products is dependent on several factors, including timely completion of new product designs, achievement of acceptable manufacturing quality and yields, introduction of competitive products by other companies, market acceptance of our products and our ability to sell our products. If the TOE, iSCSI, HighWire and adapter products or other new products developed by us do not gain market acceptance, our business, operating results, financial condition and cash flows would be materially adversely affected. THE COMMUNICATIONS AND STORAGE PRODUCTS MARKET IS INTENSELY COMPETITIVE, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR REVENUES AND MARGINS. We compete directly with traditional vendors of terminal servers, modems, remote control software, terminal emulation software and application-specific communications and storage solutions. We also compete with suppliers of routers, hubs, network interface cards and other data communications and storage products. In the future, we expect competition from companies offering client/server access solutions based on emerging technologies such as switched digital telephone services, iSCSI, SCSI, TOE, VoIP and other technologies. In addition, we may encounter increased competition from operating system and network operating system vendors to the extent such vendors include full communications and storage capabilities in their products. We may also encounter future competition from telephony service providers (such as AT&T or the regional Bell operating companies) that may offer communications services through their telephone networks. Increased competition with respect to any of our products could result in price reductions and loss of market share, which would adversely affect our business, operating results, financial condition and cash flows. Many of our current and potential competitors have greater financial, marketing, technical and other resources than we do. There can be no assurance that we will be able to compete successfully with our existing competitors or will be able to compete successfully with new competitors. WE DEPEND ON OUR KEY PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NEEDED, OUR BUSINESS WOULD BE HARMED. We are highly dependent on the technical, management, marketing and sales skills of a limited number of key employees. We do not have employment agreements with, or life insurance on the lives of, any of our key employees. The loss of the services of any key employees could adversely affect our business and operating results. Our future success will depend on our ability to continue to attract and retain highly talented personnel to the extent our business grows. Competition for qualified personnel in the networking industry, and in the San -13- Francisco Bay Area, is intense. There can be no assurance that we will be successful in retaining our key employees or that we can attract or retain additional skilled personnel as required. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD REDUCE ANY COMPETITIVE ADVANTAGE WE HAVE. Although we believe that our future success will depend primarily on continuing innovation, sales, marketing and technical expertise, the quality of product support and customer relations, we must also protect the proprietary technology contained in our products. We do not currently hold any patents and rely on a combination of copyright, trademark, trade secret laws and contractual provisions to establish and protect proprietary rights in our products. There can be no assurance that steps taken by us in this regard will be adequate to deter misappropriation or independent third-party development of our technology. Although we believe that our products and technology do not infringe on the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against us. RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU PURCHASED SUCH SHARES. The trading price of our common stock is subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, the failure to meet analyst estimates, announcements of technological innovations or new products by us or our competitors, general conditions in the computer and communications industries and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market price of the securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE DELAWARE GENERAL CORPORATION LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be materially adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Furthermore, certain other provisions of our certificate of incorporation and bylaws may have the effect of delaying or preventing changes in control or management, which could adversely affect the market price of our common stock. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. -14- OUR SALES AND OPERATING RESULTS HAVE FLUCTUATED, AND ARE LIKELY TO CONTINUE TO FLUCTUATE SIGNIFICANTLY IN FUTURE PERIODS, WHICH MAY CAUSE, OUR STOCK PRICE TO FALL AS A RESULT OF FAILURE TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS. Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future due to several factors, some of which are outside our control and which we may not be able to predict, including the existence or absence of significant orders from OEM customers, fluctuating market demand for, and declines in the average selling prices of, our products, success in achieving design wins, delays in the introduction of our new products, competitive product introductions, the mix of products sold, changes in our distribution network, the failure to anticipate changing customer product requirements, the cost and availability of components and general economic conditions. We generally do not operate with a significant order backlog, and a substantial portion of our net sales in any quarter is derived from orders booked in that quarter. Accordingly, our sales expectations are based almost entirely on our internal estimates of future demand and not on firm customer orders. Due to the adverse economic conditions in the telecommunications industry, many of our customers may hold excess inventory of our products. A result of the economic downturn is that certain of our customers have cancelled or delayed many of their new design projects and new product rollouts that included our products. Due to the current economic uncertainty, our customers now typically require a "just-in-time" ordering and delivery cycle where they will place a purchase order with us after they receive an order from their customer. This "just-in-time" inventory purchase cycle by our customers has made forecasting of our future sales volumes very difficult. Based on the foregoing, we believe that quarterly operating results are likely to vary significantly in the future and that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Further, it is likely that in some future quarter our net sales or operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock is likely to fall. MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW SBE, Inc. designs, develops and sells network communications and storage solutions to original equipment manufacturers ("OEM") in the embedded computing and storage markets. Our solutions enable data communications, telecommunications and storage solution companies, in addition to enterprise class high-end server customers, to rapidly deliver advanced networking and storage products and services. Our products include wide area network ("WAN"), local area network ("LAN"), Internet Small Computer System Interface ("iSCSI") software, SCSI, Fibre Channel, intelligent carrier cards, Encryption and TCP/IP Offload Engine ("TOE") cards. These products perform critical computing, processing offload, Input/Output ("I/O") and storage tasks across both the enterprise server and embedded markets such as high-end enterprise level -15- servers, Linux super computing clusters, workstations, media gateways, routers, internet access devices, home location registers, data messaging applications, network attached storage ("NAS") and remote storage devices and networks. SBE's has partnered with PyX Technologies, a California company, to provide iSCSI software products that strategically support our TOE development plans by offering a high value iSCSI storage software stack that utilizes the TOE hardware to facilitate Internet based storage solutions to large, small and medium sized businesses. iSCSI is an end-to-end protocol for transporting storage I/O block data over an Internet Protocol ("IP") network. The protocol is used on servers (initiators), storage devices (targets), and protocol transfer gateway devices. iSCSI uses standard Ethernet switches and routers to move the data from server to storage. The initiator is typically a host (PC, server, laptop) that is running an iSCSI initiator driver (such as the PyX or Microsoft iSCSI initiator) that will be accessing storage on the IP Storage Area Network ("SAN") and the target is any storage device such as disk drives, raid systems, CDROM's, DVD's, tapes amongst others. Managing storage is universally regarded as one of the most burdensome of IT responsibilities. In direct-attached storage environments that most small to mid-sized companies deploy, the process of managing storage is multiplied by the number of physical connection points and the number of storage systems in an organization. Imagine an environment with ten computers, each with its own storage system. Not only does that create ten point-for-management for the storage systems themselves, it also requires ten times the effort to handle storage expansion, reallocation and repairs. With SANs, storage management is consolidated to a single point from which an IT manager can partition, allocate, expand, reassign, backup and repair storage. By moving to a SAN, small to mid-sized organizations can scale their storage infrastructure much more easily. When additional capacity is needed, simply add additional storage to the SAN. IP SANs such as iSCSI provide higher-speed storage access than internal disks while also enabling load balancing across multiple connections. Remote storage powered by iSCSI also enables on-line data back up, disaster recover and high-speed access to data by remote users. The PyX iSCSI software uses the port aggregation and port failover features of the SBE TOE dual port Gigabit Ethernet card to recover from transmission failures . In addition, the PyX iSCSI software uses the SBE TOE acceleration feature to obtain wire transmission speeds of up to 2 Gigabits per second. Our TOE/iSCSI product has Error Recovery Level 0 ("ERL0") through Error Recovery Level 2 ("ERL2") failure recovery functionality. ERL2 functionality is reached when the TCP/IP and iSCSI transmission can recover from a breakdown in the initiator, the target or the transport medium. When using the PyX ERL2 iSCSI software and SBE TOE hardware, the transmission is resent from the point of failure and not from the beginning of the transmission like other ERL0 iSCSI products. Our business is characterized by a concentration of sales to a small number of OEMs and distributors who provide products and services to the datacom, telecommunications and storage markets in addition to the enterprise high-end server IT markets. Consequently, the timing of significant orders from major customers and their product cycles cause fluctuation in our operating results. HP has historically been the largest of our customers and represented 36% and 44% of net sales in the quarters ended January 31, 2005 and 2004, respectively. We shipped the final order totaling $1.0 million in January 2005 and do not expect to receive any future orders from HP for VME products. Even after HP ceases to be a customer, we expect to continue to depend on sales to a small -16- number of OEM customers, including Data Connection Limited and Nortel Networks. Sales to Data Connection Limited and Nortel Networks accounted for 15% and 14% of our net sales for the quarter ended January 31, 2005, respectively. There can be no assurance that we will become a qualified supplier with new OEM customers or that we will remain a qualified supplier with existing OEM customers. Orders by our OEM customers are affected by factors such as new product introductions, product life cycles, inventory levels, manufacturing strategies, contract awards, competitive conditions and general economic conditions. Our sales to any single OEM customer are also subject to significant variability from quarter to quarter. Three customers combined accounted for 59% of our accounts receivable at January 31, 2005. A significant reduction in orders from any of our OEM customers, or a failure to collect outstanding accounts receivable from any of our OEM customers, could have a material adverse effect on our business, operating results, financial condition and cash flows. Our products are distributed worldwide through a direct sales force, distributors, independent manufacturers' representatives and value-added resellers. Our business falls primarily within one industry segment. On January 31, 2005, we had a sales backlog of product orders of approximately $1.4 million compared to a sales backlog of product orders of approximately $2.5 million, including $1.0 million in orders from HP, at October 31, 2004. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. 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. Significant estimates and judgments made by us include matters such as warranty obligations, indemnification obligations, collectibility of accounts receivable, realizability of inventories and recoverability of capitalized software and deferred tax assets. Our critical accounting policies and estimates include the following: Revenue Recognition: Our policy is to recognize revenues for product sales upon shipment of our products to our customers provided that no significant obligation on our part remains and collection of the receivable is considered probable. Shipping terms are generally FOB shipping point. We defer and recognize service revenues over the contractual period or as services are rendered. We estimate expected sales returns and record the amount as a reduction of revenue and cost of goods ("COGS") at the time of shipment. Our policy complies with the guidance provided by Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, issued by the Securities and Exchange Commission. Judgments are required in evaluating the credit worthiness of our customers. Credit is not extended to customers and revenue is not recognized until we have determined -17- that collectibility is reasonably assured. Our sales transactions are denominated in U.S. dollars. The software component of our hardware products is considered incidental to our products. We therefore do not recognize software revenues separately from the product sale. Our agreements with OEMs, such as HP and Nortel Networks, typically incorporate clauses reflecting the following understandings: - all prices are fixed and determinable at the time of sale; - title and risk of loss pass at the time of shipment (FOB shipping point); - collectibility of the sales price is probable (the OEM is obligated to pay and such obligation is not contingent on the ultimate sale of the OEM's integrated solution); - the OEM's obligation to us will not be changed in the event of theft or physical destruction or damage of the product; - we do not have significant obligations for future performance to directly assist in the resale of the product by the OEMs; and - there is no contractual right of return other than for defective products. Our agreements with our distributors include certain product rotation and price protection rights. All distributors have the right to rotate slow moving products once each fiscal quarter. The maximum dollar value of inventory eligible for rotation is equal to 25% of our products purchased by the distributor during the previous quarter. In order to take advantage of their product rotation rights, the distributors must order and take delivery of additional SBE products equal to at least the dollar value of the products that they want to rotate. Each distributor is also allowed certain price protection rights. If and when we reduce or plan to reduce the price of any of our products and the distributor is holding any of the affected products in inventory, we will credit the distributor the difference in price when it places its next order with us. We record an allowance for price protection reducing our net sales and accounts receivable. The allowance is based on the price difference of the inventory held by our stocking distributors at the time we expect to reduce selling prices. Reserves for the right of return and restocking are established based on the requirements of SFAS 48, Revenue Recognition when Right of Return Exists because we have visibility into our distributor's inventory and have sufficient history to estimate returns. During the quarters ended January 31, 2005 and 2004, $173,000, or 6% of net sales, and $229,000, or 8% of net sales, were sold to distributors, respectively. Allowance for Doubtful Accounts: Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying their credit limits. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer's account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial -18- obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer's operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. We believe our reported allowances are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances which would result in additional general and administrative expenses being recorded for the period in which such determination was made. Warranty Reserves: We accrue the estimated costs to be incurred in performing warranty services at the time of revenue recognition and shipment of the products to OEMs. Because there is no contractual right of return other than for defective products or stock rotation rights by certain distributors, we can reasonably estimate such returns and record a warranty reserve at the point of shipment. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, the warranty accrual will increase, resulting in increased cost of goods sold and decreased gross profit margin. Inventories: We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end-of-life dates, estimated current and future market values and new product introductions. Purchasing practices and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. If actual demand for our products deteriorates, or market conditions are less favorable than those that we project, additional inventory reserves may be required. Inventories are stated at the lower of cost, using the first-in, first-out method, or market value. Deferred Taxes We record a valuation allowance to reduce our deferred taxes to the amount that is more likely than not to be realized. Based on the uncertainty of future -19- pre-tax income, we have fully reserved our deferred tax assets as of January 31, 2005 and October 31, 2004, respectively. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R, which amends SFAS No. 123 Accounting for Stock-Based Compensation, to require public entities (other than those filing as small business issuers) to report stock-based employee compensation in their financial statements. Unless modified, we will be required to comply with the provisions of SFAS No. 123R as of the first interim period that begins after June 15, 2005 (for us, beginning with the quarter ending October 31, 2005). We currently do not record compensation expense related to our stock-based employee compensation plans in our financial statements. RESULTS OF OPERATIONS The following table sets forth, as a percentage of net sales, consolidated statements of operations data for the three month period ended January 31, 2005 and 2004. These operating results are not necessarily indicative of our operating results for any future period. THREE MONTHS ENDED JANUARY 31, 2005 2004 ---- ---- Net sales 100% 100% Cost of sales 44 45 ---- ---- Gross profit 56 55 ---- ---- Product research and development 17 17 Sales and marketing 20 17 General and administrative 13 12 Loan reserve (benefit) -- (8) ---- ---- Total operating expenses 50 38 ---- ---- Operating income 6 17 Interest income and provision for income taxes -- -- ---- ---- Net income 6% 17% ==== ==== NET SALES Net sales for the first quarter of fiscal 2005 was $2.8 million, a 5% decrease from $3.0 million in the first quarter of fiscal 2004. This decrease was primarily attributable to a decrease in shipments to HP offset in part by an increase in shipments of our Highwire products to other customers. Sales to HP were $1.0 million in the first quarter of fiscal 2005, compared to $1.3 million for the first quarter of fiscal 2004. Sales to HP, primarily of VME products, -20- represented 36% of total sales for the first quarter of fiscal 2005 compared to 44% of total sales during the comparable quarter in fiscal 2004. We shipped our final order of VME products to HP in the first fiscal quarter of 2005 and do not expect sales of VME products to HP to be a substantial portion of our net sales in the future. Two other customers combined accounted for 29% of our sales for the quarter ended January 31, 2005. No other customer accounted for over 10% of sales in the first fiscal quarter of 2005 or 2004. Sales of our adapter products were $965,000 for the first quarter of fiscal 2005, as compared to $1.3 million for the same quarter in fiscal 2004. Sales of our HighWire products were $585,000 in the quarter ended January 31, 2005, as compared to $153,000 in the same quarter in fiscal 2004. Our adapter products are used primarily in edge-of-the-network applications such as Virtual Private Network ("VPN") and other routers, Voice over Internet Protocol ("VoIP") gateways and security devices, whereas our HighWire products are primarily targeted at core-of-the-network applications used primarily by telecommunications central offices. During the quarter we shipped a small number of TOE adapters to customers who will use the TOE to facilitate CPU acceleration for use in iSCSI storage applications. We continue to test our TOE and iSCSI products at customer sites and expect customer adoption of these new technologies to begin during fiscal 2005. In the future, we expect our net sales to be generated predominantly by sales of our adapter products with Linux and Solaris software, followed by the sale of TOE adapters and iSCSI software storage products. We expect to see a continued increase in the sales of our Highwire products due to some prior design wins in the communications equipment markets going into production. All of our design wins and new customers are for applications using these product families. In addition, we will continue to sell and support our older VME products, but expect them to become a declining portion of our future net sales. Our sales backlog at January 31, 2005 was $1.4 million, compared to $3.6 million at January 31, 2004, which included a $700,000 HP order for VME products. We anticipate an increase in our sales volume for adapter and HighWire products over the course of fiscal 2005 as our customers roll out their new products. We also expect to see an increase in sales of TOE and iSCSI products as these products gain market acceptance; however, there can be no assurances that such an increase or adoption will occur. The communications markets continue to be slow in recovering economically and due to the continuing economic uncertainty, our customers typically require a "just-in-time" ordering and delivery cycle where they will place a purchase order with us after they receive an order from their customer. This "just-in-time" inventory purchase cycle by our customers has made forecasting of our future sales volumes very difficult. Because our sales are generally concentrated with a small group of OEM customers, we could experience significant fluctuations in our quarterly sales volumes due to fluctuating demand from any major customer or delay in the rollout of any significant new product by a major customer. GROSS MARGIN Gross margin as a percentage of sales in the first quarter of fiscal 2005 was 56% and was 55% during the first quarter of fiscal 2004. Our gross margin on sales of HP products for the quarter was 70% versus 77% in 2004. The slight increase in overall gross profit margin in fiscal 2005 compared to fiscal 2004 -21- is partially due to the inclusion of $100,000 of non-cash intellectual property amortization expense in costs of goods sold in the first quarter of fiscal 2004. Intellectual property was fully amortized in the fiscal year ended October 31, 2004. We expect our gross margin to range between 48% and 50% for fiscal 2005. However, if market and economic conditions, particularly in the telecommunications sector, deteriorate or fail to recover, gross margin may be lower than projected. PRODUCT RESEARCH AND DEVELOPMENT Product research and development expenses representing engineering salaries and benefits, contract services and other costs to develop and enhance our products were $473,000 in the first quarter of fiscal 2004, a decrease of 6% from $505,000 in the first quarter of fiscal 2004. The decrease is primarily due to a decrease in project materials expense. We expect overall spending for our product research and development to range between 17% and 20% of net sales in fiscal 2005 as we remain committed to the development and enhancement of new and existing products, particularly TOE, iSCSI and VoIP products. We did not capitalize any internal software development costs in the first quarter of fiscal 2005. SALES AND MARKETING Sales and marketing expenses for the first quarter of fiscal 2005 were $559,000, an increase of 14% from $489,000 in the first quarter of fiscal 2004. The increase is primarily due to increased marketing program spending for our new TOE and iSCSI products. TOE/iSCSI are at the early stages of storage market acceptance and we will continue to increase our spending on marketing activities to capture market share in the emerging market space. We expect our sales and marketing expenses to range between 20% and 24% of net sales in fiscal 2005 as we continue to accelerate our product marketing efforts and attend an increasing number of industry specific trade shows. GENERAL AND ADMINISTRATIVE General and administrative expenses were $369,000 for the