SCHEDULE
14A
(RULE
14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a)
of
the Securities Exchange Act of 1934
Filed by
the Registrant x
Filed by
a Party other than the Registrant o
Check the
appropriate box:
|
x Preliminary Proxy
Statement |
|
o Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2)) |
|
o Definitive Proxy
Statement |
|
o Definitive Additional
Materials |
|
o Soliciting Material Under Rule
14a-12 |
SBE,
INC.
(Name of
Registrant as Specified In Its Charter)
(Name of
Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
|
|
|
|
o |
No
fee required. |
x Fee computed on table below per Exchange Act
Rules 14a-6(i)(1) and 0-11.
|
(1) |
Title
of each class of securities to which transaction applies: Common Stock,
par value $0.001 per share, of the Registrant (the “Common
Stock”). | |
|
(2) |
Aggregate
number of securities to which transaction applies:
2,561,050 | |
|
(3) |
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11: $2.22 | |
|
(4) |
Proposed
maximum aggregate value of transaction: $5,685,531 | |
|
(5) |
Total
fee paid: $1,137.11 | |
|
o |
Fee
paid previously with preliminary materials. | |
|
|
| |
|
o |
Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its
filing. | |
|
(1) |
Amount
previously paid: N/A | |
|
(2) |
Form,
Schedule or Registration Statement No.: N/A | |
|
(3) |
Filing
Party: N/A | |
|
(4) |
Date
Filed: N/A | |
SBE,
Inc.
[_____________],
2005
Dear
Stockholder:
You are
cordially invited to attend the Special Meeting of Stockholders of SBE, Inc. to
be held on [___________], 2005 at the Company’s offices located at 2305 Camino
Ramon, Suite 200, San Ramon, California 94583. The meeting will begin promptly
at 9:00 a.m., Pacific Daylight Time.
The items
of business to be considered at the meeting are listed in the following Notice
of Special Meeting and are more fully addressed in the proxy statement included
with this letter. The items you will be asked to approve at the meeting relate
to our proposed acquisition of PyX Technologies, Inc. and a proposed private
placement of shares of our common stock and warrants to purchase shares of our
common stock.
SBE is
making several moves to maximize opportunities in two dynamic markets, Internet
Protocol, or IP, storage and Voice-Over IP, or VoIP. Technology is changing, and
companies that grow in the future are those who are able to accept and adapt to
change. Multiple factors in today’s business landscape are driving technology
demands for storage and VoIP, and the proposed PyX acquisition gives SBE the
opportunity to make a difference.
Industry
experts in storage and VoIP project market growth that justifies our efforts in
these markets. Internet Small Computer System Interface, or iSCSI, enables
remote
access to secure multi-terabyte storage via desktops, laptops, PDAs, or other
mobile devices, and offers significant cost savings over existing storage
alternatives. Recent
reports from International Data Corporation (IDC) indicate that the iSCSI market
grew from $18 million in 2003 to $113 million in 2004. Furthermore, IDC
forecasts the IP storage area network, or SAN, market to reach $296 million in
2005 and $2.7 billion by 2008.
In my 20
years of sales and marketing experience in this industry, I’ve learned that
there is a direct correlation between product uniqueness, customer demands
relative to timing, and revenue success. Through months of research, testing,
and customer evaluations, we have concluded that PyX’s technology has unique
fault-tolerant features essential for the success of iSCSI that are not found in
competitive solutions today. We believe our acquisition of PyX will enable SBE
to approach IP storage in a three-tier manner: to sell the iSCSI software
separately; to sell storage hardware separately; and lastly, to combine the
software with our TCP/IP Offload Engines, or TOE, hardware for integrated,
“best-of breed” original equipment manufacturer, or OEM, solutions.
Timing
and execution are our focus henceforth. Our goal is to become a leading provider
of IP storage solutions to the OEM market. Concurrently, we continue to nurture
the business with our current customers in the communications markets, and
target those customers who have been key to SBE’s past success.
Our board
of directors carefully considered the proposed merger and private placement and
recommends that you vote in favor of these transactions. SBE’s strong management
staff and team of employees are ready to execute on these corporate initiatives.
We are excited about the opportunities for the combined company and believe that
the combined company will be able to create substantially more stockholder value
than could be achieved by the companies individually.
Whether
or not you plan to attend the special meeting in person, it is important that
your shares be represented and voted at the meeting. Please
date, sign, and return your proxy card promptly in the enclosed envelope to
ensure that your shares will be represented and voted at the special meeting,
even if you cannot attend. If you attend the special meeting, you may vote your
shares in person even though you have previously signed and returned your
proxy.
On behalf
of your board of directors, thank you for your investment in and continued
support of SBE, Inc.
|
|
|
|
|
Sincerely, |
|
|
|
|
|
/s/
Dan Grey |
|
|
|
|
|
Dan
Grey |
|
|
President
and Chief Executive Officer |
SBE,
INC.
NOTICE
OF SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On [__________], 2005
To the
Stockholders of SBE, Inc.:
You are
cordially invited to attend the Special Meeting
of Stockholders of SBE, Inc., a
Delaware corporation
(the “Company”). The meeting will be held on
[________], 2005 at 9:00 a.m., local time, at the Company’s offices located
at 2305 Camino Ramon, Suite 200, San Ramon, California 94583, for the following
purposes:
|
|
(1) To
approve a merger agreement between us and PyX Technologies, Inc., the
merger of PyX with and into our newly-formed, wholly-owned subsidiary, PyX
Acquisition Sub, LLC, and the issuance of 2,561,050 shares of our common
stock to the PyX shareholders and the assumption of options to purchase up
to an additional 2,038,950 shares of our common stock in the proposed
merger; |
|
|
|
|
|
(2) To
approve the form of unit subscription agreement and the issuance of units
consisting of one share of our common stock and a warrant to purchase an
additional one-half share of our common stock for aggregate gross proceeds
to us of $5,150,000 in a private placement; and |
|
|
|
|
|
(3) To
transact such other business as may properly come before the meeting or
any adjournment thereof. |
These
items of business are more fully described in the Proxy Statement accompanying
this Notice.
The
record date for the Annual Meeting is April 29, 2005. Only stockholders of
record at the close of business on that date may vote at the meeting or any
adjournment thereof.
|
|
|
|
|
By
Order of the Board of Directors, |
|
|
|
|
|
/s/
David W. Brunton |
|
|
|
|
|
David
W. Brunton |
|
|
Secretary |
San
Ramon, California
[________],
2005
YOU
ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH DOES
NOT REQUIRE ANY POSTAGE IF MAILED IN THE UNITED STATES,
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING. EVEN IF YOU HAVE
VOTED BY PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN
YOUR NAME FROM THAT RECORD HOLDER IN ORDER TO VOTE IN
PERSON.
TABLE
OF CONTENTS
| PAGE | |
|
FORWARD-LOOKING
STATEMENTS |
1 |
|
WHERE
YOU CAN FIND MORE INFORMATION |
1 |
|
SUMMARY
TERM SHEET FOR THE MERGER AND PRIVATE PLACEMENT |
6 |
|
RISK
FACTORS |
13 |
|
Risk
Relating to the Transactions |
13 |
|
Risk
Relating to the Company after the Transactions |
14 |
|
Risks
Related to PyX’s Business |
15 |
|
THE
COMPANIES |
16 |
|
SBE |
16 |
|
PyX |
16 |
|
THE
MERGER AND THE PRIVATE PLACEMENT |
17 |
|
Background
of the Merger and the Private Placement |
17 |
|
Reasons
for the Merger and the Private Placement |
19 |
|
Opinion
of Our Financial Advisor |
21 |
|
Regulatory
Approvals Relating to the Transactions |
28 |
|
Dissenters’
Rights Relating to the Transactions |
28 |
|
Interests
of Certain Persons in the Transactions |
28 |
|
PROPOSAL
1 - APPROVAL OF THE MERGER, THE MERGER AGREEMENT AND THE ISSUANCE OF
SHARES OF OUR COMMON STOCK AND ASSUMPTION OF OPTIONS TO PURCHASE SHARES OF
OUR COMMON STOCK IN THE MERGER |
29 |
|
General |
29 |
|
Effective
Time of the Merger |
29 |
|
Treatment
of Stock Options |
29 |
|
Surrender
and Exchange of Share Certificates |
30 |
|
Escrow |
30 |
|
Representations
and Warranties |
30 |
|
Certain
Covenants |
32 |
|
Indemnification |
35 |
|
Conditions
Precedent |
35 |
|
Termination |
36 |
|
Waivers |
36 |
|
Amendments |
37 |
|
Fees
and Expenses |
37 |
|
Accounting
Treatment of the Merger |
37 |
|
Shareholder
Agreement |
37 |
|
Voting
Agreement |
38 |
|
Past
Contacts, Transactions or Negotiations |
38 |
|
Recommendation
of our Board of Directors |
38 |
|
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION |
39 |
|
Unaudited
Pro forma Consolidated Financial Statements of SBE |
40 |
|
SELECTED
FINANCIAL DATA OF PYX |
43 |
|
DESCRIPTION
OF PYX’S BUSINESS |
44 |
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND |
|
|
RESULTS
OF OPERATIONS OF PYX |
46 |
|
PROPOSAL
2 - APPROVAL OF THE UNIT SUBSCRIPTION AGREEMENT AND THE ISSUANCE OF SHARES
OF SERIES A PREFERRED STOCK IN THE PRIVATE PLACEMENT |
49 |
|
General |
49 |
|
Per
Unit Purchase Price |
50 |
|
Closing
of the Private Placement |
50 |
|
Representations
and Warranties |
50 |
|
Certain
Covenants |
52 |
|
Indemnification |
52 |
|
Conditions
Precedent |
52 |
|
Warrants |
52 |
|
Investor
Rights Agreement |
52 |
|
Registration
Rights |
53 |
|
The
Voting Agreement |
53 |
|
OTHER
MATTERS |
54 |
-i-
Except as
otherwise specifically noted, “SBE,” “we,” “our,” “us” and similar words in this
proxy statement refer to SBE, Inc. and its subsidiaries. References to “PyX”
shall mean PyX Technologies, Inc.
FORWARD-LOOKING
STATEMENTS
The
information in this proxy statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements
that are not historical in nature, including statements about beliefs and
expectations, are forward-looking statements. Words such as “may,” “will,”
“should,” “estimates,” “predicts,” “believes,” “anticipates,” “plans,”
“expects,” “intends” and similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying such
statements. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and
uncertainties. You are cautioned that these forward-looking statements reflect
management's estimates only as of the date hereof, and we assume no obligation
to update these statements, even if new information becomes available or other
events occur in the future. Actual future results, events and trends may differ
materially from those expressed in or implied by such statements depending on a
variety of factors, including, but not limited to those set forth under “Risk
Factors” and elsewhere in this proxy statement. Important factors that might
cause or contribute to such a discrepancy include, but are not limited
to:
|
• |
the
extent of our ability to integrate the operations of PyX with our own
operations; |
|
• |
our
ability to develop and market the Internet Small computer System
Interface, or iSCSI, software; |
|
• |
the
effect of any unknown liabilities of PyX that materialize after the
transactions; |
|
• |
the
effect of the transactions on our market
price; |
|
• |
the
factors discussed under “Risk Factors,” beginning on page [___];
and |
|
• |
other
risks referenced from time to time in our filings with the Securities and
Exchange Commission, or SEC, including our annual report on Form 10-K
for our fiscal year ended October 31, 2004 and our quarterly report
on Form 10-Q for the quarter ended January 31, 2005, copies of which
accompany this proxy statement. |
WHERE
YOU CAN FIND MORE INFORMATION
We are a
reporting company and file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, proxy statements or other information that we file at the SEC’s public
reference room at 450 Fifth Street N.W., Room 1024, Washington, D.C.,
20549. You can also request copies of these documents by writing to the SEC and
paying a fee for the copying costs. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference room. Our public
filings with the SEC are also available on the web site maintained by the SEC
at
http://www.sec.gov.
We have
supplied all information in this proxy statement relating to SBE. PyX has
supplied all information in this proxy statement relating to PyX. Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. has supplied the information
regarding its fairness opinion.
-1-
SBE, INC.
2305
Camino Ramon, Suite 200
San
Ramon, California 94583
PROXY
STATEMENT
FOR
THE SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On [_________], 2005
The
Special Meeting of Stockholders of SBE, Inc. will be held on [_______],
2005, at 2305 Camino Ramon, Suite 200, San Ramon, California 94583, beginning
promptly at [____] a.m., local time. The enclosed proxy is solicited by our
board of directors. It is anticipated that this proxy statement and the
accompanying proxy card will be first mailed to holders of our common stock on
or about [______], 2005.
QUESTIONS
ABOUT THE MERGER AND THE PRIVATE PLACEMENT
Why
am I receiving this proxy statement and proxy card?
You are
receiving a proxy statement and proxy card because you own shares of our common
stock. This proxy statement describes the issues on which we would like you, as
a stockholder, to vote. It also gives you information on these issues so that
you can make an informed decision.
Who
can vote at the special meeting?
Only
stockholders of record at the close of business on [_______], 2005 will be
entitled to vote at the special meeting. On this record date, there were
_____ shares
of common stock outstanding and entitled to vote.
Stockholder
of Record: Shares Registered in Your Name
If on
[________],
2005 your
shares were registered directly in your name with our transfer agent, American
Stock Transfer & Trust, then you are a stockholder of record. As a
stockholder of record, you may vote in person at the meeting or vote by proxy.
Whether or not you plan to attend the meeting, we urge you to fill out and
return the enclosed proxy card to ensure your vote is counted.
Beneficial
Owner: Shares Registered in the Name of a Broker or Bank
If on
[________],
2005 your
shares were held, not in your name, but rather in an account at a brokerage
firm, bank, dealer, or other similar organization, then you are the beneficial
owner of shares held in “street name” and these proxy materials are being
forwarded to you by that organization. The organization holding your account is
considered to be the stockholder of record for purposes of voting at the special
meeting. As a beneficial owner, you have the right to direct your broker or
other agent on how to vote the shares in your account. You are also invited to
attend the special meeting. However, since you are not the stockholder of
record, you may not vote your shares in person at the meeting unless you request
and obtain a valid proxy from your broker or other agent.
What
am I voting on?
You are
being asked to vote on the following matters relating to our proposed merger
with PyX and the proposed private placement of shares of our common
stock:
|
|
|
|
|
Proposal
1 —
To approve a merger agreement between PyX, PyX Acquisition Sub, LLC, our
newly-formed, wholly owned subsidiary (referred to in the proxy statement
as “Merger Sub”) and us and the transactions contemplated by the merger
agreement, including the merger of PyX with and into Merger Sub, the
issuance of 2,561,050 shares of our common stock to the PyX shareholders,
and the assumption of options to purchase up to an additional 2,038,950
shares of our common stock; and |
|
|
|
|
|
Proposal
2 —
To approve the issuance of units consisting of one share of our common
stock and a warrant to purchase an additional one-half share of our common
stock, for aggregate gross proceeds to us of $5,150,000, in a private
placement pursuant to the terms of a unit subscription agreement between
AIGH Investment Partners, LLC and certain other unaffiliated purchasers
and us. |
-2-
Each of
the merger and the private placement is conditioned upon our receipt of
stockholder approval of each of Proposals 1 and 2. If we do not obtain
stockholder approval of each of these proposals, we will not be able to
consummate the merger or the private placement. We refer to the merger and the
private placement collectively in this proxy statement as the
transactions.
How
do I vote?
For each
of the matters to be voted on, you may vote “For” or “Against” or abstain from
voting. The procedures for voting are fairly simple:
Stockholder
of Record: Shares Registered in Your Name
If you
are a stockholder of record, you may vote in person at the special meeting or
vote by proxy using the enclosed proxy card. Whether or not you plan to attend
the meeting, we urge you to vote by proxy to ensure your vote is counted. You
may still attend the meeting and vote in person if you have already voted by
proxy.
|
• |
To
vote in person, come to the special meeting and we will give you a ballot
when you arrive. |
|
• |
To
vote using the proxy card, simply complete, sign and date the enclosed
proxy card and return it promptly in the envelope provided. If you return
your signed proxy card to us before the special meeting, we will vote your
shares as you direct. |
Beneficial
Owner: Shares Registered in the Name of Broker or Bank
If you
are a beneficial owner of shares registered in the name of your broker, bank, or
other agent, you should have received a proxy card and voting instructions with
these proxy materials from that organization rather than from us. Simply
complete and mail the proxy card to ensure that your vote is counted. To vote in
person at the special meeting, you must obtain a valid proxy from your broker,
bank, or other agent. Follow the instructions from your broker or bank included
with these proxy materials, or contact your broker or bank to request a proxy
form.
How
many votes do I have?
On each
matter to be voted upon, you have one vote for each share of common stock you
own as of [_________], 2005.
How
are votes counted?
Votes
will be counted by the inspector of election appointed for the meeting, who will
separately count “For” and “Against” votes, abstentions and broker non-votes.
Abstentions and broker non-votes will be counted towards the vote total for each
proposal and will have the same effect as “Against” votes.
If your
shares are held by your broker as your nominee (that is, in “street name”), you
will need to obtain a proxy form from the institution that holds your shares and
follow the instructions included on that form regarding how to instruct your
broker to vote your shares. If you do not give instructions to your broker, the
shares will be treated as broker non-votes.
What
if I return a proxy card but do not make specific
choices?
If you
return a signed and dated proxy card without marking any voting selections, your
shares will be treated as broker non-votes and will have the same effect as
“Against” votes.
-3-
Who
is paying for this proxy solicitation?
We will
pay for the entire cost of soliciting proxies. In addition to these mailed proxy
materials, our directors and employees may also solicit proxies in person, by
telephone or by other means of communication. Directors and employees will not
be paid any additional compensation for soliciting proxies. We may also
reimburse brokerage firms, banks and other agents for the cost of forwarding
proxy materials to beneficial owners.
What
does it mean if I receive more than one proxy card?
If you
receive more than one proxy card, your shares are registered in more than one
name or are registered in different accounts. Please complete, sign and return
each proxy
card to ensure that all of your shares are voted.
Can
I change my vote after submitting my proxy?
Yes. You
can revoke your proxy at any time before the final vote at the meeting. If you
are the record holder of your shares, you may revoke your proxy in any one of
three ways:
|
• |
You
may submit another properly completed proxy card with a later
date; |
|
• |
You
may send a written notice that you are revoking your proxy to our
Secretary at 2305 Camino Ramon, Suite 200, San Ramon, California 94583;
or |
|
• |
You
may attend the special meeting and vote in person. However, simply
attending the special meeting will not, by itself, revoke your
proxy. |
If your
shares are held by your broker or bank as a nominee or agent, you should follow
the instructions provided by your broker or bank.
What
will happen in the merger?
In the
merger, PyX will be merged with and into Merger Sub. Merger Sub will then be the
surviving entity. PyX will cease to exist as a separate entity and we will
continue as the sole member of Merger Sub. As consideration for the merger, we
will issue 0.46 of a share of our common stock to the PyX shareholders for each
share of PyX common stock outstanding as of the effective time of the merger. In
addition, we will assume each stock option that is then outstanding under PyX’s
2005 Stock Plan, whether vested or unvested, in accordance with the existing
terms of that plan and the applicable stock option agreement. We will issue a
total of 2,561,050 shares of our common stock in consideration of the shares of
PyX common stock outstanding as of the effective time of the merger. In
addition, we will assume options to purchase an additional 2,038,950 shares of
our common stock.
What
will happen in the private placement?
In the
private placement, we will issue units consisting of one share of our common
stock and a warrant to purchase an additional one-half share of our common
stock, for aggregate gross proceeds to us of $5,150,000, pursuant to a unit
subscription agreement between us, AIGH Investment Partners LLC and certain
other unaffiliated investors.
When
do you expect the merger and private placement to be
completed?
We plan
to complete the transactions as soon as possible after the special meeting,
subject to the satisfaction or waiver of certain conditions to the transactions,
which are described in this proxy statement. We cannot predict when, or if,
these conditions will be satisfied or waived.
What
risks should I consider in evaluating the merger and private
placement?
You
should consider the risks described under the heading “Risk Factors” beginning
on page[ ___].
-4-
How many votes are needed to approve each proposal?
To be
approved, each of Proposal 1 (to consider and vote on the merger, the related
merger agreement, the issuance of shares of our common stock and the assumption
of options to purchase shares of our common stock in the merger) and Proposal 2
(to approve the unit subscription agreement and the issuance of shares of our
common stock and warrants to purchase shares of our common stock in the private
placement) must receive a “For” vote from the majority of the outstanding shares
present and voting at the special meeting, either in person or by proxy. If
those present do not vote, or abstain from voting, it will have the same effect
as an “Against” vote. In addition, Broker non-votes will have the same effect as
“Against” votes.
What
is the quorum requirement?
A quorum
is necessary to hold a valid meeting. A quorum will be present if a majority of
the outstanding shares are represented either by stockholders present
at the meeting or by proxy. On the record date, there were [_____] shares of SBE
common stock outstanding and entitled to vote. Thus, at least[ _____] shares
must be represented either by stockholders present at the meeting or by proxy in
order to have a quorum.
Your
shares will be counted towards the quorum only if you submit a valid proxy (or
one is submitted on your behalf by your broker, bank or other nominee) or if you
vote in person at the meeting. Abstentions and broker non-votes will be counted
towards the quorum requirement. If there is no quorum, a majority of the votes
present at the meeting may adjourn the meeting to another date.
Does
the board of directors recommend approval of the proposals at the special
meeting?
Yes.
After careful consideration, our board of directors recommends that our
stockholders vote FOR each of the proposals.
Who
can help answer my questions about the proposals?
If you
have additional questions about these proposals, you should contact David
Brunton, our chief financial officer, at (925) 355-2000.
How
can I find out the results of the voting at the special
meeting?
Preliminary
voting results may be announced at the special meeting. Final voting results
will be published in our quarterly report on Form 10-Q for the quarter in which
the special meeting occurs.
-5-
SUMMARY
TERM SHEET
FOR
THE MERGER AND PRIVATE PLACEMENT
(Proposals
1 and 2)
The
following summary, together with the previous question and answer section,
provides an overview of the proposed merger and private placement discussed in
this proxy statement and presented in the attached annexes. The summary also
contains cross-references to the more detailed discussions elsewhere in the
proxy statement. This summary may not contain all of the information that is
important to you. To understand the proposed merger and private placement fully,
and for a more complete description of the terms of the proposed merger and
private placement, you should carefully read this entire proxy statement and the
attached annexes in their entirety.
The
Companies (see page[ ___])
SBE
We
develop and provide network communications and storage solutions for original
equipment manufacturers, or OEMs, in the embedded systems marketplace. Embedded
networking technology is hardware or software that serves as a component within
a larger networking or storage device or system, such as a Gigabit Ethernet or a
T-1/T-3 input/output network interface card, that plugs into an expansion slot
in a high-end computer or storage system. Embedded networking solutions enable
the functionality of many commonly used devices or equipment, such as products
and solutions for basic telephone and internet services, mobile phones, medical
equipment and storage networks.
PyX
PyX
Technologies, Inc. is a development-stage technology company focused on the
development, implementation and sale of Internet Small Computer System
Interface, or iSCSI, software as an economical and efficient data storage
alternative for enterprises and organizations. PyX currently has two Linux-based
products that have been completed - the iSCSI Initiator and the iSCSI Target.
All PyX products conform to the iSCSI standard as ratified by the Internet
Engineering Task Force, or IETF. PyX believes that it is the first and only
company in the world to complete development of a iSCSI protocol that meets and
exceeds certain IETF standards.
Overview
of the Transactions (see page [___])
We have
entered into a definitive agreement and plan of merger and reorganization with
PyX. Under the merger agreement, PyX will merge with and into our newly-formed,
wholly-owned subsidiary, PyX Acquisition Sub, LLC (referred to in this proxy
statement as Merger Sub), which will remain as the surviving legal entity and
our wholly-owned subsidiary. At the time of the merger, PyX will cease to exist
as a separate entity and Merger Sub will succeed to all of PyX’s assets,
liabilities, rights and obligations.
We also
have entered into unit subscription agreements pursuant to which we agreed to
issue units consisting of one share of our common stock and a warrant to
purchase an additional one-half share of our common stock, for aggregate gross
proceeds to us of $5,150,000, in a private placement. The completion of the
merger is contingent on us being able to raise at least $5.0 million in gross
proceeds in an equity financing. We expect to raise a total of $5,150,000.00. in
connection with the private placement. In addition, the private placement is
contingent on the completion of the merger. It is anticipated that the
transactions will be completed concurrently.
Recommendation
of the Board of Directors (see page[ ___])
Our board
of directors has determined that the merger, the private placement and the
issuance of shares of our common stock as consideration in the transaction, are
fair to, and in the best interests of, us and our stockholders and recommends
that our stockholders vote FOR each of the transactions and the issuance of
shares of our common stock in connection with these transactions.
-6-
To review
the background and reasons for the transactions in detail, see “The Merger and
the Private Placement — Reasons for the Merger and the Private Placement”
beginning on page [___].
Opinion
of Our Financial Advisor (see page [___])
In
connection with the merger, our board of directors received a written opinion
from Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as to the
fairness of the merger consideration to be paid by us, from a financial point of
view and as of the date of the opinion. The full text of Houlihan Lokey’s
written opinion is attached to this proxy statement as Annex A. You are
encouraged to read this opinion carefully in its entirety for a description of
the assumptions made, matters considered and limitations on the review
undertaken. We did not obtain a fairness opinion with respect to the private
placement.
The
Merger (see page [___])
General
Following
the merger, PyX will cease to exist as a separate entity and Merger Sub will
continue as the surviving limited liability company and our wholly-owned
subsidiary. When the merger occurs:
|
• |
the
issued and outstanding shares of PyX common stock will be converted into
the right to receive an aggregate of 2,561,050 shares of our common stock,
or approximately _____% of the outstanding shares of our common stock
based on the number of shares outstanding on _____, 2005 and ___% of the
outstanding shares of our common stock after the closing of the private
placement, assuming no further issuances of shares of our common stock and
no exercise of outstanding stock options or warrants;
and |
|
• |
the
issued and outstanding options to purchase shares of PyX common stock will
be assumed by us and converted into the right to receive an aggregate of
2,038,950 shares of our common stock upon exercise of the underlying
options, or approximately _____% of the outstanding shares of our common
stock based on the number of shares outstanding on _____, 2005 and __% of
the outstanding shares of our common stock after the closing of the
private placement, assuming no further issuances of shares of our common
stock and no exercise of outstanding stock options or warrants. The
exercise price of the assumed options will be $2.17 per share of our
common stock issuable upon exercise of the underlying option. The options
will be subject to the same terms and conditions as were in place prior to
the merger. |
The
exchange rate for each share of PyX common stock is 0.46 of a share of our
common stock and is fixed and not subject to change.