first quarter of fiscal 2005, virtually unchanged from $364,000 in the first quarter of 2004. We do expect an increase in our general and administrative expense due to compliance work related to the Sarbanes-Oxley Section 404 compliance. General and administrative expenses are expected to range between 14% and 18% of net sales for fiscal 2005. LOAN RESERVE BENEFIT On November 6, 1998, we made a loan to our retiring President and CEO, which was used by him to exercise an option to purchase 139,400 shares of our common stock and pay related taxes. The loan, as amended, was collateralized by shares of our common stock, bore interest at a rate of 2.48% per annum and was due on December 14, 2003. On October 31, 2002, we determined that it was probable that we would be unable to fully recover the balance of the loan on its due date of December 14, 2003. Accordingly, a valuation allowance of $474,000 was recorded against the loan at October 31, 2002. -22- During the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan and as a result, we recognized a benefit of $235,000 related to the reversal of the loan impairment charge taken by us in fiscal 2002. During the first quarter of fiscal 2004, the officer repaid the remaining loan balance in full and as a result, we recorded a benefit of $239,000 relating to the reversal of the remaining loan impairment charge. NET INCOME As a result of the factors discussed above, we recorded net income of $177,000 in the first quarter of fiscal 2005, as compared to net income of $527,000 in the first quarter of fiscal 2004. OFF-BALANCE SHEET ARRANGEMENTS We do not have any transactions, arrangements or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We also do not engage in leasing, hedging, research and development services, or other relationships that could expose us to liability that is not reflected on the face of the financial statements. LIQUIDITY AND CAPITAL RESOURCES Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things: - the actual versus anticipated increase in sales of our products; - ongoing cost control actions and expenses, including for example, research and development and capital expenditures; - timing of product shipments which occur primarily during the last month of the quarter; - the gross profit margin; - the ability to raise additional capital, if necessary - the ability to secure credit facilities, if necessary, and - the ability to successfully negotiate merger and partnership agreements to acquire certain intellectual property rights related to the storage and VoIP markets. At January 31, 2005, we had cash and cash equivalents of $1.6 million, as compared to $1.8 million at October 31, 2004. In the first three months of fiscal 2005, $317,000 of cash was used in operating activities primarily as a result of an increase in our trade accounts receivable and a decrease in our accounts payable, partially offset by a decrease in inventory. The increase in trade accounts receivable is due to large shipments made to HP and two other customers during the later part of January. The decrease in accounts payable is related to payments to our contract manufacturers for finished goods inventory received at the end of October 2004. The decrease in inventory is due to the shipment of VME products to HP with an inventory cost of approximately $300,000 was in inventory at October 31, 2004. Working capital, comprised of our current assets less our current liabilities, at January 31, 2005 was $4.3 million, as compared to $3.9 million at October 31, 2004. -23- In the first three months of fiscal 2005, we purchased $38,000 of fixed assets, consisting primarily of computer and engineering equipment. Capital expenditures for each of the remaining quarters of fiscal 2005 are expected to range from $25,000 to $100,000 per quarter. Cash from financing activities in the first three months of fiscal 2005 consisted of $79,000 in payments related to common stock purchases made by employees pursuant to the exercise of employee stock options. We have a working capital line of credit with a Bank that with an annual renew date of May 14. The credit line is secured by a first lien on all our assets and carries a floating annual interest rate equal to the bank's prime rate, plus 1.50%. Draw-downs on the credit line are based on a formula equal to 80% of our domestic accounts receivable. We have not drawn down on this line of credit and have no amounts payable at January 31, 2005. We believe our projected net sales during fiscal 2005 will generate sufficient cash flows to fund our operations through October 31, 2005 and beyond. Our projected future quarterly operational cash flow breakeven point (the point at which we would generate positive cash flow from operations) is expected to be $2.6 million to $2.7 million of net sales, assuming an expected 48% to 50% gross margin. Our projected net sales are based on a combination of increasing demand for existing products and market acceptance of recently released products, such as TOE and iSCSI, to a limited number of new and existing OEM customers and are based on internal and customer provided estimates of future demand, not firm customer orders. If the projected sales do not materialize, we will need to reduce expenses further and raise additional capital through customer prepayments or the issuance of debt or equity securities. We have embarked on a strategy of acquiring certain intellectual property rights related to storage and VoIP products and our future liquidity may be affected by our ability to raise additional capital, if necessary. If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations. The sale of equity or debt could result in additional dilution to current stockholders, and such financing may not be available to us on acceptable terms, if at all. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our cash and cash equivalents are subject to interest rate risk. We invest primarily on a short-term basis. Our financial instrument holdings at January 31, 2005 were analyzed to determine their sensitivity to interest rate changes. The fair values of these instruments were determined by net present values. In our sensitivity analysis, the same change in interest rate was used for all maturities and all other factors were held constant. If interest rates increased by 10%, the expected effect on net income related to our financial instruments would be immaterial. We hold no assets or liabilities denominated in a foreign currency. Since October 31, 2004, there has been no change in our exposure to market risk. -24- ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures An evaluation as of January 31, 2005 was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's "disclosure controls and procedures," which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. (b) Changes in Internal Controls over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the company's internal control over financial reporting that occurred during the quarter ended January 31, 2005, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)(3) List of Exhibits Exhibit Number Description ------ ----------- 2.1(1) Asset Purchase Agreement dated August 8, 2003, by and between D.R. Barthol & Company and SBE, Inc. 3.1(2) Certificate of Incorporation, as amended through March 29, 2004 3.2(3) Bylaws, as amended through December 8, 1998. 10.1(4) 1996 Stock Option Plan, as amended. 10.2(4) 1991 Non-Employee Directors' Stock Option Plan, as amended. 10.3(4) 1992 Employee Stock Purchase Plan, as amended. 10.4(4) 1998 Non-Officer Stock Option Plan as amended. -25- 10.5(5) Lease for 4550 Norris Canyon Road, San Ramon, California dated November 2, 1992 between the Company and PacTel Properties. 10.6(6) Amendment dated June 6, 1995 to lease for 4550 Norris Canyon Road, San Ramon, California, between the Company and CalProp L.P. (assignee of PacTel Properties). 10.7(4) Full Recourse Promissory Note executed by William B. Heye, Jr. in favor of the Company dated November 6, 1998, as amended and restated on December 14, 2001. 10.8(7) Securities Purchase Agreement, dated July 27, 2003, between SBE, Inc. and purchasers of SBE's common stock thereunder, including form of warrant issued thereunder 10.9(7) Form of warrant issued to associates of Puglisi & Co. ($1.50 exercise price) 10.10(7) Form of warrant issued to associates of Puglisi & Co. ($1.75 and $2.00 exercise price) 10.11 Employment agreement dated January 1, 2005, between SBE and Daniel Grey, President & CEO 10.12 Severance agreement, dated April 12, 2004, between SBE and Daniel Grey, President and CEO 10.13 Severance agreement, dated April 12, 2004, between SBE and David Brunton, Vice President Finance, Secretary, Treasurer & CFO 10.14 Severance agreement dated April 12, 2004, between SBE and Kirk Anderson, Vice President, Operations 10.15 Offer Letter, dated August 7, 2003, between SBE and Carl Munio, Vice President, Engineering 10.16 Termination agreement, dated January 5, 2005, between SBE and William Heye, Jr., retiring President & CEO 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -26- + Certain confidential information has been deleted from this exhibit pursuant to a confidential treatment order that has been granted. (1) Filed as an exhibit to Current Report on Form 8-K, dated April 30, 2002 and incorporated herein by reference. (2) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1997 and incorporated herein by reference. (3) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1998 and incorporated herein by reference. (4) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 2002 and incorporated herein by reference. (5) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1993 and incorporated herein by reference. (6) Filed as an exhibit to Annual Report on Form 10-K for the year ended October 31, 1995 and incorporated herein by reference. (7) Filed as an exhibit to Registration Statement on Form S-3 dated July 11, 2003 and incorporated herein by reference. (b) REPORTS ON FORM 8-K A report on Form 8-K was filed with the Securities and Exchange Commission on January 1, 2005. The report provided information regarding the granting of options to purchase common stock to certain officers and directors on January 1, 2005. -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on March 2, 2005. SBE, INC. Registrant Date: March 2, 2005 By: /s/ Daniel B. Grey -------------------------- Daniel B. Grey Chief Executive Officer and President (Principal Executive Officer) Date: March 2, 2005 By: /s/ David W. Brunton -------------------------- David W. Brunton Chief Financial Officer, Vice President, Finance and Secretary (Principal Financial and Accounting Officer) -28- EX-10.11 2 v13803_ex10-11.txt EXHIBIT 10.11 January 1, 2005 Mr. Dan Grey 2305 Camino Ramon, Suite 200 San Ramon, CA 94583 RE: EMPLOYMENT TERMS Dear Dan: SBE, Inc. (the "Company") is pleased to offer you the position of Chief Executive Officer on the following terms. You shall have such responsibilities and duties as are determined by the Company's Board of Directors (the "Board"). You will continue to work at our facility located at 2305 Camino Ramon, Suite 200, San Ramon, CA 94583. You will be expected to abide by Company policies and procedures, and to comply with the Company's employee handbooks and manuals. Your base salary will be $200,000 per year, less payroll deductions and required withholdings, paid semi-monthly. You will also continue to be eligible to participate in the Company's Management Incentive Program ("MIPS"). You will continue to be eligible for the standard Company benefits offered to other employees, including but not limited to health, dental, vision, profit sharing, 401K, life insurance and disability insurance under the Company's plans. The Company may change its benefits from time to time in its discretion. Subject to approval by the Board, the Company shall grant you a new option to purchase 100,000 shares of the Company's common stock, at an exercise price equal to the fair market value of the stock as of the closing price the day before the grant date, which shall be January 1, 2005 (the "Option"). The Option will vest over four years with 25% vesting on January 1, 2006 and monthly thereafter, and will be subject to the further terms and conditions of the governing stock option issuance document and the Company's 1996 Stock Option Plan, as amended. Your employment relationship continues to be "at will," at the pleasure of the Board, which means both you and the Company may terminate your employment at any time, with or without cause or advance notice. Your employment at-will status can only be modified in a written agreement signed by you and a duly authorized member of the Board. This letter, together with your Proprietary Information and Inventions Agreement ("Proprietary Information Agreement") and Executive Severance Benefits Agreement dated April 12, 2004 ("Severance Agreement"), forms the complete and exclusive statement of your employment agreement with the Company. The terms in this letter supersede any other agreements, promises or representations made to you by anyone, whether oral or written, regarding its subject matters, other than as contained in the Proprietary Information Agreement and Severance Agreement. Mr. Dan Grey January 1, 2005 Page 2 This letter agreement cannot be changed except in a written agreement signed by you and a duly authorized member of the Board. Please sign and date this letter and return it to me at your earliest convenience to continue your employment with the Company under the terms described above. We look forward to your favorable reply. Sincerely, /s/ John Reardon - --------------------------- John Reardon Duly Authorized Member of the Board Accepted: /s/ Dan Grey January 1, 2005 - --------------------------- ----------------- Dan Grey Date EX-10.12 3 v13803_ex10-12.txt EXHIBIT 10.12 EXECUTIVE SEVERANCE BENEFITS AGREEMENT THIS EXECUTIVE SEVERANCE BENEFITS AGREEMENT (the "AGREEMENT") is entered into as of the 12TH day of April, 2004 (the "Effective Date"), between DAN GREY ("EXECUTIVE") and SBE, INC. (the "COMPANY"). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article 5. The Company and Executive hereby agree as follows: ARTICLE 1 SCOPE OF AND CONSIDERATION FOR THIS AGREEMENT 1.1 Executive is currently employed by the Company. 1.2 The Company and Executive wish to set forth the compensation and benefits that Executive shall be entitled to receive in the event of a termination of Executive's employment with the Company in the circumstances described in this Agreement. 1.3 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company, and, with respect to the benefits described in Article 2, Executive's execution of a release in accordance with Section 3.1. 1.4 This Agreement shall supersede any other agreement relating to cash compensation benefits in the event of Executive's severance from employment with the Company. ARTICLE 2 SEVERANCE BENEFITS 2.1 CHANGE IN CONTROL TERMINATION. If Executive's employment terminates due to a Change in Control Termination, as defined in Section 5.4, Executive will be entitled to receive the benefits set forth in subsections 2.2(a) through 2.2(c). 2.2 (a) SALARY CONTINUATION. Executive shall continue to receive an amount equal to six (6) months of Base Salary, as defined in Section 5.1. Such amount shall be paid in equal monthly installments over the six (6) months following Executive's Change in Control Termination and shall be subject to all required tax withholding. (b) BONUS PAYMENT. Within fifteen (15) days following the last day of the fiscal quarter during which Executive's Change in Control Termination occurs. Executive shall receive the pro-rata share of any bonus to which Executive would have been entitled had Executive's employment with the Company 1 continued. The bonus amount paid will be the product of the bonus percentage of Base Salary derived per the Executive's bonus plan multiplied by Executive's Base Salary from the beginning of the Fiscal Year through the date of Executive's Involuntary Termination Without Cause. Such payment shall be subject to all required tax withholding. (c) ACCELERATION OF OPTION VESTING. Effective as of the date of Executive's Change in Control Termination, Executive shall be credited with full vesting under all options to purchase the Company's Common Stock that Executive holds on such date. By entering into this Agreement, Executive acknowledges that Executive understands that such acceleration may result in some of Executive's incentive stock options being reclassified as nonqualified stock options, which could result in adverse tax consequences to Executive. 2.3 NON-DUPLICATION OF BENEFITS. Notwithstanding any of the foregoing to the contrary, to the extent that Executive is eligible to receive severance benefits under Section 2.2 above due to Executive's Change in Control Termination, Executive shall not be entitled to receive severance benefits under Section 2.1 above. Executive shall not be eligible to receive severance benefits pursuant to this Agreement more than one time. 2.4 MITIGATION. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by any retirement benefits received by Executive after the date of Executive's Change in Control Termination. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 RELEASE PRIOR TO PAYMENT OF BENEFITS. Upon the occurrence of Executive's Change in Control Termination that occurs at any time other than during the six (6) months following the effective date of a Change in Control, and prior to the payment of any benefits under this Agreement on account of such termination, Executive shall execute a release (the "Release") in the form (or in a substantially similar form to that) attached hereto and incorporated herein as Exhibit A, Exhibit B or Exhibit C, as applicable. Such Release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution and shall confirm Executive's obligations under the Company's standard form of proprietary information and inventions agreement. It is understood that, as specified in the applicable Release, Executive has a certain number of calendar days to consider whether to execute such Release, and Executive may revoke such Release within seven (7) calendar days after he signs it. If Executive does not execute such Release within the applicable period, or if Executive revokes such Release within the subsequent seven (7) day period, no benefits shall be payable under this Agreement, and this Agreement shall be null and void. 3.2 PARACHUTE PAYMENTS. If any payment or benefit Executive would receive pursuant to a Change in Control from the Company or otherwise ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 2 of the Code (the "Excise Tax"), then such Payment shall be reduced to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless Executive elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. In the event that acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of Executive's stock awards unless Executive elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive's right to a Payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or Executive. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive. 3.3 CERTAIN REDUCTIONS AND OFFSETS. Notwithstanding any other provision of this Agreement to the contrary, any benefits payable to Executive under this Agreement shall be reduced by any severance benefits payable by the Company to such individual under any other policy, plan, program or arrangement, including, without limitation, a contract between Executive and any entity. Furthermore, to the extent that any federal, state or local laws, including, without limitation, so-called "plant closing" laws, require the Company to give advance notice, make a payment of any kind or provide any benefits to Executive because of Executive's involuntary termination due to a layoff, reduction in force, plant or facility closing, sale of business, change in control, or any other similar event or reason, the payments and other benefits payable under this Agreement shall be reduced by the full amount and extent of such notice, payment and/or benefits. The benefits provided under this Agreement are intended to satisfy any 3 and all statutory obligations that may arise out of Executive's involuntary termination of employment for the foregoing reasons, and the parties shall so construe and enforce the terms of the Agreement. ARTICLE 4 OTHER RIGHTS AND BENEFITS Nothing in the Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under other agreements with the Company except as provided in Section 1.4 above. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the effective date of a Change in Control shall be payable in accordance with such plan, policy, practice or program. ARTICLE 5 DEFINITIONS For purposes of the Agreement, the following terms are defined as follows: 5.1 "BASE SALARY" means Executive's annual base salary as in effect on the date of his termination. 5.2 "BOARD" means the Board of Directors of the Company. 5.3 "CHANGE IN CONTROL" means: (a) the sale of all or substantially all of the Company's assets to a single purchaser or a group of related purchasers; (b) the sale, exchange or other disposition, in a single transaction, of more than fifty percent (50%) of the Company's outstanding capital stock; or (c) a merger or consolidation of the Company in a transaction following which the Company's stockholders receive less than fifty percent (50%) of the outstanding voting shares of the surviving entity. 5.4 "CHANGE IN CONTROL TERMINATION" means an Involuntary Termination Without Cause or a Voluntary Termination for Good Reason, effective as of Executive's termination date, either of which occurs within six (6) months following the effective date of a Change in Control. 5.5 "COMPANY" means SBE, Inc. or, following a Change in Control, the surviving entity resulting from such transaction. 5.6 "INVOLUNTARY TERMINATION WITHOUT CAUSE" means Executive's dismissal or discharge for reasons other than Cause, effective as of Executive's termination date. For this purpose, "Cause" means that, in the reasonable determination of the Company, Executive has 4 (a) been convicted of or pled guilty or nolo contendere to a felony or any crime involving moral turpitude or dishonesty; (b) participated in a fraud or act of dishonesty against the Company, (c) willfully and materially breached a Company policy; (d) intentionally damaged the Company's property; (e) willfully and materially breached Executive's Proprietary Information and Inventions Agreement with the Company; (f) engaged in conduct that demonstrates gross unfitness to serve; or (g) failed to perform Executive's job duties in a satisfactory manner, including, but not limited to, by engaging in willful misconduct, neglecting Executive's job duties, refusing to comply with any lawful directive of the Company, or failing to meet expected performance standards. Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause (c), (f) or (g) unless the conduct described in such clause, if capable of cure, has not been cured within thirty (30) days following Executive's receipt of written notice from the Company or the Board, as the case may be, specifying the particulars of the conduct constituting Cause. 5.7 "VOLUNTARY TERMINATION FOR GOOD REASON" means that Executive voluntarily terminates employment with the Company after any of the following is undertaken by the Company without Executive's written consent: (a) the assignment to Executive of any duties or responsibilities that results in a significant diminution in Executive's job duties and responsibilities, taken as a whole, as in effect immediately prior to the effective date of the Change in Control; (b) a reduction in Executive's title or reporting relationships as in effect immediately prior to the effective date of the Change in Control; (c) a reduction by the Company in Executive's Base Salary by five percent (5%) or more; provided, however, that a reduction by the Company of Executive's Base Salary by up to ten percent (10%) shall not constitute Good Reason for purposes of this Agreement if it is made in connection with an across-the-board reduction by the Company of all executives' annual base salaries by a percentage at least equal to the percentage by which Executive's Base Salary is reduced; (d) a relocation of Executive's business office to a location that requires Executive to commute more than seventy-five (75) miles each way, except for required travel by Executive on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the effective date of a Change in Control; provided, however, that no relocation of Executive's business office shall constitute Good Reason for purposes of this Agreement if Executive provides services to the Company from a remote location (e.g., through telecommuting) at the time of the relocation; 5 (e) a material breach by the Company of any provision of this Agreement; or (f) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. Notwithstanding the foregoing, Good Reason shall not exist based on conduct described in clauses (a), (b), (c), (d), (e) or (f) above unless the conduct described in such clause, if capable of cure, has not been cured within thirty (30) days following receipt by the Company or the Board, as the case may be, of written notice from Executive specifying the particulars of the conduct constituting Good Reason. ARTICLE 6 GENERAL PROVISIONS 6.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of employment or impose upon Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, (ii) to change the status of Executive as an at-will employee, which at-will status Executive hereby acknowledges, or (iii) to change the Company's policies regarding termination of employment. 6.2 NOTICES. Any notices provided hereunder must be in writing, and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at Executive's address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at the address as listed in the Company's payroll records. 6.3 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.4 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.5 ARBITRATION. Unless otherwise prohibited by law or specified below, all disputes, claims and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation shall be resolved solely and exclusively by final and binding arbitration, by a single arbitrator, held in San Francisco County, California through Judicial Arbitration & Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration rules and as otherwise required by law. However, nothing in this section is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of 6 any such arbitration. Each party in any such arbitration shall be responsible for its own attorneys' fees, costs and necessary disbursements; provided, however, that in the event one party refuses to arbitrate and the other party seeks to compel arbitration by court order, if such other party prevails, it shall be entitled to recover reasonable attorneys' fees, costs and necessary disbursements. Pursuant to California Civil Code Section 1717, each party warrants that it was represented by counsel in the negotiation and execution of this Agreement, including the attorneys' fees provision herein. 6.6 COMPLETE AGREEMENT. This Agreement, including Exhibit A, Exhibit B and Exhibit C, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter, wholly superseding all written and oral agreements with respect to payments and benefits to Executive in the event of employment termination. It is entered into without reliance on any promise or representation other than those expressly contained herein. 6.7 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by an executive officer of the Company after such change or termination has been approved by the Board. 6.8 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.9 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.10 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, and the Company, and any surviving entity resulting from a Change in Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company, and their respective successors, assigns, heirs, executors and administrators, without regard to whether or not such person actively assumes any rights or duties hereunder; provided, however, that Executive may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 6.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California, without regard to such state's conflict of laws rules. 6.12 NON-PUBLICATION. The parties mutually agree not to disclose the terms of this Agreement except to the extent that disclosure is mandated by applicable law or corporate reporting requirements, or to respective advisors (e.g., attorneys, accountants). 7 6.13 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. IN WITNESS WHEREOF, the parties have executed this Agreement on the Effective Date written above. SBE, INC. DAN GREY By: /s/ William B. Heye, Jr. /s/ Dan Grey ----------------------------- ------------------------- Name: William B. Heye, Jr. --------------------------- Title: President & CEO -------------------------- Exhibit A: Release (Termination of Executive under Age 40) Exhibit B: Release (Individual Termination of Executive Age 40 or Older) Exhibit C: Release (Group Termination of Executive Age 40 or Older) 8 EXHIBIT A RELEASE (TERMINATION OF EXECUTIVE UNDER AGE 40) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the date I return this signed Release to the Company. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Release. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- -------------------------- Date Dan Grey 1 EXHIBIT B RELEASE (INDIVIDUAL TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"). Nevertheless, my general release of claims, except for the ADEA Waiver, is effective immediately, and not revocable. This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject 2 matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- -------------------------- Date Dan Grey 3 EXHIBIT C RELEASE (GROUP TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"); and (f) I have received with this Release a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. While I have the right to revoke the ADEA Waiver, my general release of claims (except for the ADEA Waiver), is effective immediately, and not revocable. 4 This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- -------------------------- Date Dan Grey 5 EX-10.13 4 v13803_ex10-13.txt EXHIBIT 10.13 EXECUTIVE SEVERANCE BENEFITS AGREEMENT THIS EXECUTIVE SEVERANCE BENEFITS AGREEMENT (the "AGREEMENT") is entered into as of the 12TH day of April, 2004 (the "Effective Date"), between DAVID W. BRUNTON ("EXECUTIVE") and SBE, INC. (the "COMPANY"). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article 5. The Company and Executive hereby agree as follows: ARTICLE 1 SCOPE OF AND CONSIDERATION FOR THIS AGREEMENT 1.1 Executive is currently employed by the Company. 1.2 The Company and Executive wish to set forth the compensation and benefits that Executive shall be entitled to receive in the event of a termination of Executive's employment with the Company in the circumstances described in this Agreement. 1.3 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company, and, with respect to the benefits described in Article 2, Executive's execution of a release in accordance with Section 3.1. 1.4 This Agreement shall supersede any other agreement relating to cash compensation benefits in the event of Executive's severance from employment with the Company. ARTICLE 2 SEVERANCE BENEFITS 2.1 CHANGE IN CONTROL TERMINATION. If Executive's employment terminates due to a Change in Control Termination, as defined in Section 5.4, Executive will be entitled to receive the benefits set forth in subsections 2.2(a) through 2.2(c). 2.2 (a) SALARY CONTINUATION. Executive shall continue to receive an amount equal to six (6) months of Base Salary, as defined in Section 5.1. Such amount shall be paid in equal monthly installments over the six (6) months following Executive's Change in Control Termination and shall be subject to all required tax withholding. (b) BONUS PAYMENT. Within fifteen (15) days following the last day of the fiscal quarter during which Executive's Change in Control Termination occurs. Executive shall receive the pro-rata share of any bonus to which Executive would have been entitled had Executive's employment with the Company 1 continued. The bonus amount paid will be the product of the bonus percentage of Base Salary derived per the Executive's bonus plan multiplied by Executive's Base Salary from the beginning of the Fiscal Year through the date of Executive's Involuntary Termination Without Cause. Such payment shall be subject to all required tax withholding. (c) ACCELERATION OF OPTION VESTING. Effective as of the date of Executive's Change in Control Termination, Executive shall be credited with full vesting under all options to purchase the Company's Common Stock that Executive holds on such date. By entering into this Agreement, Executive acknowledges that Executive understands that such acceleration may result in some of Executive's incentive stock options being reclassified as nonqualified stock options, which could result in adverse tax consequences to Executive. 2.3 NON-DUPLICATION OF BENEFITS. Notwithstanding any of the foregoing to the contrary, to the extent that Executive is eligible to receive severance benefits under Section 2.2 above due to Executive's Change in Control Termination, Executive shall not be entitled to receive severance benefits under Section 2.1 above. Executive shall not be eligible to receive severance benefits pursuant to this Agreement more than one time. 2.4 MITIGATION. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by any retirement benefits received by Executive after the date of Executive's Change in Control Termination. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 RELEASE PRIOR TO PAYMENT OF BENEFITS. Upon the occurrence of Executive's Change in Control Termination that occurs at any time other than during the six (6) months following the effective date of a Change in Control, and prior to the payment of any benefits under this Agreement on account of such termination, Executive shall execute a release (the "Release") in the form (or in a substantially similar form to that) attached hereto and incorporated herein as Exhibit A, Exhibit B or Exhibit C, as applicable. Such Release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution and shall confirm Executive's obligations under the Company's standard form of proprietary information and inventions agreement. It is understood that, as specified in the applicable Release, Executive has a certain number of calendar days to consider whether to execute such Release, and Executive may revoke such Release within seven (7) calendar days after he signs it. If Executive does not execute such Release within the applicable period, or if Executive revokes such Release within the subsequent seven (7) day period, no benefits shall be payable under this Agreement, and this Agreement shall be null and void. 3.2 PARACHUTE PAYMENTS. If any payment or benefit Executive would receive pursuant to a Change in Control from the Company or otherwise ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be reduced to the 2 Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless Executive elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. In the event that acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of Executive's stock awards unless Executive elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive's right to a Payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or Executive. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive. 3.3 CERTAIN REDUCTIONS AND OFFSETS. Notwithstanding any other provision of this Agreement to the contrary, any benefits payable to Executive under this Agreement shall be reduced by any severance benefits payable by the Company to such individual under any other policy, plan, program or arrangement, including, without limitation, a contract between Executive and any entity. Furthermore, to the extent that any federal, state or local laws, including, without limitation, so-called "plant closing" laws, require the Company to give advance notice, make a payment of any kind or provide any benefits to Executive because of Executive's involuntary termination due to a layoff, reduction in force, plant or facility closing, sale of business, change in control, or any other similar event or reason, the payments and other benefits payable under this Agreement shall be reduced by the full amount and to the extent of such notice, payment and/or benefits. The benefits provided under this Agreement are intended to 3 satisfy any and all statutory obligations that may arise out of Executive's involuntary termination of employment for the foregoing reasons, and the parties shall so construe and enforce the terms of the Agreement. ARTICLE 4 OTHER RIGHTS AND BENEFITS Nothing in the Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under other agreements with the Company except as provided in Section 1.4 above. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the effective date of a Change in Control shall be payable in accordance with such plan, policy, practice or program. ARTICLE 5 DEFINITIONS For purposes of the Agreement, the following terms are defined as follows: 5.1 "BASE SALARY" means Executive's annual base salary as in effect on the date of his termination. 5.2 "BOARD" means the Board of Directors of the Company. 5.3 "CHANGE IN CONTROL" means: (a) the sale of all or substantially all of the Company's assets to a single purchaser or a group of related purchasers; (b) the sale, exchange or other disposition, in a single transaction, of more than fifty percent (50%) of the Company's outstanding capital stock; or (c) a merger or consolidation of the Company in a transaction following which the Company's stockholders receive less than fifty percent (50%) of the outstanding voting shares of the surviving entity. 5.4 "CHANGE IN CONTROL TERMINATION" means an Involuntary Termination Without Cause or a Voluntary Termination for Good Reason, effective as of Executive's termination date, either of which occurs within six (6) months following the effective date of a Change in Control. 5.5 "COMPANY" means SBE, Inc. or, following a Change in Control, the surviving entity resulting from such transaction. 5.6 "INVOLUNTARY TERMINATION WITHOUT CAUSE" means Executive's dismissal or discharge for reasons other than Cause, effective as of Executive's termination date. For this purpose, "Cause" means that, in the reasonable determination of the Company, Executive has 4 (a) been convicted of or pled guilty or nolo contendere to a felony or any crime involving moral turpitude or dishonesty; (b) participated in a fraud or act of dishonesty against the Company, (c) willfully and materially breached a Company policy; (d) intentionally damaged the Company's property; (e) willfully and materially breached Executive's Proprietary Information and Inventions Agreement with the Company; (f) engaged in conduct that demonstrates gross unfitness to serve; or (g) failed to perform Executive's job duties in a satisfactory manner, including, but not limited to, by engaging in willful misconduct, neglecting Executive's job duties, refusing to comply with any lawful directive of the Company, or failing to meet expected performance standards. Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause (c), (f) or (g) unless the conduct described in such clause has not been cured within thirty (30) days following Executive's receipt of written notice from the Company or the Board, as the case may be, specifying the particulars of the conduct constituting Cause. 5.7 "VOLUNTARY TERMINATION FOR GOOD REASON" means that Executive voluntarily terminates employment with the Company after any of the following is undertaken by the Company without Executive's written consent: (a) the assignment to Executive of any duties or responsibilities that results in a significant diminution in Executive's job duties and responsibilities, taken as a whole, as in effect immediately prior to the effective date of the Change in Control; (b) a reduction in Executive's title or reporting relationships as in effect immediately prior to the effective date of the Change in Control; (c) a reduction by the Company in Executive's Base Salary by five percent (5%) or more; provided, however, that a reduction by the Company of Executive's Base Salary by up to ten percent (10%) shall not constitute Good Reason for purposes of this Agreement if it is made in connection with an across-the-board reduction by the Company of all executives' annual base salaries by a percentage at least equal to the percentage by which Executive's Base Salary is reduced; (d) a relocation of Executive's business office to a location that requires Executive to commute more than seventy-five (75) miles each way, except for required travel by Executive on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the effective date of a Change in Control; provided, however, that no relocation of Executive's business office shall constitute Good Reason for purposes of this Agreement if Executive provides services to the Company from a remote location (e.g., through telecommuting) at the time of the relocation; 5 (e) a material breach by the Company of any provision of this Agreement; or (f) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. Notwithstanding the foregoing, Good Reason shall not exist based on conduct described in clauses (a), (b), (c), (d), (e) or (f) above unless the conduct described in such clause, if capable of cure, has not been cured within thirty (30) days following receipt by the Company or the Board, as the case may be, of written notice from Executive specifying the particulars of the conduct constituting Good Reason. ARTICLE 6 GENERAL PROVISIONS 6.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of employment or impose upon Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, (ii) to change the status of Executive as an at-will employee, which at-will status Executive hereby acknowledges, or (iii) to change the Company's policies regarding termination of employment. 6.2 NOTICES. Any notices provided hereunder must be in writing, and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at Executive's address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at the address as listed in the Company's payroll records. 6.3 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.4 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.5 ARBITRATION. Unless otherwise prohibited by law or specified below, all disputes, claims and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation shall be resolved solely and exclusively by final and binding arbitration, by a single arbitrator, held in San Francisco County, California through Judicial Arbitration & Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration rules and as otherwise required by law. However, nothing in this section is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of 6 any such arbitration. Each party in any such arbitration shall be responsible for its own attorneys' fees, costs and necessary disbursements; provided, however, that in the event one party refuses to arbitrate and the other party seeks to compel arbitration by court order, if such other party prevails, it shall be entitled to recover reasonable attorneys' fees, costs and necessary disbursements. Pursuant to California Civil Code Section 1717, each party warrants that it was represented by counsel in the negotiation and execution of this Agreement, including the attorneys' fees provision herein. 6.6 COMPLETE AGREEMENT. This Agreement, including Exhibit A, Exhibit B and Exhibit C, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter, wholly superseding all written and oral agreements with respect to payments and benefits to Executive in the event of employment termination. It is entered into without reliance on any promise or representation other than those expressly contained herein. 6.7 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by an executive officer of the Company after such change or termination has been approved by the Board. 6.8 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.9 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.10 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, and the Company, and any surviving entity resulting from a Change in Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company, and their respective successors, assigns, heirs, executors and administrators, without regard to whether or not such person actively assumes any rights or duties hereunder; provided, however, that Executive may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 6.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California, without regard to such state's conflict of laws rules. 6.12 NON-PUBLICATION. The parties mutually agree not to disclose the terms of this Agreement except to the extent that disclosure is mandated by applicable law or corporate reporting requirements, or to respective advisors (e.g., attorneys, accountants). 7 6.13 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. IN WITNESS WHEREOF, the parties have executed this Agreement on the Effective Date written above. SBE, INC. DAVID W. BRUNTON By: /s/ William B. Heye, Jr. /s/ David W. Brunton --------------------------- -------------------- Name: William B. Heye, Jr. ------------------------- Title: President & CEO ------------------------ Exhibit A: Release (Termination of Executive under Age 40) Exhibit B: Release (Individual Termination of Executive Age 40 or Older) Exhibit C: Release (Group Termination of Executive Age 40 or Older) 8 EXHIBIT A RELEASE (TERMINATION OF EXECUTIVE UNDER AGE 40) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the date I return this signed Release to the Company. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Release. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- ------------------------- Date David W. Brunton 1 EXHIBIT B RELEASE (INDIVIDUAL TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"). Nevertheless, my general release of claims, except for the ADEA Waiver, is effective immediately, and not revocable. This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject 2 matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- ------------------------- Date David W. Brunton 3 EXHIBIT C RELEASE (GROUP TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"); and (f) I have received with this Release a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. While I have the right to revoke the ADEA Waiver, my general release of claims (except for the ADEA Waiver), is effective immediately, and not revocable. 4 This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------- ------------------------- Date David W. Brunton 5 EX-10.14 5 v13803_ex10-14.txt EXHIBIT 10.14 EXECUTIVE SEVERANCE BENEFITS AGREEMENT THIS EXECUTIVE SEVERANCE BENEFITS AGREEMENT (the "AGREEMENT") is entered into as of the 12TH day of April, 2004 (the "Effective Date"), between KIRK ANDERSON ("EXECUTIVE") and SBE, INC. (the "COMPANY"). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events. Certain capitalized terms used in this Agreement are defined in Article 5. The Company and Executive hereby agree as follows: ARTICLE 1 SCOPE OF AND CONSIDERATION FOR THIS AGREEMENT 1.1 Executive is currently employed by the Company. 1.2 The Company and Executive wish to set forth the compensation and benefits that Executive shall be entitled to receive in the event of a termination of Executive's employment with the Company in the circumstances described in this Agreement. 1.3 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company, and, with respect to the benefits described in Article 2, Executive's execution of a release in accordance with Section 3.1. 1.4 This Agreement shall supersede any other agreement relating to cash compensation benefits in the event of Executive's severance from employment with the Company. ARTICLE 2 SEVERANCE BENEFITS 2.1 CHANGE IN CONTROL TERMINATION. If Executive's employment terminates due to a Change in Control Termination, as defined in Section 5.2, Executive will be entitled to receive the benefits set forth in subsections 2.2. 2.2 ACCELERATION OF OPTION VESTING. Effective as of the date of Executive's Change in Control Termination, Executive shall be credited with full vesting under all options to purchase the Company's Common Stock that Executive holds on such date. By entering into this Agreement, Executive acknowledges that Executive understands that such acceleration may result in some of Executive's incentive stock options being reclassified as nonqualified stock options, which could result in adverse tax consequences to Executive. 2.3 MITIGATION. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor 1 shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by any retirement benefits received by Executive after the date of Executive's Change in Control Termination. ARTICLE 3 LIMITATIONS AND CONDITIONS ON BENEFITS 3.1 RELEASE PRIOR TO PAYMENT OF BENEFITS. Upon the occurrence of Executive's Change in Control Termination that occurs at any time other than during the six (6) months following the effective date of a Change in Control, and prior to the payment of any benefits under this Agreement on account of such termination, Executive shall execute a release (the "Release") in the form (or in a substantially similar form to that) attached hereto and incorporated herein as Exhibit A, Exhibit B or Exhibit C, as applicable. Such Release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution and shall confirm Executive's obligations under the Company's standard form of proprietary information and inventions agreement. It is understood that, as specified in the applicable Release, Executive has a certain number of calendar days to consider whether to execute such Release, and Executive may revoke such Release within seven (7) calendar days after he signs it. If Executive does not execute such Release within the applicable period, or if Executive revokes such Release within the subsequent seven (7) day period, no benefits shall be payable under this Agreement, and this Agreement shall be null and void. 3.2 PARACHUTE PAYMENTS. If any payment or benefit Executive would receive pursuant to a Change in Control from the Company or otherwise ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be reduced to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order unless Executive elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. In the event that acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of Executive's stock awards unless Executive elects in writing a different order for cancellation. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting 2 the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Executive within fifteen (15) calendar days after the date on which Executive's right to a Payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or Executive. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Executive. 3.3 CERTAIN REDUCTIONS AND OFFSETS. Notwithstanding any other provision of this Agreement to the contrary, any benefits payable to Executive under this Agreement shall be reduced by any severance benefits payable by the Company to such individual under any other policy, plan, program or arrangement, including, without limitation, a contract between Executive and any entity. Furthermore, to the extent that any federal, state or local laws, including, without limitation, so-called "plant closing" laws, require the Company to give advance notice, make a payment of any kind or provide any benefits to Executive because of Executive's involuntary termination due to a layoff, reduction in force, plant or facility closing, sale of business, change in control, or any other similar event or reason, the payments and other benefits payable under this Agreement shall be reduced by the full amount and extent of such notice, payment and/or benefits. The benefits provided under this Agreement are intended to satisfy any and all statutory obligations that may arise out of Executive's involuntary termination of employment for the foregoing reasons, and the parties shall so construe and enforce the terms of the Agreement. ARTICLE 4 OTHER RIGHTS AND BENEFITS Nothing in the Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under other agreements with the Company except as provided in Section 1.4 above. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the effective date of a Change in Control shall be payable in accordance with such plan, policy, practice or program. 3 ARTICLE 5 DEFINITIONS For purposes of the Agreement, the following terms are defined as follows: 5.1 "BOARD" means the Board of Directors of the Company. 5.2 "CHANGE IN CONTROL" means: (a) the sale of all or substantially all of the Company's assets to a single purchaser or a group of related purchasers; (b) the sale, exchange or other disposition, in a single transaction, of more than fifty percent (50%) of the Company's outstanding capital stock; or (c) a merger or consolidation of the Company in a transaction following which the Company's stockholders receive less than fifty percent (50%) of the outstanding voting shares of the surviving entity. 5.3 "CHANGE IN CONTROL TERMINATION" means an Involuntary Termination Without Cause or a Voluntary Termination for Good Reason, effective as of Executive's termination date, either of which occurs within six (6) months following the effective date of a Change in Control. 5.4 "COMPANY" means SBE, Inc. or, following a Change in Control, the surviving entity resulting from such transaction. 5.5 "INVOLUNTARY TERMINATION WITHOUT CAUSE" means Executive's dismissal or discharge for reasons other than Cause, effective as of Executive's termination date. For this purpose, "Cause" means that, in the reasonable determination of the Company, Executive has (a) been convicted of or pled guilty or nolo contendere to a felony or any crime involving moral turpitude or dishonesty; (b) participated in a fraud or act of dishonesty against the Company, (c) willfully and materially breached a Company policy; (d) intentionally damaged the Company's property; (e) willfully and materially breached Executive's Proprietary Information and Inventions Agreement with the Company; (f) engaged in conduct that demonstrates gross unfitness to serve; or (g) failed to perform Executive's job duties in a satisfactory manner, including, but not limited to, by engaging in willful misconduct, neglecting Executive's job duties, refusing to comply with any lawful directive of the Company, or failing to meet expected performance standards. 4 Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause (c), (f) or (g) unless the conduct described in such clause, if capable of cure, has not been cured within thirty (30) days following Executive's receipt of written notice from the Company or the Board, as the case may be, specifying the particulars of the conduct constituting Cause. 5.6 "VOLUNTARY TERMINATION FOR GOOD REASON" means that Executive voluntarily terminates employment with the Company after any of the following is undertaken by the Company without Executive's written consent: (a) the assignment to Executive of any duties or responsibilities that results in a significant diminution in Executive's job duties and responsibilities, taken as a whole, as in effect immediately prior to the effective date of the Change in Control; (b) a reduction in Executive's title or reporting relationships as in effect immediately prior to the effective date of the Change in Control; (c) a reduction by the Company in Executive's Base Salary by five percent (5%) or more; provided, however, that a reduction by the Company of Executive's Base Salary by up to ten percent (10%) shall not constitute Good Reason for purposes of this Agreement if it is made in connection with an across-the-board reduction by the Company of all executives' annual base salaries by a percentage at least equal to the percentage by which Executive's Base Salary is reduced; (d) a relocation of Executive's business office to a location that requires Executive to commute more than seventy-five (75) miles each way, except for required travel by Executive on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the effective date of a Change in Control; provided, however, that no relocation of Executive's business office shall constitute Good Reason for purposes of this Agreement if Executive provides services to the Company from a remote location (e.g., through telecommuting) at the time of the relocation; (e) a material breach by the Company of any provision of this Agreement; or (f) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. Notwithstanding the foregoing, Good Reason shall not exist based on conduct described in clauses (a), (b), (c), (d), (e) or (f) above unless the conduct described in such clause, if capable of cure, has not been cured within thirty (30) days following receipt by the Company or the Board, as the case may be, of written notice from Executive specifying the particulars of the conduct constituting Good Reason. ARTICLE 6 GENERAL PROVISIONS 6.1 EMPLOYMENT STATUS. This Agreement does not constitute a contract of employment or impose upon Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, 5 (ii) to change the status of Executive as an at-will employee, which at-will status Executive hereby acknowledges, or (iii) to change the Company's policies regarding termination of employment. 6.2 NOTICES. Any notices provided hereunder must be in writing, and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at Executive's address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at the address as listed in the Company's payroll records. 6.3 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.4 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.5 ARBITRATION. Unless otherwise prohibited by law or specified below, all disputes, claims and causes of action, in law or equity, arising from or relating to this Agreement or its enforcement, performance, breach, or interpretation shall be resolved solely and exclusively by final and binding arbitration, by a single arbitrator, held in San Francisco County, California through Judicial Arbitration & Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration rules and as otherwise required by law. However, nothing in this section is intended to prevent either party from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Each party in any such arbitration shall be responsible for its own attorneys' fees, costs and necessary disbursements; provided, however, that in the event one party refuses to arbitrate and the other party seeks to compel arbitration by court order, if such other party prevails, it shall be entitled to recover reasonable attorneys' fees, costs and necessary disbursements. Pursuant to California Civil Code Section 1717, each party warrants that it was represented by counsel in the negotiation and execution of this Agreement, including the attorneys' fees provision herein. 6.6 COMPLETE AGREEMENT. This Agreement, including Exhibit A, Exhibit B and Exhibit C, constitutes the entire agreement between Executive and the Company and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter, wholly superseding all written and oral agreements with respect to payments and benefits to Executive in the event of employment termination. It is entered into without reliance on any promise or representation other than those expressly contained herein. 6.7 AMENDMENT OR TERMINATION OF AGREEMENT. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this 6 Agreement must be signed by an executive officer of the Company after such change or termination has been approved by the Board. 6.8 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.9 HEADINGS. The headings of the Articles and Sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.10 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, and the Company, and any surviving entity resulting from a Change in Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company, and their respective successors, assigns, heirs, executors and administrators, without regard to whether or not such person actively assumes any rights or duties hereunder; provided, however, that Executive may not assign any duties hereunder and may not assign any rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. 6.11 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California, without regard to such state's conflict of laws rules. 6.12 NON-PUBLICATION. The parties mutually agree not to disclose the terms of this Agreement except to the extent that disclosure is mandated by applicable law or corporate reporting requirements, or to respective advisors (e.g., attorneys, accountants). 6.13 CONSTRUCTION OF AGREEMENT. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. IN WITNESS WHEREOF, the parties have executed this Agreement on the Effective Date written above. SBE, INC. KIRK ANDERSON By: /s/ William B. Heye, Jr. /s/ Kirk Anderson --------------------------- ----------------- Name: William B. Heye, Jr. ------------------------- Title: President & CEO ------------------------ Exhibit A: Release (Termination of Executive under Age 40) Exhibit B: Release (Individual Termination of Executive Age 40 or Older) Exhibit C: Release (Group Termination of Executive Age 40 or Older) 7 EXHIBIT A RELEASE (TERMINATION OF EXECUTIVE UNDER AGE 40) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the date I return this signed Release to the Company. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Release. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------------- ----------------------------- Date Kirk Anderson 8 EXHIBIT B RELEASE (INDIVIDUAL TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"). Nevertheless, my general release of claims, except for the ADEA Waiver, is effective immediately, and not revocable. This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------------- ----------------------------- Date Kirk Anderson 9 EXHIBIT C RELEASE (GROUP TERMINATION OF EXECUTIVE AGE 40 OR OLDER) I understand that my position with SBE, Inc. (the "COMPANY") terminated effective ___________, 200_. The Company has agreed that if I choose to sign this Release, the Company will provide me with the severance benefits described in that certain Executive Severance Benefits Agreement (the "AGREEMENT") between me and the Company dated _____, 2004. The severance benefits will be provided to me within five (5) business days of the Effective Date of this Release. I understand that I am not entitled to any severance benefits unless I sign this Release. In addition to the severance benefits, the Company will pay me all of my accrued salary and vacation, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I acknowledge my obligations under my Proprietary Information and Inventions Agreement not to use or disclose any of the Company's proprietary information, and I agree to immediately return all Company property and documents (including all embodiments of proprietary information) and all copies thereof in my possession or control. I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Agreement. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, wages or benefits, or claims for any form of compensation. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA WAIVER"). I also acknowledge that the consideration given for the ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release ("EFFECTIVE DATE"); and (f) I have received with this Release a detailed list of the job titles and ages of all employees who were terminated in this group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. While I have the right to revoke the ADEA Waiver, my general release of claims (except for the ADEA Waiver), is effective immediately, and not revocable. This Release, together with the Agreement and my Proprietary Information and Inventions Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized officer of the Company. I accept and agree to the terms and conditions stated above: - -------------------------------- ----------------------------- Date Kirk Anderson 10 EX-10.15 6 v13803_ex10-15.txt EXHIBIT 10.15 August 7, 2003 Ignacio "Carl" Munio San Jose, CA Dear Carl: THIS OFFER LETTER IS CONDITIONED AND EFFECTIVE UPON THE CLOSING (THE "CLOSING") OF THE ACQUISITION OF CERTAIN ASSETS OF ANTARES MICROSYSTEMS, INC. ("ANTARES") FROM DH BARTHOL & COMPANY, AS THE ASSIGNEE FOR THE BENEFIT OF CREDITORS OF ANTARES (THE "ASSIGNEE") I am pleased to extend to you an offer of employment with SBE, Inc. ("SBE") as Vice President, Engineering. The starting salary for this position will be $14,583.34 per month, less payroll deductions and all required withholdings, payable in equal periodic installments according to SBE's customary payroll practices. This is a full-time, exempt position. We would like you to start with SBE on the day after the Closing (the "Starting Date"). You will report to Bill Heye, President/CEO. Your primary responsibility will be to manage the engineering organization of SBE. We may also ask you to perform additional or different duties, or alter your reporting relationship, as we deem necessary. CASH INCENTIVE BONUS Subject to the terms herein, you will be paid a total cash incentive bonus of $105,000 to be paid in two installments, less payroll deductions and all required withholdings. The first installment totaling $80,000, less payroll deductions and all required withholdings, will be paid one week after the closing and a second payment