We will
not issue any fractional shares. Instead, PyX shareholders will receive a check
equal to the fractional share amount multiplied by the average closing sale
price of a share of our common stock for the ten consecutive trading days
immediately preceding the closing date of the merger, as reported on the Nasdaq
SmallCap Market.
Terms
of the Merger Agreement
The
merger agreement is attached to this proxy statement as Annex B. We
encourage you to read the merger agreement carefully. Our board of directors has
approved the merger agreement, and it is the binding legal agreement that
governs the terms of the merger.
Agreement
Not to Solicit Other Offers
PyX and
certain holders of PyX’s outstanding capital stock, referred to in this proxy
statement as the signing shareholders, have agreed that neither PyX nor the
signing shareholders will do any of the following during the period between the
signing of the merger agreement and the effective time of the merger, or until
the merger agreement is terminated in the event the merger is never
consummated:
|
• |
solicit
or encourage the initiation of any inquiry, proposal or offer relating to
an alternative business combination proposal;
|
|
• |
participate
in any discussions or negotiations or enter into any agreement with, or
furnish any non-public information to, any person relating to or in
connection with any alternative business combination proposal;
or |
|
• |
consider,
entertain or accept any proposal or offer from any person relating to any
alternative business combination proposal. |
-7-
Conditions
Precedent
The
completion of the merger depends on the satisfaction or waiver of a number of
conditions, including conditions relating to:
|
• |
accuracy
of the other party’s representations and warranties and compliance by the
other party with their covenants; |
|
• |
approval
by our stockholders of the issuance of shares of our common stock in
connection with the merger; |
|
• |
execution
and delivery of certain ancillary documents attached to the merger
agreement as exhibits; |
|
• |
receipt
of an officer’s certificate certifying the accuracy of each party’s
representations and warranties and satisfaction of certain conditions;
|
|
• |
our
entering into a definitive agreement with respect to the private
placement; |
|
• |
absence
of legal prohibitions to the completion of the
merger; |
|
• |
absence
of legal proceedings challenging the merger, seeking recovery of a
material amount in damages or seeking to prohibit or limit the exercise of
any material right with respect to our ownership of stock in Merger Sub or
the PyX shareholders’ ownership of our common stock;
and |
|
• |
no
material adverse effect will have occurred and no circumstance exists that
could reasonably be expected to have or result in a material adverse
effect with respect to us or PyX. |
In
addition, our obligation to complete the merger is subject to satisfaction or
waiver of certain additional conditions, including conditions relating
to:
|
• |
holders
of no more than 5% of the outstanding PyX common stock will have elected
to exercise their dissenters’ rights in connection with the
merger; |
|
• |
receipt
of required third-party consents; and |
|
• |
amendment
of PyX’s current customer agreement with Pelco in a manner acceptable to
us. |
Termination
In
addition to terminating upon mutual consent, either party may terminate the
merger agreement under the following circumstances:
|
• |
if
it is reasonably determined by that party that timely satisfaction of any
of the conditions precedent to the obligations of that party to effect the
merger and consummate the transactions contemplated by the merger
agreement has become impossible; |
|
• |
if
any of the conditions precedent to the obligations of that party to effect
the merger and consummate the transactions contemplated by the merger
agreement has not been satisfied as of the agreed closing date;
or |
|
• |
the
merger has not been completed on or before July 31,
2005. |
-8-
Survival
of Representations and Warranties
The
merger agreement contains customary representations and warranties made by PyX
and the signing shareholders to SBE and Merger Sub and by SBE and Merger Sub to
PyX and the signing shareholders for purposes of allocating the risks associated
with the merger. The assertions embodied in the representations and warranties
made by PyX and the signing shareholders are qualified by information set forth
in a confidential disclosure schedule that was delivered in connection with the
execution of the merger agreement. All of the representations and warranties
made by the parties to the merger agreement survive for a period of one year
following the closing of the merger, except for PyX and the signing
shareholders’ representation and warranty relating to PyX’s capitalization,
which survives for a period of five years following the closing of the merger,
and the representation and warranty relating to PyX’s legal proceedings, which
survives for a period of three years following the closing of the merger.
Indemnification
With
certain exceptions, satisfaction of PyX and the signing shareholders’
indemnification obligations is limited to the shares of our common stock placed
in escrow, as described below under “Escrow,” and is further limited to claims
asserted on or prior to the end of the one year period following the closing of
the merger. However, the signing shareholders are personally liable for any
breach of the representations and warranties relating to PyX’s capitalization
and legal proceedings. With respect to breaches of the representation and
warranty relating to PyX’s legal proceedings, the signing shareholders’
liability is capped at their pro rata portion of the shares received from the
escrow. All of the shares received by the signing shareholders in connection
with the merger are subject to their indemnification obligations with respect to
breaches of the representation and warranty relating to PyX’s capitalization and
breaches of certain covenants related to securities law compliance and the
information statement provided to the PyX shareholders in connection with the
solicitation of PyX shareholders’ votes with respect to the merger agreement and
merger. There is no limitation on the liability of the signing shareholders with
respect to breaches involving fraud or intentional misrepresentations.
We are
not entitled to recover any damages with respect to an indemnification claim
until the total damages incurred under the merger agreement exceed $25,000,
after which we are entitled to recover such number of shares of our common stock
equal to the amount of the liability divided by the average closing sale price
of a share of our common stock for each of the 10 consecutive trading days
immediately preceding the closing date of the merger, if the claim was made on
or prior to the end of the one year period following the closing of the merger,
otherwise, for the 10 consecutive trading days immediately preceding the date
notice of the claim was delivered.
Escrow
The
merger agreement provides that, at the effective time of the merger, 460,000
shares, or 17.96% of the aggregate number of shares of our common stock to be
issued to the PyX shareholders at the effective time of the merger, will be
placed into an escrow account to satisfy the shareholders’ indemnification
obligations relating to representations and warranties made in the merger
agreement, as described above under “Indemnification.” As of
[_____], 2005, the value of the escrow shares was $[____] based on the closing
price of our common stock on that date. If no claims for indemnity are made
within one year following the closing of the merger, the shares of our common
stock held in escrow will be distributed on a pro rata basis to the PyX
shareholders.
-9-
Interest of Certain Persons in the Merger
Mr.
Ignacio C. Munio, our Vice President, Engineering, beneficially owns 25,000
shares of PyX common stock and as a result will be entitled to receive 11,500
shares of our common stock in connection with the merger. In addition to the
shares of our common stock that Mr. Munio will receive in connection in with the
merger, he currently beneficially owns 299,825 shares of our common stock, or
approximately _____% of the outstanding shares of our common stock based on the
number of shares outstanding on _____, 2005. After consummation of the
transactions, Mr. Munio will beneficially own _____% of the outstanding shares
of our common stock, assuming no further issuances of shares of our common stock
and not exercise of outstanding stock options or warrants.
Mr. Greg
Yamamoto, currently the Chief Executive Officer of PyX, beneficially owns
200,000 shares of PyX common stock and options to purchase up to an additional
750,000 shares of PyX common stock. As a result of the merger, Mr. Yamamoto will
be entitled to receive 92,000 shares of our common stock and options to purchase
up to an additional 345,000 shares of our common stock, representing
approximately _____% of the outstanding shares of our common stock, assuming the
exercise in full of all of the options, based on the number of shares
outstanding on [____], 2005. In addition, Mr. Yamamoto is investing $200,000 in
the private placement and,
assuming a purchase price per share of $2.00 will receive 100,000 shares
of our common stock and a warrant to purchase up to an additional 50,000 shares
of our common stock. After consummation of the merger and the private placement,
Mr. Yamamoto will beneficially own _____% of the outstanding shares of our
common stock, assuming exercise of all options and warrants to purchase shares
of our common stock, assuming no further issuances of shares of our common stock
and no exercise of outstanding stock options or warrants, other than the
exercise of the stock options and warrants issued to Mr. Yamamoto. In addition,
Mr. Yamamoto is investing an additional $100,000 in the private placement on
behalf of his two minor children, Melanie Yamamoto and Nicholas Yamamoto,
and,
assuming a purchase price per share of $2.00 each child will receive
25,000 shares of our common stock and a warrant to purchase up to an additional
12,500 shares of our common stock.
Accounting
Treatment
The
merger will be accounted for by us under the purchase method of accounting in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by us in connection with the merger, together with
the direct costs of the merger, will be allocated to PyX’s tangible and
intangible assets and liabilities based on their fair market values. The assets
and liabilities of PyX will be consolidated into our assets and liabilities as
of the effective date of the merger. The stock options issued to the former
holders of options to purchase shares of PyX common stock will be assumed by us
and accounted for in accordance with Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees,
or APB 25.
Under APB 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of the stock and the exercise price of
the option.
The
Private Placement (see page [___])
General
The unit
subscription agreement provides that, assuming a purchase price of $2.00 per
share, we will issue 2,575,000 shares of our common stock, or approximately
_____% of the outstanding shares of our common stock based on the number of
shares outstanding on _____, 2005, and warrants to purchase up to an additional
1,287,500 shares of our common stock, or approximately _____% of the outstanding
shares of our common stock based on the number of shares outstanding on _____,
2005, to the purchasers.
Terms
of the Unit Subscription Agreement
The unit
subscription agreement is attached to this proxy statement as Annex C. You
should read the unit subscription agreement carefully. Our board of directors
has approved the unit subscription agreement, and it is the binding legal
agreement that governs the private placement.
Calculation
of Unit Price
The unit
subscription agreements provide that the purchasers will invest $5,150,000 for
units consisting of one share of our common stock and a warrant to purchase
one-half of a share of our common stock. The price per unit is to be the lowest
of:
| • | $2.50; |
| • | 92% of the average closing sale price per share of our common stock, as quoted on the Nasdaq SmallCap Market, for each of the five consecutive trading days on which our common stock trades ending on the date immediately prior to the closing date of the private placement; and |
| • | 95% of the closing sale price per share of our common stock, as quoted on the Nasdaq SmallCap Market, on the trading day on which our common stock trades that immediately precedes the closing date of the private placement. |
-10-
The private placement will be significantly dilutive to current stockholders and the PyX stockholders. We have the right to terminate the unit subscription agreement and not close the transaction if the price per unit is less than $2.00.
Conditions
Precedent
The
completion of the private placement depends on the satisfaction or waiver of a
number of conditions, including, among others, conditions relating
to:
|
• |
execution
and delivery of the investor rights
agreement; |
|
• |
accuracy
of the representations and warranties of the parties and compliance by the
parties with their respective covenants; |
|
• |
approval
by our stockholders of Proposals 1 and
2; |
|
• |
our
listing status on the Nasdaq SmallCap
Market; |
|
• |
completion
of the merger; and |
|
• |
entry
by PyX into a reseller agreement with LSI
Logic. |
Representations
and Warranties
The unit
subscription agreements contains customary representations and warranties made
by us to the purchasers and by the purchasers to us for purposes of allocating
the risks associated with the private placement. The assertions embodied in the
representations and warranties made by us are qualified by information set forth
in a confidential disclosure letter that was delivered in connection with the
execution of the unit subscription agreements. All of the representations and
warranties made by the parties to the unit subscription agreements survive for a
period of one year following the closing of the private placement.
Rights
of Participations
The
purchasers in the private placement will have the right to participate in any
future private placements of our equity for a period of two years following the
closing of the private placement. These rights are subject to certain customary
exceptions, including, among other things, issuances of common stock to
employees, officers and directors under our equity compensation
plans.
Warrants
The
warrants issued in connection with the private placement have a term of five
years and are exercisable at a per share price equal to 133% of the unit price,
subject to proportional adjustments for stock splits, stock dividends,
recapitalizations and the like. In addition, the shares of our common stock
issuable upon exercise of the warrants are subject to adjustment in the event we
issue shares of our common stock at a price less than the then applicable
purchase price of the warrants, subject to certain customary exceptions,
including, among other things, issuances to employees, officers and directors
under our equity compensation plans. If not exercised after five years, the
right to purchase shares of our common stock pursuant to the warrants will
terminate. The warrants contain a cashless exercise feature. The common stock
underlying the warrants are entitled to the benefits and subject to the terms of
the Registration Rights described below.
-11-
Regulatory Approvals (see page [___])
We are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger and private
placement, other than the filing of (1) a certificate of merger with the
Secretary of State of the State of California, (2) this proxy statement
with the SEC and (3) compliance with all applicable state securities laws
regarding the offering and issuance of the shares in connection with the
transactions. If any additional approvals or filings are required, we will use
our commercially reasonable efforts to obtain those approvals and make any
required filings before completing the transactions.
Dissenters’
Rights (see page [___])
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Registration
Rights (see page [___])
We have
agreed to file a registration statement within 90 days after the completion
of the merger and within 60 days after completion of the private placement
registering for resale the shares of our common stock issued to (1) the PyX
shareholders in the merger and (2) the purchasers in the private
placement. The merger agreement requires that, prior to completion of the
merger, each PyX shareholder who will receive shares of our common stock in the
merger enter into an agreement providing that, with respect to 95% of the shares
of our common stock that such shareholder receives in connection with the
merger, the shareholder will not sell those shares until one year after the
closing date of the merger. We expect all PyX shareholders to enter into this
agreement. In addition, we have agreed to register the shares of our common
stock issuable upon exercise of the PyX options we assume in connection with the
merger on a registration statement on Form S-8 shortly after the closing of the
merger.
Voting
Agreement (see pages [___] and [___])
Our
executive officers and members of our board of directors are party to a voting
agreement pursuant to which they have agreed, subject to the terms and
conditions of the voting agreement, to vote all of their shares of common stock
in favor of proposals 1 and 2 and any other matter necessary to effect the
transactions. The shares subject to the voting agreement represent approximately
___% of the outstanding shares of our common stock, based on the number of
shares outstanding on _____, 2005.