totaling $25,000, less payroll deductions and all required withholdings will be paid on January 2, 2004 (the "Incentive Bonus"). RESTRICTED SBE STOCK AWARD You will be issued a total of 98,945 shares of restricted SBE common stock (the "Stock Award"). The following is the schedule for delivering the restricted stock to you: 10,000 shares on January 1, 2004; 20,000 shares on April 2, 2004; 20,000 shares on December 1, 2004; 20,000 shares on January 1, 2005 and 28,945 shares on April 2, 2005. The shares subject to the Stock Award will vest 1/24th upon the completion of each month of your continued employment with SBE. The Stock Award will be subject to the terms of the SBE 1996 Stock Option Plan and the form of the restricted stock award to be entered into by you and SBE. You hereby acknowledge and agree that it is your obligation and responsibility to timely file any election under Section 83(b) of the Internal Revenue Code required in connection with the Stock Award, and neither SBE nor SBE's legal or financial advisors shall have any obligation or responsibility with respect to this filing. INITIAL TOE INCENTIVE PAYMENT Subject to the terms herein, following the fiscal quarter in which SBE has shipped an aggregate of $200,000 of the TCP/IP offload product (the "TOE Product") to third party customers, you will be entitled to a payment of $15,833 for each quarter in which SBE has shipped at least $150,000 TOE Products, up to 2305 Camino Ramon, Suite 200, San Ramon, CA 94583 925.355.2000 a maximum aggregate payment to you of $190,000 (the "Initial TOE Incentive Payment"). Each such quarterly payment will be due and payable to you within five business days after SBE's public release of its earnings for such quarter. SUBSEQUENT TOE INCENTIVE PAYMENTS Subject to the terms herein, for each $1,000,000 of TOE Products shipped, you will entitled to a payment of either (i) $47,500, (ii) a stock bonus award of 22,511 shares of SBE common stock or (iii) any combination thereof, to be determined in the sole discretion of SBE, up to a maximum aggregate payment of $237,500 (the "Subsequent TOE Incentive Payment"). Each such payment will be due and payable to you within five business days after SBE's public release of its earnings for the quarter in which you become entitled to such payment. BRIDGE BANK GUARANTEE SBE agrees to use all commercially reasonable efforts to obtain a cancellation of the currently outstanding guarantee between you and Bridge Bank for any and all sums owing to Bridge Bank arising from Antares operations after the amounts owing to Bridge Bank have been paid in full with the outstanding accounts receivable that serve as collateral for the loans from Bridge Bank. TERMINATION You and SBE may terminate your employment with SBE at any time and for any reason. If you terminate your employment or SBE terminates your employment, your rights to the Incentive Bonus, the Stock Award, the Initial TOE Incentive Payment and the Subsequent TOE Incentive Payment, to the extent not yet received or vested, shall automatically vest, (i) the Incentive Bonus, if it has not yet been paid, will become immediately due and payable, (ii) the stock certificate for the 98,945 share Stock Award, less any stock certificates previously issued under the Stock Award, will be immediately delivered, and (iii) the Initial TOE Incentive Payment and Subsequent TOE Incentive Payments shall continue to be due and payable pursuant to the terms hereof. RELEASE AND INDEMNIFICATION In exchange for the payments and other consideration under this offer letter, you hereby acknowledge and agree that: (i) you release, acquit and forever discharge SBE, its subsidiaries, and their respective officers, directors, agents, servants, employees, attorneys, stockholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date of the Closing, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with your employment with Antares, the termination of that employment or any claims that you may have as a creditor of Antares. TAXES The risk of any adverse tax consequence or tax liability that you may experience as a result of the provisions of this offer letter will be borne solely by you. Nothing in this offer letter shall be construed to impose any such tax liability upon SBE, or to require that SBE indemnify, hold harmless or otherwise reimburse you for any such tax liability or other costs that you may incur as a result of this offer. All payments provided for in this offer letter will be subject to applicable payroll deductions and withholding laws. YOU SHOULD CONSULT WITH YOUR PROFESSIONAL TAX ADVISORS TO DISCUSS ANY TAX CONSEQUENCES OR TAX LIABILITIES THAT MAY RESULT AS A RESULT OF THIS OFFER LETTER. GENERAL Health insurance will be effective on the first day of the month following your employment date. SBE may modify the company benefit programs as it deems necessary. In accordance with federal law, this offer is subject to your submission of an I-9 form and satisfactory documentation of your identification and right to work in the United States no later than three days after your employment begins. 2305 Camino Ramon, Suite 200, San Ramon, CA 94583 925.355.2000 As an SBE employee, you will be expected to abide by SBE rules and regulations, acknowledge in writing that you have read SBE's company handbook, and sign and comply with the attached [Proprietary Information and Inventions Agreement], which prohibits unauthorized use or disclosure of SBE proprietary information. Employment with SBE is at will, as explained in the SBE company handbook. This at-will employment provision supersedes all prior communication with you and can only be modified by written agreement signed by you and SBE. You may not assign any of your duties or rights hereunder without the written consent of SBE. In the event that the Closing does not occur on or prior to August 31, 2003, this offer letter shall automatically terminate and shall be of no further force or effect. If you wish to accept employment at SBE under the terms listed above, please sign and date this letter, and return one copy to me by August 7, 2003. Sincerely, /s/ Bill Heye - ------------------ Bill Heye President/CEO ACKNOWLEDGED AND AGREED TO: /s/ Carl Munio 8/7/2003 - -------------------------- ------------------- Signature Date EX-10.16 7 v13803_ex10-16.txt EXHIBIT 10.16 RELEASE AGREEMENT [TO BE SIGNED ON OR WITHIN 21-DAYS AFTER DECEMBER 31, 2004] I resigned from my position with SBE, Inc. (the "COMPANY"), and my employment with the Company in all capacities will terminate effective December 31, 2004 (the "SEPARATION DATE"). The Company has agreed that, if I provide continued employment service to the Company through December 31, 2004, train my successor as necessary or appropriate or as requested by the Company's Board of Directors, and sign and abide by the terms of this Release Agreement (the "RELEASE"), the Company will pay me severance in the amount of $250,000, less legally required withholdings and deductions and shall grant me an option to purchase 75,000 shares of the Company's common stock, which option shall vest on a monthly basis measured from the date of grant through to March 31, 2006. The severance amount will be paid in the form of continuing base salary payments, paid in equal semi-monthly installments over a twelve month period on the Company's customary payroll payment dates, commencing on the first payroll date after the Effective Date (as hereinafter defined) of this Release and the option grant shall be made on the Effective Date of this Release. In addition to the severance benefits described above, the Company will pay me all accrued salary and vacation earned through the Separation Date, to which I am entitled by law. In consideration for the severance benefits I am receiving under this Release to which I am not otherwise entitled, I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are known or unknown, arising at any time prior to and including the date I sign this Release. This general release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or the termination of that employment (including, but not limited to, any claims or rights I may have under any agreement or contract which provides for payment upon termination of employment or in connection with a Change of Control (excluding only this Release)); (2) all claims related to my compensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options or any other ownership interests in the Company; (3) all contractual claims, including claims for breach of contract, wrongful termination, or breach of the covenant of good faith and fair dealing; (4) all tort claims, including claims for fraud, discrimination, defamation or emotional distress; and (5) all federal, state, and local statutory claims (including, but not limited to, claims for discrimination, harassment, attorneys' fees or other claims arising under the federal Civil Rights Act of 1964, as amended, the federal Americans with Disabilities Act of 1990, as amended, the Employee Retirement Income Security Act of 1974, as amended, the California Labor Code (as amended) or the California Fair Employment and Housing Act (as amended)). I understand that the above release of claims includes claims which may be unknown to or unsuspected by me. In releasing claims unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code, which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby waive all rights and benefits under Section 1542 of the California Civil Code and any law or legal principle of similar effect in any jurisdiction. 1 I further acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended (the "ADEA WAIVER"). I also acknowledge that the consideration given for this ADEA Waiver is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (i) my ADEA Waiver does not apply to any rights or claims that arise after the date I sign this Release; (ii) I should consult with an attorney prior to signing this Release; (iii) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily sign it sooner); (iv) I have seven (7) days following the date I sign this Release to revoke the ADEA Waiver; and (v) the ADEA Waiver will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after I sign this Release (the "EFFECTIVE DATE"). Nevertheless, my general release of claims, except for the ADEA Waiver, is effective immediately, and not revocable. This Release constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein. This agreement may only be modified by a writing signed by both me and a duly authorized of member of the Board of Directors of the Company. I accept and agree to the terms and conditions stated above: January 5, 2005 /s/ William B. Heye - ----------------- ------------------- Date William B. Heye 2 EX-31.1 8 v13803_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Daniel B. Grey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SBE, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under the supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: March 2, 2005 /s/ Daniel B. Grey ------------------------------------- Daniel B. Grey Chief Executive Officer and President EX-31.2 9 v13803_ex31-2.txt EXHIBIT 31.2 CERTIFICATIONS I, David W. Brunton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SBE, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under the supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and Date: March 2, 2005 /s/ David W. Brunton ------------------------- David W. Brunton Chief Financial Officer, Vice President, Finance and Secretary EX-32.1 10 v13803_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Act of 1934, as amended(the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code ("18 U.S.C. Section 1350"), Daniel B. Grey, the Chief Executive Officer of SBE, Inc. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2005, to which this Certification is attached as Exhibit 32.1 (the "Quarterly Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, as amended; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: March 2, 2005 /s/ Daniel B. Grey - --------------------------- Daniel B. Grey Chief Executive Officer "This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference to any filing of SBE, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before of after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing." EX-32.2 11 v13803_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Act of 1934, as amended(the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code ("18 U.S.C. Section 1350"), David W. Brunton, the Chief Financial Officer of SBE, Inc. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2005, to which this Certification is attached as Exhibit 32.1 (the "Quarterly Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, as amended; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: March 2, 2005 /s/ David W. Brunton - -------------------------- David W. Brunton Chief Financial Officer "This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference to any filing of SBE, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before of after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing." -----END PRIVACY-ENHANCED MESSAGE-----