-12-
RISK
FACTORS
You
should consider carefully the following risk factors as well as other
information in this proxy statement and the documents incorporated by reference
herein or therein, including our annual report on Form 10-K for the year ended
October 31, 2004 and our quarterly report on Form 10-Q for the quarter ended
January 31, 2005, in voting on Proposals 1 and 2 relating to the merger and the
private placement, respectively. If any of the following risks actually occur,
our business, operating results and financial condition could be adversely
affected. This could cause the market price of our common stock to decline, and
you may lose all or part of your investment.
Risk
Relating to the Transactions
If
we are unable to complete the merger and the private placement, our business
will be adversely affected.
If the
merger and the private placement are not completed, our business and the market
price of our stock price may be adversely affected. We currently anticipate that
our available cash balances, available borrowings and cash generated from
operations will be sufficient to fund our operations only through July 2005. If
we are unable to complete the transactions, we may be unable to find another way
to grow our business. Costs related to the transactions, such as legal,
accounting and financial advisor fees, must be paid even if the transactions are
not completed. In addition, even if we have sufficient funds to continue to
operate our business but the transactions are not completed, the current market
price of our common stock may decline.
The
transactions will result in substantial dilution to our current
stockholders.
The
issuance of shares of our common stock in the merger and the private placement
will significantly dilute the voting power, book value and ownership percentage
of our existing stockholders. In addition, the private placement will
significantly dilute the interests of the PyX shareholders in our common stock.
We will issue a total of 4,600,000 shares of our common stock in the merger,
including shares of our common stock issuable upon exercise of the PyX stock
options that we are assuming in connection with the merger. We expect to issue
up to 3,787,500 shares of our common stock in the private placement, including
shares issuable upon exercise of the warrants to purchase our common stock that
we are issuing in connection with the private placement. Immediately following
completion of the transactions, the shares held by our existing stockholders are
expected to represent approximately [_____]% of our outstanding capital stock
assuming the exercise in full of all outstanding options and warrants. If the
PyX shareholders and the purchasers in the private placement were to act in
concert, they would be able to direct our actions after the transaction,
including actions that could be opposed by our management, our board of
directors and/or our minority stockholders and may make it more difficult for us
to enter into other transactions, including mergers, acquisitions or change of
control transactions.
We
may not realize any anticipated benefits from the
merger.
While we
believe that the opportunities for the combined company are greater than our
current opportunities and that the combined company will be able to create
substantially more stockholder value than could be achieved by the companies
individually, there is substantial risk that the synergies and benefits sought
in the transactions might not be fully achieved. There is no assurance that
PyX’s technology can be successfully integrated into our existing product
platforms or that the financial results of combined company will meet or exceed
the financial results that would have been achieved by the companies
individually. As a result, our operations and financial results may suffer and
the market price of our common stock may decline.
The
exchange rate in the merger will not be adjusted, even if there is an increase
in the price of our common stock.
The price
of our common stock at the time the merger may vary from its price at the date
of this proxy statement and at the date of the special meeting. Therefore, the
shares that we issue in connection with the merger may have a greater value than
the value of the same number of shares on the date of this proxy statement or
the date of the special meeting. Variations in the price of our common stock
before the completion of the merger may result from a number of factors that are
beyond our control, including actual or anticipated changes in our business,
operations or prospects, market assessments of the likelihood that the
transactions will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions and other factors. At the
time of the special meeting, you will not know the exact value of the shares
that we will issue in the merger.
-13-
In
addition, the stock market generally has experienced significant price and
volume fluctuations. These market fluctuations could have a material effect on
the market price of our common stock before the merger is completed, and
therefore could materially increase the value that we will transfer to the
stockholders of PyX in the merger.
The
purchase price for the shares issued in the private placement reflects a
discount from the market price of our stock and will not be increased, even if
there is an increase in the price of our common
stock.
The
purchasers in the private placement will have acquired shares of our common
stock at a discount from than the per share market value of a share of our
common stock as reported on the Nasdaq Smallcap Market. Therefore, the shares
that we issue in the private placement will have a greater value than the value
of the same number of shares on the date the unit subscription agreement
relating to the private placement is executed or on the date the private
placement is closed. Further, the purchase price may further decrease if the
market price of our stock decreases between the date we executed the unit
subscription agreement and the date the private placement is closed. Variations
in the price of our common stock before the closing of the private placement may
result from a number of factors that are beyond our control, including actual or
anticipated changes in our business, operations or prospects, market assessments
of the likelihood that the transactions will be consummated and the timing
thereof, regulatory considerations, general market and economic conditions and
other factors. At the time of the special meeting, you will not know the exact
price at which the shares will be issued in the private placement. In addition,
although we have the ability to terminate the private placement if the purchase
price per share is less than $2.00, we may be unable to complete the merger if
we do so. Further, the costs related to the transactions, such as legal,
accounting and financial advisor fees, must be paid even if the transactions are
not completed. Even if we have sufficient funds to continue to operate our
business but the transactions are not completed, the current market price of our
common stock may decline.
Most
of the indemnification obligations under the merger agreement are secured only
by shares of our common stock.
PyX and
the PyX shareholders have agreed to indemnify us for certain breaches of
representations, warranties and covenants set forth in the merger agreement. In
the event of such breach, our right to recover for any damages we suffer as a
result of such breaches is largely limited to the shares of our common stock
issued to the PyX shareholders in connection with the merger. Subject to certain
limitations, we are entitled to recover such number of shares of our common
stock equal to the amount of the liability divided by the average closing sale
price of a share of our common stock for each of the 10 consecutive trading days
immediately preceding the closing date of the merger, if the claim was made on
or prior to the end of the one year period following the closing of the merger,
otherwise, for the 10 consecutive trading days immediately preceding the date
notice of the claim was delivered, in each case as reported on the Nasdaq
SmallCap Market. Such shares may be inadequate to fully address any damages we
may incur and our operations and financial results may suffer and the market
price of our common stock may decline.
Risk
Relating to the Company after the Transactions
If
we are unable to successfully integrate the business operations of PyX after the
merger, we will not realize the anticipated potential benefits from the merger
and our business could be adversely affected.
The
merger involves the integration of companies that have previously operated
independently. Successful integration of PyX’s operations with ours will depend
on our ability to consolidate operations, systems and procedures, eliminate
redundancies and to reduce costs. If we are unable to do so, we will not realize
the anticipated potential benefits of the merger with PyX, and our business and
results of operations could be adversely affected. Difficulties could include
the loss of key employees and customers, the disruption of our and PyX’s ongoing
businesses and possible inconsistencies in standards, controls, procedures and
policies. Our integration of PyX may be complex and time-consuming.
Additionally, the realization of expected efficiencies and cost savings could be
adversely affected by a number of factors beyond our control, and may not
materialize after the merger.
-14-
If
the combined company experiences losses after the transactions are completed, we
could experience difficulty meeting our business plan, and our stock price could
be negatively affected.
After the
transactions, the combined company may experience operating losses and negative
cash flow from operations as it develops PyX’s iSCSI software solution. Any
failure to achieve or maintain profitability could negatively impact the market
price of our common stock. Historically, PyX has not been profitable on a
quarterly or annual basis, and we expect that the combined company will incur
net losses for the foreseeable future. We anticipate that the combined company
will incur significant product development, sales and marketing and
administrative expenses. As a result, the combined company will need to generate
significant quarterly revenues if it is to achieve and maintain profitability. A
substantial failure to achieve profitability could make it difficult or
impossible for us to grow our business. The combined company’s business strategy
may not be successful, and the combined company may not generate significant
revenues or achieve profitability. Any failure to significantly increase
revenues would also harm our ability to achieve and maintain profitability. If
we do achieve profitability in the future, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
Future
sales of our common stock issued in the transactions could cause the market
price for our common stock to significantly decline.
After the
transactions, sales of substantial amounts of our common stock in the public
market could cause the market price of our common stock to fall, and could make
it more difficult for us to raise capital through public offerings or other
sales of our capital stock. In addition, the public perception that these sales
might occur could have the same undesirable effects. The PyX shareholders who
receive shares of our common stock in the merger will, prior to the completion
of the transactions, enter into an agreement that provides, in part, that, with
respect to 95% of the shares of our common stock that the shareholder receives
in connection with the merger, the shareholder will not sell these shares until
one year after the merger is completed. However, we are required to file a
registration statement for the resale of all shares that we issue in the merger
no later than 90 days after the merger is completed. In addition, we are
required to register for sale all of the shares issued in the private placement
no later than 60 days after the private placement is completed. The purchasers
in the private placement are not subject to any lockup with respect to the
shares they purchase in the private placement. Once the registration statement
relating to such shares becomes effective, the shares issued in the private
placement will generally be freely tradeable without restriction. Such free
transferability could materially and adversely affect the market price of our
common stock. We intend to register the shares issued in connection with the
merger at the same time we register the shares issued in connection with the
private placement. As a result, sales under the registration statement will
include a very substantial number of shares and percentage of our common stock.
Immediately after the transactions, holders of approximately [___]% of the
outstanding shares of our common stock will have the right to sell their shares
pursuant to these registration rights and holders of an additional approximately
[___]% of the outstanding shares of our common stock, assuming no further
issuances of shares of our common stock, will have the right to sell their
shares after the one year period has passed.
Risks
Related to PyX’s Business
PyX’s
products will require a substantial product development investment by us and we
may not realize any return on our investment.
The
development of new or enhanced products is a complex and uncertain process. As
we integrate the PyX products into our product line, our customers may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements, both to our existing product line as well as to the PyX products.
Development costs and expenses are incurred before we generate any net revenue
from sales of the products resulting from these efforts. We expect to incur
substantial research and development expenses relating to the PyX product line,
which could have a negative impact on our earnings in future
periods.
If
PyX’s products contain undetected errors, we could incur significant unexpected
expenses, experience product returns and lost sales.
The
products developed by PyX are highly technical and complex. While PyX’s products
have been tested, because of their nature, we can not be certain of their
performance either as stand-alone products or when integrated with our existing
product line. Because of PyX’s short operating history, we have little
information on the performance of its products. There can be no assurance that
defects or errors may not arise or be discovered in the future. Any defects or
errors in PyX's products discovered in the future could result in a loss of
customers or decrease in net revenue and market share.
-15-
THE
COMPANIES
SBE
We
develop and provide network communications and storage solutions for original
equipment manufacturers in the embedded systems marketplace. Embedded networking
technology is hardware or software that serves as a component within a larger
networking or storage device or system, such as a Gigabit Ethernet or a T-1/T-3
input/output network interface card, that plugs into an expansion slot in a
high-end computer or storage system. Embedded networking solutions enable the
functionality of many commonly used devices or equipment, such as products and
solutions for basic telephone and internet services, mobile phones, medical
equipment and storage networks.
We
deliver a product portfolio comprised of standards-based wide area networking,
or WAN, local area networking and storage area network, network interface and
intelligent communications controller cards. All of our products are coupled
with enabling Linux or Solaris software drivers. Our products are designed to be
functionally compatible with each other and, since we use industry standard form
factors and technologies, our products are also compatible with third party
standards-based products. This standard scalability and modularity offers our
customers greater flexibility to develop solutions for unique product
configurations and applications.
We were
incorporated in 1961 as Linear Systems, Inc. In 1976, we completed our initial
public offering. In July 2000, we acquired LAN Media Corporation, a privately
held company, to complement and grow our WAN adapter product line from both a
hardware and software perspective. In August 2003, we acquired the products and
technologies of Antares Microsystems to increase the functionality of our PCI
product line. We continue to operate under a single business unit.
PyX
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception, PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page [ ___] represent those of a development stage
enterprise.
PyX has
developed a complete software-based, scalable storage solution via an iSCSI
Initiator and Target driver set for the NetBSD or LINUX OS. PyX believes that
its iSCSI software provides an efficient alternative for all environments
seeking interoperability in a software-based enterprise storage solution. A
Storage Area Network, or SAN, infrastructure with iSCSI capabilities can
continue to operate during the constant network changes and updates facing
network operators today.
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.
-16-
THE
MERGER AND THE PRIVATE PLACEMENT
Background
of the Merger and the Private Placement
Our
acquisition of Antares Microsystems on August 7, 2003 provided us with products
that addressed technical functionality that we desired. Our greatest interest
was in the TCP/IP Offload Engine, or TOE, which accelerates TCP/IP protocol
processing by the computer system by running the protocol on the TOE itself -
offloading the work from the computer’s motherboard. Antares also had storage
products, such as Small Computer Storage Interface, or SCSI, and Fibre Channel
adapters, used for both attached disk drives and high performance storage area
networked installations.
The TOE
is particularly valuable in connection with two applications: connecting
computers together for fast file transfers, such as with databases running
database management software or cluster computing when the host CPU is fully
utilized; and IP storage, supporting the iSCSI protocol, ultimately providing a
lower cost and fault-tolerant replacement for Fibre Channel storage
architectures.
We
immediately recognized the need to support iSCSI and opened discussions with
several software companies to provide that functionality. On August 7, 2003,
Andre Hedrick, a founder and then chief executive officer of PyX, approached us
at the LinuxWorld trade show in San Francisco expressing an interest in
combining his iSCSI products with our TOE. We passed the PyX contact and product
information on to our engineering group.
During
the fourth quarter of 2003, PyX was given several of our TOE products in order
to write software drivers that would interface with Linux
workstations.
In the
first quarter of 2004, Mr. Hedrick gave us a demonstration of the iSCSI target
and initiator software products. PyX was excited about our TOE product because
it was the only multi-port product available, and highlighted the benefits of
PyX’s port aggregation feature, which allows the user to combine both Gigabit
Ethernet ports for combined functionality, and failover and error recovery
features that detect fatal errors on one port and quickly re-route to the other
port.
On April
23, 2004, Mr. Hedrick met with our engineering, sales and marketing groups for a
training session and we had preliminary discussions regarding a joint marketing
effort. We discussed and agreed to move forward with a joint marketing effort
based on several factors, including the low cost of initial research and
development, the anticipated quick time to market a joint product, and the
benefits associated with joint sales materials and demonstrations.
On April
30, 2004, Chris Short joined PyX as vice president of sales and marketing. Mr.
Short met with Dan Grey, our then Senior Vice President of Sales & Marketing
and currently our President and Chief Executive Officer, to negotiate terms of a
reseller agreement.
On May 5,
2004, Mr. Short met with Yee-Ling Chin, our Vice President, Marketing, and
together they developed data sheets and other marketing materials in preparation
for the Network World InterOp trade show in Las Vegas, Nevada.
On May
11, 2004, PyX demonstrated a complete fault tolerant target/initiator system in
our booth at the Network World InterOp trade show. In addition, we also issued a
joint press release highlighting the results of the Las Vegas demonstration and
the availability of iSCSI products.
On June
22, 2004, PyX demonstrated a complete fault tolerant target/initiator system in
our booth at the SUPERCOMM trade show in Chicago. Approximately 40% of our new
sales leads came from the combined TOE-iSCSI product.
On July
8, 2004, Bill Heye, our then President and Chief Executive Officer and David
Brunton, our Chief Financial Officer, initiated preliminary discussions with Mr.
Hedrick regarding the possible acquisition of PyX by us, our valuation, and the
potential strengths of the combined company. After several meetings during July,
PyX chose to continue to grow independently and without outside
funding.
-17-
On August
5, 2004, PyX demonstrated a complete fault tolerant target/initiator system in
our booth at the LinuxWorld trade show in San Francisco.
On
September 1, 2004, we and PyX signed an OEM agreement allowing us to resell the
full PyX product-line in combination with our TOE adapter.
In
December 2004, we started our first joint TOE-iSCSI advertising campaign in
InfoStor, a leading storage magazine, entitled “Have You Been Chasing the Wrong
Target?”
On
December 14, 2004, we issued a press release announcing the first shipment of
the combined TOE-iSCSI product.
Also in
December 2004, Messrs. Brunton and Hedrick met on several occasions to again
discuss a potential merger of us and PyX. Mr. Hedrick was receptive to the idea,
but PyX was in the process of hiring a new chief Executive Officer and Chief
Operating Officer. We were told at that time that the new management team was
set to begin working in January 2005 and would make the decision on the future
of PyX.
Between
January 24 and January 28, 2005, Messrs. Grey and Brunton held advanced
discussions with various parties regarding a potential equity financing. These
discussions included the topic of a potential acquisition of PyX by us, the need
to raise up to $10 million in a private placement of either equity or
convertible debt, and our desire to continue as a reseller of PyX’s iSCSI
software, which would require us to raise up to $3 million through a private
placement of either equity or convertible debt. All of the parties were
supportive of the PyX acquisition and expressed an interest in providing all or
part of the capital necessary to complete the acquisition.
On
January 31, 2005, Mr. Grey met with Greg Yamamoto, PyX’s current Chief
Executive Officer, to discuss PyX’s growth plans and a possible merger with us.
Messrs. Grey and Yamamoto also met with other members of our management to
discuss the potential merger between the companies.
During
the first week of February 2005, a term sheet for the proposed merger was
delivered to PyX. After negotiation, both parties mutually agreed to the terms
of the merger.
In
February 2005, we continued our discussions with PyX on the details of the
proposed merger between us and PyX, including potential synergies, revenue
growth potential, marketing position, potential product offerings and the
management structure of the combined company. In light of the liquidity issues
facing both companies at the time, we also discussed the necessity for an
additional equity investment in the combined company. Messrs. Grey and
Yamamoto decided at that time that it would be in the best interests of both
companies to move forward with the merger.
On
February 8, 2005, our board of directors met to approve the term sheet and
instructed our management to move forward with the merger. Messrs. Grey and
Brunton were tasked with responsibility of overseeing the negotiation and
execution of definitive agreements relating to the merger.
On February 15, 2005, the PyX iSCSI solution was
demonstrated in our booth at the LinuxWorld trade show in Boston.
In
mid-February 2005, Mr. Brunton contacted certain investors and investment banks
who had previously expressed an interest in providing financing to us regarding
a $5 - $7 million private placement of equity to fund the proposed merger and
the combined company after the merger. AIGH Investment Partners was selected as
the lead investor in the proposed private placement. AIGH agreed to raise the
necessary capital from both new and certain existing investors without charging
either a placement or referral fee.
In late
February 2005, we delivered the first draft of the merger agreement to PyX and
its counsel. During February and March 2005, additional meetings and conference
calls were held to discuss open issues and to conduct further legal, business,
accounting and financial due diligence. During this time, our management team
and legal and financial advisors continued to analyze the business, legal and
regulatory issues arising from a potential merger of us and PyX. In addition,
our management team and advisors met with PyX’s management team and advisors to
analyze in detail the potential synergies and the near- and long-term value
creation that would result from a strategic merger of the two
companies.
-18-
In
February 2005, Mr. Brunton arranged for PyX to move into office space adjacent
to our offices, rent-free until the merger was completed.
On March
8, 2005, the PyX iSCSI solution was demonstrated in our booth at the Embedded
Systems Conference in San Francisco.
In early
March 2005, Mr. Brunton selected Houlihan Lokey to render a fairness opinion as
to the purchase price that we proposed to pay for PyX. During the next three
weeks, the team from Houlihan Lokey met with the management teams from both
companies and performed due diligence on the companies and the transaction in
connection with their valuation services.
On March
22, 2005, we held a telephonic meeting of our board of directors to review the
results of the Houlihan Lokey investigation. Houlihan Lokey presented the
results of their investigation and answered the questions of our board of
directors. Houlihan Lokey also determined that the price to be paid by us for
PyX was reasonable and fair. Our legal counsel reviewed with our
board of directors the terms of the proposed final drafts of the merger
agreement and related documents and the corporate actions required to approve
the merger. Our board of directors then unanimously approved and adopted the
merger agreement and the transactions contemplated by the merger agreement and
agreed to recommend to our stockholders the adoption of the merger agreement and
approval of the transactions contemplated by the merger agreement.
On March
28, 2005, we and PyX signed the merger agreement. On the same day, a press
release announcing the merger was released and filed on a Form 8-K with the
Securities and Exchange Commission.
In the
March issue of Embedded Computing Design magazine, an article co-authored by us
and PyX was published entitled “Storage Data Transfers Across the Internet with
iSCSI and Dual-Port TOE.”
On April
5, 2005, AIGH’s legal counsel delivered the initial private placement term sheet
to us and our legal counsel. After negotiation, the revised private placement
term sheet was signed on April 11, 2005.
On April
11, 2005, we and our counsel received the initial drafts of the private
placement documents from AIGH’s counsel.
On April
12, 2005, we and PyX jointly exhibited at our first storage-only trade show,
Storage Network World, in Phoenix, Arizona. PyX distributed a joint white paper
with Neterion and Force 10 highlighting the world’s record for iSCSI performance
on a 10 Gigabit network.
On April
15, 2005, we held a telephonic meeting of our board of directors to review and
approve the term sheet relating to the private placement regarding raising $5 -
$7 million through the sale of shares of our common stock and the issuance of
warrants to purchase shares of our common stock. Our board of directors then
unanimously approved and adopted the agreement and agreed to recommend to our
stockholders the adoption of the unit subscription agreement and the approval of
the issuance of shares of our common stock and warrants to purchase shares of
our common stock to the purchasers in the private placement.
On May 4,
2005 after negotiations, the agreed upon private placement documents were
executed by our officers and the purchasers.
Reasons
for the Merger and the Private Placement
In
reaching its decision to approve the merger and the private placement and to
recommend approval of the merger agreement and issuance of shares of our common
stock in connection with the merger and the private placement by our
stockholders, our board of directors consulted with our management team and
advisors and independently considered the proposed merger agreement, the unit
subscription agreement, and the transactions contemplated by such
agreements.
-19-
Our board
of directors considered the following factors as reasons that the merger and the
private placement will be beneficial to us and our stockholders.
The
Merger
Prior to
approving the merger, our board of directors considered various alternative ways
to grow our business. After such consideration, our board of directors concluded
that the merger presented the best course of action for us at this
time.
The
material factors considered by our board of directors in making its
determination to pursue the merger included the following:
|
1. |
whether
the combination of our existing solutions with PyX’s Internet Small
Computer System Interface, or iSCSI, software meets a significant customer
need; |
|
2. |
whether
the combined company will be in the best position to capture market share
as iSCSI technology is adopted in the marketplace;
and |
| 3. | whether our products with PyX’s products will increase their respective functionality. |
The
Private Placement
Prior to
approving the private placement, our board of directors considered various
alternatives to the private placement. After such consideration, our board of
directors concluded that the private placement, in connection with the merger,
presented the best course of action for us at this time.
The
material factors considered by our board of directors in making its
determination to pursue the private placement included the
following:
|
1. |
the
price to be paid for the common stock by the purchasers in the private
placement; |
|
2. |
limited
sources of capital for companies in SBE’s financial position;
and |
|
3. |
our
immediate need for additional capital to develop PyX’s iSCSI software
solutions in order to enhance SBE’s future
revenues. |
Factors
Relevant to the Merger and the Private Placement
In the
course of its deliberations, our board of directors reviewed a number of other
factors relevant to the transactions with our management. In particular, our
board of directors considered, among other things:
|
1. |
information
relating to the business, assets, management, competitive position and
operating performance of PyX, including the prospects of SBE if it were to
continue without acquiring PyX; |
|
2. |
the
financial presentation of Houlihan Lokey, including its opinion described
under “Opinion of Our Financial Advisor” on page [___], to the effect
that, as of the date of the opinion, the merger consideration is fair to
our stockholders from a financial point of view;
and |
|
3. |
our
need following the transactions for capital to develop the iSCSI software
solutions, fund the costs associated with merger and provide sufficient
operating capital to support our operations for the near
term. |
-20-
Recommendation of Our Board of Directors
At its
meetings held on March 22, 2005 and April 14, 2005, our board of directors
(1) determined that the merger, the private placement, the merger agreement
and the unit subscription agreement are fair to and in the best interests of us
and our stockholders and (2) determined to recommend that our stockholders
approve the proposals related to the transactions. Accordingly, our board of
directors recommends that our stockholders vote FOR the merger, the merger
agreement, the unit subscription agreement and the issuance of shares of our
common stock to the PyX shareholders in connection with the merger and to the
purchasers in connection with the private placement.
In
connection with the foregoing actions, our board of directors consulted with our
management team, as well as our financial advisor and legal counsel, and
considered the following material factors:
|
1. |
all
the reasons described above under “Reasons for the Merger and the Private
Placement”; |
|
2. |
the
judgment, advice and analyses of our senior management, including their
favorable recommendation of the merger and the private
placement; |
|
3. |
alternatives
to the merger and the private placement; |
|
4. |
the
presentations by and discussions with our senior management and
representatives of our counsel and Houlihan Lokey regarding the terms and
conditions of the unit subscription agreement and the private
placement; |
|
5. |
the
presentations by and discussions with our senior management and
representatives of our counsel regarding the terms and conditions of the
merger agreement and the merger; |
|
6. |
that
while the merger and the private placement are likely to be completed,
there are risks associated with completing the transactions and, as a
result of conditions to the completion of the transactions, it is possible
that the transactions may not be completed even if approved by our
stockholders and PyX’s shareholders; and |
|
7. |
the
risk that the synergies and benefits sought in the merger might not be
fully achieved or achieved at all. |
Our board
of directors did not find it useful to, and did not attempt to, quantify, rank
or otherwise assign relative weights to these factors. Our board of directors
relied on the analysis, experience, expertise and recommendation of our
management team with respect to each of the transactions and relied on Houlihan
Lokey, our financial advisor, for analyses of the financial terms of the merger.
See “Opinion of Our Financial Advisor” on page [___].
In
addition, our board of directors did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather our board of directors conducted an overall analysis of the factors
described above, including discussions with our management team and legal,
financial and accounting advisors. In considering the factors described above,
individual members of our board of directors may have given different weight to
different factors.
Our board
of directors considered all these factors as a whole, and overall considered the
factors to be favorable and to support its determination. However, the general
view of our board of directors was that factors 6 and 7 described above were
uncertainties, risks or drawbacks relating to the transactions, but that the
other reasons and factors described above were generally considered
favorable.
Opinion
of Our Financial Advisor
The full
text of the written opinion, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered, limitations
on and qualifications made by Houlihan Lokey in its review, is set forth as
Annex A to this proxy statement and is incorporated herein by reference. The
summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its
entirety by reference to the full text of the written opinion. You are urged to
read carefully Houlihan Lokey’s written opinion in its entirety.
-21-
Overview
Our board
of directors retained Houlihan Lokey to render a written opinion as to the
fairness to us, from a financial point of view, of the consideration to be paid
by us in connection with the merger. Houlihan Lokey is a nationally recognized
investment banking firm that is frequently engaged to provide financial advisory
services and rendering fairness opinions in connection with mergers and
acquisitions, leveraged buyouts and business and securities valuations for a
variety of regulatory and planning purposes, recapitalizations, financial
restructurings and private placements of debt and equity securities. Our board
of directors chose to retain Houlihan Lokey based upon their experience in the
valuation of businesses and their securities in connection with mergers and
acquisitions, recapitalizations and similar transactions. Houlihan Lokey has no
material prior relationship with us or our affiliates.
Houlihan
Lokey's opinion to our board of directors addresses only the fairness of the
merger to our stockholders from a financial point of view. Their opinion does
not address the underlying business decision to effect the merger or our board
of director’s decision to recommend the merger or the merger agreement to our
stockholders; nor does it constitute a recommendation to our stockholders as to
how to vote with respect to the merger. Houlihan Lokey has no obligation to
update or reaffirm its opinion. However, Houlihan Lokey may render updates or
bringdowns of its opinion if reasonably requested by us prior to the completion
of the merger. Houlihan Lokey did not, and was not requested by our board of
directors, us or any other person to make any recommendations as to the form or
amount of consideration to be paid by us in connection with the merger.
Furthermore, Houlihan Lokey did not negotiate any portion of the merger
agreement or the merger, initiate any discussions with third parties with
respect to the merger or advise our board of directors with respect to
alternatives to the merger.
As
compensation for its services in connection with the merger, we agreed to pay
Houlihan Lokey a fee of $135,000, in addition to reimbursement of their
reasonable out-of-pocket expenses. To the extent that we request Houlihan Lokey
to render updates or bringdowns of its opinion beyond May 31, 2005, we agreed to
pay Houlihan Lokey a fee of $25,000 per month until the merger is completed. No
portion of Houlihan Lokey’s fee is contingent upon the successful completion of
the merger, the private placement or the conclusions reached in Houlihan Lokey’s
opinion. We have also agreed to indemnify and hold harmless Houlihan Lokey and
its affiliates, and their respective past, present and future directors,
officers, shareholders, employees, agents, representatives, advisors and
controlling persons within the meaning of either Section 15 of the Securities
Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934,
as amended, which we refer to in this proxy statement as the Indemnified
Parties, to the fullest extent lawful, from and against any and all losses,
claims, damages or liabilities (or actions in respect thereof), joint or
several, arising out of or related to Houlihan Lokey’s engagement by our board
of directors, any actions taken or omitted to be taken by an Indemnified Party
(including acts or omissions constituting ordinary negligence) in connection
with the engagement, the opinion, or any transaction or proposed
transaction.
In
arriving at its fairness opinion, Houlihan Lokey performed, among other things,
the following:
|
1. |
reviewed
our Annual Report on Form 10-K for the fiscal year ended October 31, 2004,
and our quarterly report on Form 10-Q for the first quarter ended January
31, 2005, which our management has identified as being the most current
financial statements available; |
|
2. |
reviewed
PyX’s unaudited financial statements for the fiscal years ended December
31, 2003 and 2004 and interim financial statements for the two-month
period ended February 28, 2005; |
|
3. |
reviewed
copies of the following agreements: |
|
• |
the
Term Sheet between us and PyX, dated February 7,
2005; |
|
• |
the
Agreement and Plan of Merger and Reorganization between us and PyX, dated
March 28, 2005; |
-22-
|
• |
the
Form of Shareholder Agreement between us and the shareholders of
PyX; |
|
• |
the
Form of Noncompetition Agreement; |
|
• |
the
Form of General Release; |
|
• |
the
Form of Affiliate Agreement; |
|
• |
the
Form of Escrow Agreement; |
|
• |
the
Disclosure Schedule of PyX, dated March 28,
2005. |
|
4. |
reviewed
the form of legal opinion of Orrick, Herrington & Sutcliffe LLP, dated
March 28, 2005; |
|
5. |
met
with certain members of the senior management of PyX and us to discuss the
operations, financial condition, future prospects and projected operations
and performance of PyX and us, and met with representatives of our legal
counsel to discuss certain matters; |
|
6. |
visited
our facilities and business offices; |
|
7. |
reviewed
forecasts and projections prepared by our management with respect to us on
a stand-alone basis and in combination with PyX for the fiscal years ended
October 31, 2005 and 2006; |
|
8. |
reviewed
the historical market prices and trading volume for our publicly-traded
securities; |
|
9. |
reviewed
certain other publicly-available financial data for certain companies that
Houlihan Lokey deemed comparable to us and PyX, and publicly-available
prices and premiums paid in other transactions that they considered
similar to the merger; and |
|
10. |
conducted
such other studies, analyses and inquiries as Houlihan Lokey deemed
appropriate. |
Analyses
Houlihan
Lokey used several methodologies to assess the fairness of the consideration to
be paid by us in connection with the merger, from a financial point of view. The
following is a summary of the material financial analyses used by Houlihan Lokey
in connection with providing its opinion. This summary is qualified in its
entirety by reference to the full text of their opinion, which is attached as
Annex A to this proxy statement and incorporated herein by reference.
Houlihan
Lokey performed each of the following analyses based upon its view that each is
appropriate and reflective of generally accepted valuation methodologies, the
accessibility of comparable privately-held companies, data from recent
financings, the accessibility of comparable publicly-traded companies and the
availability of forecasts from our management. Further, no one methodology was
considered to be more appropriate than any other methodology, and therefore
Houlihan Lokey utilized all of the aforementioned methodologies in arriving at
its conclusions.
Valuation
of PyX
Houlihan
Lokey performed the following analyses in order to determine the value of the
equity of PyX:
Private
Financing Methodology
The
private financing methodology considered pre-money valuations of
publicly-disclosed private financings of comparable private companies to derive
a value for PyX. The private financings selected included first and second
rounds of funding. Houlihan Lokey considers PyX to be a company that, if venture
backed, would be at a stage between a first and second round.
-23-
The
pre-money valuations of the private financings selected exhibited a range of
$7.0 million to $17.4 million with a median and mean of $8.8 million and $10.4
million, respectively. Furthermore, median pre-money valuations for first- and
second-round financings for all disclosed venture-financed deals in 2004 were
approximately $5.1 million and $12.1 million, respectively.
Based on
the private financing methodology, Houlihan Lokey selected a range of value for
the PyX business of $7.0 million to $12.0 million, on a controlling interest
basis.
Previous
PyX Financing
PyX
completed a round of financing in January 2005 in which they raised money from
investors, including two incoming key members of their senior management, at a
post-money valuation of $10.0 million, which equates to $1.00 per share on a
fully-diluted basis. Since the time of the financing, the two members of senior
management that participated in the financing have begun employment with PyX,
and PyX has further developed its products, customer pipeline and sales
process.
Determination
of Equity Value
As set
forth above, Houlihan Lokey determined the value of the PyX business using the
private financing methodology and the previous PyX financing. These valuation
indications are summarized as follows:
|
Enterprise
Value Indication from Operations |
||||||||||
|
Market
Approach |
Low |
High |
||||||||
|
(figures
in thousands) |
||||||||||
|
Private
Financing Methodology |
$ |
7,000 |
-- |
$ |
12,000 |
|||||
|
Previous
PyX Financing |
$ |
10,000 |
-- |
$ |
10,000 |
|||||
|
|
||||||||||
|
Concluded
Enterprise Value |
$ |
7,000 |
-- |
$ |
12,000 |
|||||
|
Concluded
Equity Value |
$ |
7,000 |
-- |
$ |
12,000 |
|||||
Based
upon the aforementioned analyses, Houlihan Lokey selected a range of value for
the PyX business of approximately $7.0 million to $12.0 million.
Houlihan
Lokey considered the aforementioned analyses as a whole and did not weight any
one analyses more or less than any other of its analyses. Accordingly, Houlihan
Lokey arrived at its range of equity value based upon all of the aforementioned
analyses.
Valuation
of SBE
Houlihan
Lokey performed the following analyses in order to determine our fundamental
value per share:
Multiple
of Income and Cash Flow Measures - Market Multiple
Methodology.
Houlihan
Lokey reviewed certain financial information of comparable publicly-traded
companies engaged in the sale of solutions for the embedded systems marketplace.
These publicly-traded comparable companies were selected solely by Houlihan
Lokey, and Houlihan Lokey deemed the selected companies to be reasonably
comparable to us. The comparable companies included: Adaptec, Inc., Interphase
Corporation, Performance
Technologies, Inc., RadiSys Corporation and SBS Technologies, Inc. Houlihan
Lokey calculated and considered certain financial ratios of the comparable
companies based on the most recent publicly-available information, including the
multiples of:
|
• |
enterprise
value, or EV, which is the market value of equity, or MVE, of the
comparable company, plus all interest-bearing debt, less cash and cash
equivalents, to our latest 12 months, or LTM, of
revenues; |
|
• |
EV
to estimated calendar year 2005 revenues; |
|
• |
EV
to estimated calendar year 2006 revenues; |
-24-
The
analysis showed that the multiples exhibited by the comparable public companies,
as of March 9, 2005, were as follows:
|
EV
/ Revenues |
|||||||||||||||||||
|
LTM |
CY05 |
CY06 |
|||||||||||||||||
|
Selected
Comparables |
|
||||||||||||||||||
|
Performance
Technologies, Inc. |
1.75x |
1.59x |
1.39x |
||||||||||||||||
|
Radisys
Corporation |
0.99x |
0.92x |
0.79x |
||||||||||||||||
|
Adaptec,
Inc. |
0.94x |
0.85x |
0.76x |
||||||||||||||||
|
SBS
Technologies, Inc. |
0.93x |
0.83x |
0.72x |
||||||||||||||||
|
Interphase
Corporation |
0.71x |
NA |
NA |
||||||||||||||||
Houlihan
Lokey determined that LTM, calendar year 2005 and calendar year 2006 revenues
should be considered given the growth prospects and profitability levels of our
business.
The
EV/LTM revenue multiples had a range of 0.71 to 1.75 with a median and mean of
0.94 and 1.06, respectively. The EV/calendar year 2005 revenue multiples had a
range of 0.83 to 1.59 with a median and mean of 0.89 and 1.05, respectively. The
EV/calendar year 2006 revenue multiples had a range of 0.72 to 1.39 with a
median and mean of 0.78 and 0.92, respectively.
Houlihan
Lokey derived indications of the value of our business by applying selected
revenue multiples to our LTM, calendar year 2005, calendar year 2006, low case
scenario, and calendar year 2006, high case scenario, revenues.
The
indications of the value of our business based on selected multiples from
comparable public companies ranged from approximately $11.1 million to
approximately $15.6 million.
Houlihan
Lokey also analyzed the market multiples as of March 24, 2005 and observed that
the comparable companies had generally traded down. Performance Technologies,
Inc., in particular, traded down 22.0%, but had a company-specific negative
announcement on March 8, 2005.
-25-
Determinations
of Equity Value and Resulting Per Share Value
As set
forth above, Houlihan Lokey determined the value of our business using the
multiple of income and cash flow measures methodology. These valuation
indications are summarized as follows:
|
(figures
in thousands, except per share values) |
|||||||
Enterprise
Value Indication from Operations |
|||||||
|
Fundamental
Valuation of SBE |
Low |
High |
|||||
|
Market
Multiple Methodology |
$ |
11,100 |
$ |
15,600 |
|||
|
Enterprise
Value from Operations using Market Approach |
$ |
11,100 |
$ |
15,600 |
|||
|
Add:
Excess Cash (1) |
-- |
-- |
|||||
|
Less:
Total Debt |
$ |
172 |
$ |
72 |
|||
|
Aggregate
Equity Value of Minority Interests |
$ |
10,928 |
$ |
15,428 |
|||
|
Primary
Shares Outstanding |
5,200 |
5,200 |
|||||
|
Dilutive
Effect of Options |
359 |
495 |
|||||
|
Diluted
Shares Outstanding |
5,559 |
5,694 |
|||||
|
Per
Share Value - Indication from Fundamental Valuation of
SBE |
$ |
1.97 |
$ |
2.71 |
|||
| (1) | Cash of $1.56 million as of January 31, 2005, is expected to be used to fund operating losses and therefore was not included in the equity value of SBE. |
Based
upon the aforementioned analysis, Houlihan Lokey selected a range of value for
our business of approximately $11.1 million to approximately $15.6 million.
Houlihan Lokey then made certain adjustments to the range of the selected
enterprise values to determine our equity value. Such adjustments included
subtracting our debt of approximately $0.172 million. This resulted in an equity
value with a range of $10.9 million to $15.4 million or approximately $1.97 to
$2.71 per share, on a minority interest basis.
Public
Market Pricing
Houlihan
Lokey reviewed the historical market prices and trading volume for our common
stock and reviewed news articles and press releases relating to us and the
industry in which we operate. Houlihan Lokey analyzed the closing price of our
common stock as of March 9, 2005, which was $3.29 per share, and the 20-day
average price of our common stock as of March 9, 2005, which was $3.03. Houlihan
Lokey also analyzed the closing price of our common stock as of March 24, 2005,
which was $3.15 per share, and the 20-day average price of our common stock as
of March 24, 2005, which was $3.20. Finally, Houlihan Lokey analyzed the closing
price of our common stock for other historical periods.
Houlihan
Lokey considered the aforementioned analyses as a whole and did not weight any
one analyses more or less than any other of its analyses. Accordingly, Houlihan
Lokey arrived at its range of equity values based upon all of the aforementioned
analyses.
Determination
of Fairness
|
(in
thousands) |
||||||||||
|
Low |
High |
|||||||||
|
Concluded
Equity Value of PyX |
$ |
7,000 |
$ |
12,000 |
||||||
|
Consideration
Paid for PyX - Based on SBE Public Share Price
(1) |
$ |
10,500 |
||||||||
|
Consideration
Paid for PyX - Based on SBE Public Share Price
(2) |
|
$ |
11,100 |
|||||||
|
Consideration
Paid for PyX - Based on Fundamental SBE Valuation |
$ |
6,500 |
-- |
$ |
9,000 |
|||||
|
(1)
Using the 20-Day Average Stock Price of $3.03 as of March 9,
2005. | ||||||||
|
(2)
Using the 20-Day Average Stock Price of $3.20 as of March 24,
2005. |
-26-
After
determining our equity value and price per share, Houlihan Lokey noted that the
consideration to be paid by us in connection with the merger is fair to us from
a financial point of view.
Conclusion
Houlihan
Lokey delivered a written opinion, dated March 28, 2005, to our board of
directors stating that, as of that date, based on and subject to the assumptions
made, matters considered, limitations on and qualifications made by Houlihan
Lokey in its review, the consideration of 2,561,050
shares of our common stock and the assumption of options to purchase 2,038,950
shares of our common stock issued to employees of PyX, was
fair to us from a financial point of view. In connection with its review,
Houlihan Lokey considered financial projections prepared by our management. The
financial projections did not take into account any circumstances or events
occurring after the date they were prepared. In addition, factors such as
industry performance, general business, economic, regulatory, market and
financial conditions, as well as changes to our business, financial condition or
results of operation, may cause the financial projections or the underlying
assumptions to be inaccurate. As a result, the financial projections provided to
Houlihan Lokey are not necessarily indicative of our future
results.
Houlihan
Lokey’s opinion is based on the business, economic, market and other conditions,
including, but not limited to, growth in the U.S. Gross Domestic Product,
inflation rates, interest rates, consumer spending levels, manufacturing
productivity levels, unemployment rates and general stock market performance as
they existed as of March 28, 2005, and on our financial projections provided to
Houlihan Lokey. Subsequent events that could affect the conclusions set forth in
the opinion include adverse changes in industry performance or market conditions
and changes to the business, financial condition and results of operations of
PyX or us. In rendering its opinion, Houlihan Lokey relied upon and assumed,
without independent verification, that the financial and other information
provided to them, including the financial projections, was reasonably prepared
and reflected the best currently available estimates of our financial results
and condition; that no material change had occurred in the information reviewed
between the date the information was provided and the date of the Houlihan Lokey
opinion; and that there were no facts or information regarding us that would
cause the information supplied to Houlihan Lokey to be incomplete or misleading
in any material respect. Houlihan Lokey did not independently verify the
accuracy or completeness of the information supplied to it with respect to us
and does not assume responsibility for it. Houlihan Lokey did not make any
independent appraisal of the specific properties, assets or liabilities of us or
PyX.
Houlihan
Lokey was not asked to opine and does not express any opinion as to:
|
• |
the
tax or legal consequences of the merger; |
|
• |
the
net realizable value of our common stock or the prices at which our common
stock may trade; |
|
• |
the
private placement; and |
|
• |
the
fairness of any aspect of the merger not expressly addressed in its
fairness opinion. |
No
limitations were imposed by our board of directors upon Houlihan Lokey with
respect to the investigations made or procedures followed by it in rendering its
opinion.
The
summary set forth above describes the material points of more detailed analyses
performed by Houlihan Lokey in arriving at its fairness opinion. The preparation
of the fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and application of those methods to the particular circumstances and is
therefore not readily susceptible to summary description. In arriving at its
opinion, Houlihan Lokey made qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, the analyses and summary set
forth in this proxy statement must be considered as a whole and that selecting
portions of the analyses, without considering all analyses and factors, or
portions of this summary, could create an incomplete and/or inaccurate view of
the processes underlying the analyses set forth in Houlihan Lokey’s fairness
opinion. In its analyses, Houlihan Lokey made numerous assumptions with respect
to us, the merger, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the respective entities. The estimates contained in the analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by the analyses.
Additionally, analyses relating to the value of our businesses or securities are
not appraisals. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty.
-27-
Regulatory
Approvals Relating to the Transactions
We are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger and private
placement, other than the filing of (1) a certificate of merger with the
Secretary of State of the State of California, (2) this proxy statement
with the SEC and (3) compliance with all applicable state securities laws
regarding the offering and issuance of the shares in connection with the
transactions. If any additional approvals or filings are required, we will use
our commercially reasonable efforts to obtain those approvals and make any
required filings before completing the transactions.
Dissenters’
Rights Relating to the Transactions
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Interests
of Certain Persons in the Transactions
Mr.
Ignacio C. Munio, our Vice President, Engineering, beneficially owns 25,000
shares of PyX common stock and as a result will be entitled to receive 11,500
shares of our common stock in connection with the merger. In addition to the
shares of our common stock that Mr. Munio will receive in connection in with the
merger, he currently beneficially owns 299,825 shares of our common stock, or
approximately _____% of the outstanding shares of our common stock based on the
number of shares outstanding on _____, 2005. After consummation of the
transactions, Mr. Munio will beneficially own _____% of the outstanding shares
of our common stock, assuming no further issuances of shares of our common stock
and not exercise of outstanding stock options or warrants.
Mr. Greg
Yamamoto, currently the Chief Executive Officer of PyX, beneficially owns
200,000 shares of PyX common stock and options to purchase up to an additional
750,000 shares of PyX common stock. As a result of the merger, Mr. Yamamoto will
be entitled to receive 92,000 shares of our common stock and options to purchase
up to an additional 345,000 shares of our common stock, representing
approximately _____% of the outstanding shares of our common stock, assuming the
exercise in full of all of the options, based on the number of shares
outstanding on [____], 2005. In addition, Mr. Yamamoto is investing $200,000 in
the private placement and,
assuming a purchase price per share of $2.00 will receive 100,000 shares
of our common stock and a warrant to purchase up to an additional 50,000 shares
of our common stock. After consummation of the merger and the private placement,
Mr. Yamamoto will beneficially own _____% of the outstanding shares of our
common stock, assuming exercise of all options and warrants to purchase shares
of our common stock, assuming no further issuances of shares of our common stock
and no exercise of outstanding stock options or warrants, other than the
exercise of the stock options and warrants issued to Mr. Yamamoto. In addition,
Mr. Yamamoto is investing an additional $100,000 in the private placement on
behalf of his two minor children, Melanie Yamamoto and Nicholas Yamamoto,
and,
assuming a purchase price per share of $2.00 each child will receive
25,000 shares of our common stock and a warrant to purchase up to an additional
12,500 shares of our common stock.
-28-
PROPOSAL
1
APPROVAL
OF THE MERGER, THE MERGER AGREEMENT AND
THE
ISSUANCE OF SHARES OF OUR COMMON STOCK AND ASSUMPTION OF OPTIONS
TO
PURCHASE
SHARES OF OUR COMMON STOCK IN THE MERGER
General
The
merger agreement provides that, subject to satisfaction of certain conditions,
PyX will be merged with and into our newly-formed, wholly-owned subsidiary, PyX
Acquisition Sub, LLC, referred to in this proxy statement as Merger Sub, and
that following the merger, PyX will cease to exist as a separate entity and we
will continue as sole member of Merger Sub, the surviving entity in the merger.
When the merger occurs:
|
• |
the
issued and outstanding shares of PyX common stock will be converted into
the right to receive an aggregate of 2,561,050 shares of our common stock,
or approximately [_____]% of the outstanding shares of our common stock
based on the number of shares outstanding on [_____], 2005 and[ __]% of
the outstanding shares of our common stock after the closing of the
private placement, assuming no further issuances of shares of our common
stock and not exercise of outstanding stock options or warrants;
and |
|
• |
the
issued and outstanding options to purchase shares of PyX common stock will
be assumed by us and converted into the right to receive an aggregate of
2,038,950 shares of our common stock upon exercise of the underlying
options, or approximately[ _____]% of the outstanding shares of our common
stock based on the number of shares outstanding on [_____], 2005 and [__]%
of the outstanding shares of our common stock after the closing of the
private placement, assuming no further issuances of shares of our common
stock and no exercise of outstanding stock options or warrants. The
options will be subject to the same terms and conditions as were in place
prior to the merger. |
We
entered into the merger agreement with PyX on March 28, 2005. The merger
agreement is attached to this proxy statement as Annex B. You should read
the merger agreement carefully. It is the agreement that governs the terms of
the merger. The following information summarizes the terms of the merger
agreement.
Effective
Time of the Merger
The
merger agreement provides that the closing of the merger will take place as soon
as practicable and no later than two business days after the last condition
precedent to closing has been satisfied or waived. Concurrently with the
closing, we will file a certificate of merger and all other necessary documents
with the Secretary of State of the State of California to complete the merger.
The merger will become effective at the time the certificate of merger has been
accepted by the Secretary of State, or at another time as the parties may agree,
which will be specified in the certificate.
Completion
of the merger could be delayed if there is a delay in satisfying the closing
conditions to the merger. There can be no assurances as to whether, and on what
date, the conditions will be satisfied or that the parties will complete the
merger at all. If the merger is not completed on or before July 31, 2005,
either we or PyX may terminate the merger agreement, except that a party may not
terminate the merger agreement if that party’s failure to fulfill any of its
obligations under the merger agreement was the cause of the merger not being
completed by that date.
Treatment
of Stock Options
At the
effective time of the merger, each outstanding option granted by PyX to purchase
shares of PyX common stock will be converted into an option to acquire shares of
our common stock and will be subject to the same terms and conditions as the PyX
stock option had before the effective time of the merger. The number of shares
of our common stock that will be subject to the new stock option the exercise
price per share of our common stock issuable upon exercise of the new option
will reflect the exchange ratio in the merger. We expect the exercise price of
the assumed options will be approximately $2.17 per share of our common stock
issuable upon exercise of the assumed options.
-29-
The stock
options granted to the PyX employees are subject to change of control provisions
that provide for full acceleration of the vesting on their options in the event
that either their employment is terminated without cause or they resign for good
reason after the change in control takes place. Because the merger constitutes a
change of control under the agreements governing these options, and because we
are assuming these options upon the same terms and conditions as were in place
immediately prior to the merger, if any of these employees are terminated
without cause or resign for good reason following the merger, these options will
become fully vested and immediately exercisable by the affected
employee.
Surrender
and Exchange of Share Certificates
As soon
as reasonably practicable after the effective time of the merger, but in any
event no more than two business days thereafter, we or our agent will send to
the PyX shareholders, other than the shareholders who are party to the merger
agreement (referred to in this proxy statement as the signing shareholders),
transmittal materials containing instructions on how to exchange of their stock
certificates representing shares of PyX common stock for certificates
representing shares of our common stock that are payable to them in connection
with the merger. Upon surrender to us or our agent of their stock certificate or
certificates representing the shares of PyX common stock held immediately prior
to the merger, and the acceptance of such certificate or certificates by us or
our agent in accordance with the instructions to be provided by us or our agent,
the PyX shareholders will receive that number of shares of our common stock
equal to the number of shares of PyX common stock held immediately prior to the
merger multiplied by the exchange rate of 0.46, less that shareholder’s pro rata
portion of the escrow which, as stated below, consists of 460,000 shares of our
common stock. PyX shareholders that fail to exchange their stock certificates
will not be entitled to receive any dividends or other distributions payable by
us after the closing until their certificates are surrendered.
We will
not issue any fractional shares in the merger. In lieu of fractional shares, PyX
shareholders will receive a cash payment equal to the fractional share amount
multiplied by the average closing sale price of a share of our common stock, as
reported on the Nasdaq SmallCap market, for each of the 10 consecutive trading
days immediately preceding the closing date of the merger.
Escrow
At the
effective time of the merger, 460,000 shares, or 17.96% of the aggregate number
of our shares of common stock to be issued to the PyX shareholders at the
effective time, will be placed into an escrow account to satisfy the PyX
shareholders’ indemnification obligations relating to breaches of
representations, warranties and covenants made in the merger agreement, as
described below under “Representations
and Warranties.”
However, our ability to make a claim against the shares placed in escrow for any
damages we incur as a result of such breach will be limited to claims made
within the first year after the closing of the merger. If no claims are made
within that one-year period, the shares of common stock held in escrow will be
distributed on a pro rata basis to the PyX shareholders.
Representations
and Warranties
The
merger agreement contains customary representations and warranties made by PyX
and the signing shareholders to SBE and Merger Sub and by SBE and Merger Sub to
PyX and the signing shareholders for purposes of allocating the risks associated
with the merger. The assertions embodied in the representations and warranties
made by PyX and the signing shareholders are qualified by information set forth
in a confidential disclosure schedule that was delivered in connection with the
execution of the merger agreement. While we do not believe that the disclosure
schedule contains information that securities laws require us to publicly
disclose, other than information that is being disclosed in this proxy
statement, the disclosure schedule may contain information that modifies,
qualifies and creates exceptions to the representations and warranties set forth
in the merger agreement. Accordingly, you should not rely on any of these
representations and warranties as characterizations of the actual state of
facts, since they may be modified in important respects by the underlying
disclosure schedule. Moreover, information concerning the subject matter of the
representations and warranties may have changed since the date of the merger
agreement, which subsequent information may or may not be fully reflected in the
disclosure schedule PyX delivered to us at signing and which may not be
delivered to us until the closing date of the merger.
-30-
The
representations and warranties in the merger agreement include, among other
things:
|
• |
the
organization, qualification and good standing of each of us, Merger Sub
and PyX; |
|
• |
capitalization; |
|
• |
the
accuracy of each of our and PyX’s financial
statements; |
|
• |
PyX
and our authority to enter into, and carry out the obligations under, the
merger agreement and the enforceability of the merger
agreement; |
|
• |
the
vote required to approve the merger by our stockholders and PyX’s
shareholders; |
|
• |
the
absence of conflicts, violations or defaults under each party’s
organizational documents, applicable laws and material
agreements; |
|
• |
the
absence of litigation matters involving the assets of the parties or that
may have the effect of interfering with the merger;
and |
|
• |
finders’
or advisors’ fees. |
In
addition, the merger agreement contains additional representations and
warranties by PyX and the signing shareholders to us and Merger Sub as to
certain other matters, including:
|
• |
the
accuracy of PyX’s books and records; |
|
• |
the
absence of certain changes since February 28,
2005; |
|
• |
title
to, and absence of liens and encumbrances on, PyX’s
assets; |
|
• |
the
accuracy of information regarding accounts with financial institutions and
the collectibility of PyX’s accounts
receivable; |
|
• |
the
condition and adequacy of PyX’s assets; |
|
• |
PyX’s
intellectual property; |
|
• |
PyX’s
material contracts; |
|
• |
the
absence of undisclosed material liabilities of
PyX; |
|
• |
compliance
by PyX with applicable legal requirements; |
|
• |
governmental
authorizations required in connection with the operation of PyX’s
business; |
|
• |
tax
matters; |
|
• |
employee
benefit and labor matters; |
|
• |
environmental
matters; |
|
• |
insurance;
and |
|
• |
the
absence of certain agreements, conflicts and/or other relationships with
PyX’s officers, directors and other related
parties. |
-31-
All of
the representations, warranties and indemnities set forth in the merger
agreement survive for a period of one year following the closing of the merger,
except for PyX’s representation and warranty relating to its capitalization,
which survives for a period of five years following the closing of the merger,
and PyX’s representation and warranty relating to legal proceedings, which
survives for a period of three years following the closing of the
merger.
Certain
Covenants
Access
to Information and Confidentiality
The
merger agreement provides that PyX will, and will cause its respective officers,
directors, employees, representatives and advisors to:
|
• |
provide
us with reasonable access to PyX’s representatives, personnel, assets and
to all existing books, records, tax returns, work papers and other
documents and information relating to PyX; |
|
• |
provide
us with copies of any existing books, records, tax returns, work papers
and other documents and information relating to PyX;
and |
|
• |
provide
us with such additional financial, operating, and other data and
information regarding PyX as we may reasonably
request. |
Conduct
of Business Prior to the Merger
PyX and
the signing shareholders have agreed that during the period from the date of the
merger agreement through the effective time of the merger, PyX
shall:
|
• |
conduct
its business and operations in the ordinary course and in substantially
the same manner as conducted prior to the date of the merger
agreement; |
|
• |
use
reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and employees and
maintain its relations and goodwill with persons having business
relationships with PyX; |
|
• |
keep
in full force all identified insurance
policies; |
|
• |
report
to us on at least a weekly basis concerning the status of PyX’s
business; |
|
• |
not
take certain actions with respect to PyX’s capital stock and option plans
and agreements relating to PyX’s capital
stock; |
|
• |
not
take any action with respect to PyX’s articles of incorporation or bylaws
or become a party to an alternative business combination
proposal; |
|
• |
not
form any subsidiary or acquire any interest in any other
entity; |
|
• |
not
make capital expenditures in excess of $5,000 per
month; |
|
• |
not
enter into or permit PyX’s assets to become bound by, any material
contract or amend, prematurely terminate or waive any material right or
remedy under any material contract; |
|
• |
not
acquire, lease or license any right or other
asset; |
-32-
|
• |
not
sell, lease or license any right or other
asset; |
|
• |
waive
or relinquish any right other than assets acquired, leased, licensed or
disposed of pursuant to immaterial
contracts; |
|
• |
not
lend money or incur or guarantee any indebtedness for borrowed
money; |
|
• |
not
establish, adopt or amend any employee benefit
plan; |
|
• |
not
pay any bonus or make any profit-sharing payment, cash incentive payment
or similar payment to, or increase the amount of any compensation payable
to any of its directors, officers or
employees; |
|
• |
not
hire any new employee; |
|
• |
not
change any of its methods of accounting or accounting practices in any
material respect; |
|
• |
not
make any tax election; |
|
• |
not
commence or settle any material legal
proceeding; |
|
• |
not
make any payment to any third party without our consent in the event we
make an extension of funds to PyX as provided below under “Exclusion
of Funds,”
on page __; and |
|
• |
not
agree or commit to take any of the above
actions. |
PyX
Shareholder Vote
The
holders of a majority of the outstanding shares of PyX common stock have already
approved the merger and the merger agreement. Because one of the conditions
precedent to our obligation to effect the merger is that holders of no more than
5% of the outstanding shares of PyX common stock elect to exercise their
dissenters’ rights in connection with the merger, PyX and we are continuing to
solicit consent from the remaining PyX shareholders. In addition, pursuant to
the terms of the merger agreement, PyX has prepared and distributed a notice
regarding the merger to its shareholders, including an information statement
setting forth the material terms of the merger agreement and the merger. We took
no part in drafting the PyX information statement, although we were given the
opportunity to review and comment on the information statement prior to its
distribution to the PyX shareholders.
Agreement
Not to Solicit Other Offers
PyX and
the signing shareholders have agreed that neither PyX nor the signing
shareholders will do any of the following during the period between the signing
of the merger agreement and the effective time of the merger, or until the
merger agreement is terminated in the event the merger is never
consummated:
|
• |
solicit
or encourage the initiation of any inquiry, proposal or offer relating to
an alternative business combination proposal;
|
|
• |
participate
in any discussions or negotiations or enter into any agreement with, or
furnish any non-public information to, any person relating to or in
connection with any alternative business combination proposal;
or |
|
• |
consider,
entertain or accept any proposal or offer from any person relating to any
alternative business combination proposal. |
-33-
Public Announcements
The
merger agreement provides that neither PyX nor any signing shareholder will
issue any press release or make any public statement regarding the merger or the
merger agreement, or the other transactions contemplated by the merger
agreement, without our prior written consent. We agreed to use reasonable
efforts to consult with PyX before issuing any press release or making any
public statement with respect to merger.
Notification
The
merger agreement provides that, prior to the effective time of the merger, the
parties to the merger agreement shall promptly advise each other
of:
|
• |
the
discovery of any event, condition, fact or circumstance that occurred or
existed on or prior to the date of the merger agreement that could cause
or constitute an inaccuracy in or breach of any representation or warranty
made by such party in the merger agreement; |
|
• |
any
material breach of any covenant or obligation;
and |
|
• |
any
event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions set forth in the merger agreement
impossible or unlikely. |
Employee
Matters
We agreed
that, on or before the effective time of the merger, we will make employment
offers to certain employees of PyX on terms no less favorable than that provided
to existing employees of ours who are similarly situated. Following the
effective time of the merger, the time each of these employees spent employed by
PyX will be treated as time spent employed by us for purposes of determining
certain employee benefits, including any tax-qualified pension plan and welfare
benefit plans. No employment offers have been made or determined as of the date
of this proxy statement, however, one of the conditions precedent to our
obligation to effect the merger is that Nick Bellinger and Andre Hedrick accept
their employment offers. At the time of this proxy statement, it is our
expectation that one or more of the PyX employees to whom employment offers are
made will become executive officers of SBE. However, we expect that our existing
management team will remain in place and will otherwise be unaffected by the
merger.
Indemnification
of Directors and Officers
We and
PyX have agreed that the indemnification obligations existing in favor of the
directors and officers of PyX, as in effect immediately prior to the effective
time of the merger, shall continue in full force and effect for a period of six
years after the effective time of the merger. In addition, for a period of six
years after the effective time of the merger, Merger Sub will, to the fullest
extent permitted under applicable law, indemnify and hold harmless those persons
currently covered by the indemnification provisions currently set forth in PyX’s
articles of incorporation and bylaws against all costs and expenses, judgments,
fines, losses, claims, damages, liabilities and settlement amounts paid in
connection with any claim, action, suit, proceeding or investigation, whether
arising before or after the effective time of the merger, arising out of or
pertaining to any action or omission in their capacity as an officer, director,
employee, fiduciary or agent, to the same extent currently set forth in PyX’s
articles of incorporation and bylaws. In the event that Merger Sub is
consolidated with or merged into another entity and is not the surviving entity
of such consolidation or merger, or if Merger Sub transfers all or substantially
all of its properties and assets to another person, then proper provisions will
be made so that the successors and assigns, or we, will assume these
indemnification obligations.
Extension
of Funds
The
merger agreement provides that, if the closing of the merger does not occur on
or before May 15, 2005, we will extend a loan to PyX, in the amount of $50,000,
on the 15th day of
each month, commencing on May 15, 2005, and continuing until the earlier of the
closing of the merger or the termination of the merger agreement. We have agreed
that any loan made to PyX pursuant to this provision of the merger agreement
will not, under any circumstances, be secured by the PyX source code. Such
loans, if made, are expected to become due and payable six months after they are
made.
-34-
Dilution
Prior to
the effective time of the merger, we have agreed to refrain from granting any
option, subscription right, call, warrant or other right to acquire shares of
our capital stock or other securities to any new or existing employee, officer
or director without first notifying PyX’s chief executive officer and giving him
reasonable opportunity to consult with us regarding any such grant.
Indemnification
With
certain exceptions, satisfaction of the PyX and signing shareholders’
indemnification obligation with respect to breaches of representations,
warranties and covenants is limited to the shares of our common stock placed in
escrow, as described above under “Escrow” on page
[__] and “Representations
and Warranties” on
page[ ___], and is further limited to claims asserted on or prior to the end of
the one-year period following the closing of the merger. However, the signing
shareholders are personally liable for any breach of the representations and
warranties relating to PyX’s capitalization and legal proceedings. The signing
shareholders will receive a total of approximately 1,817,000 shares of our
common stock in connection with the merger, or approximately 71% of the total
number of shares paid to all of the PyX shareholders in connection with the
merger. With respect to breaches of the representation and warranty relating to
PyX’s legal proceedings, the signing shareholders’ liability is capped at their
pro rata portion of the shares received from the escrow, or a total of
approximately 326,358 shares of our common stock. All of the shares received by
the signing shareholders in connection with the merger, or a total of
approximately 1,817,000 shares of our common stock, are subject to their
indemnification obligations with respect to breaches of the representation and
warranty relating to PyX’s capitalization and breaches of certain covenants
related to securities law compliance and the information statement provided to
the PyX shareholders in connection with the solicitation of the PyX shareholder
vote with respect to the merger agreement and merger. There is no limitation on
the liability of the signing shareholders with respect to breaches involving
fraud or intentional misrepresentations.
We are
not entitled to recover any damages with respect to an indemnification claim
until the total damages incurred under the merger agreement exceed $25,000,
after which, and subject to the limitations described above, we are entitled to
recover such number of shares of our common stock equal to the amount of the
liability divided by the average closing sale price of a share of our common
stock for each of the 10 consecutive trading days immediately preceding the
closing date of the merger, if the claim was made on or prior to the end of the
one year period following the closing of the merger, otherwise, for the 10
consecutive trading days immediately preceding the date notice of the claim was
delivered, in each case as reported on the Nasdaq SmallCap Market.
Conditions
Precedent
Conditions
to the Obligations of Each Party
Our
obligation and the obligation of PyX to effect the merger are subject to the
satisfaction or waiver of the following conditions:
|
• |
accuracy
of the other party’s representations and warranties and compliance by the
other party with their covenants; |
|
• |
approval
by our stockholders of the issuance of shares of our common stock in
connection with the merger; |
|
• |
execution
and delivery of certain ancillary documents attached to the merger
agreement as exhibits; |
|
• |
receipt
of an officer’s certificate certifying the accuracy of each party’s
representations and warranties and satisfaction of certain conditions;
|
-35-
|
• |
our
entering into a definitive agreement with respect to the private
placement; |
|
• |
absence
of legal prohibitions to the completion of the
merger; |
|
• |
absence
of legal proceedings challenging the merger, seeking recovery of a
material amount in damages or seeking to prohibit or limit the exercise of
any material right with respect to our ownership of stock in Merger Sub or
the PyX shareholders’ ownership of our common stock;
and |
|
• |
no
material adverse effect will have occurred and no circumstance exists that
could reasonably be expected to have or result in a material adverse
effect with respect to us or PyX. |
Additional
Conditions to Our Obligations
Our
obligation to effect the merger is also subject to the following
conditions:
|
• |
holders
of no more than 5% of the outstanding PyX common stock will have elected
to exercise their dissenters’ rights in connection with the
merger; |
|
• |
receipt
of required consents; and |
|
• |
amendment
of PyX’s current customer agreement with Pelco in a manner acceptable to
us. |
Material
Adverse Effect
As set
forth in the merger agreement, a violation or other matter will be deemed to
have a “material adverse effect” on a person if the violation or other matter
would have a material adverse effect on the person’s business, condition,
assets, liabilities, operations, financial performance or
prospects.
Termination
In
addition to terminating upon mutual consent, either party may terminate the
merger agreement under the following circumstances:
|
• |
if
it is reasonably determined by that party that timely satisfaction of any
of the conditions precedent to the obligations of that party to effect the
merger and consummate the transactions contemplated by the merger
agreement has become impossible; |
|
• |
if
any of the conditions precedent to the obligations of that party to effect
the merger and consummate the transactions contemplated by the merger
agreement has not been satisfied as of the agreed closing date;
or |
|
• |
the
merger has not been completed on or before July 31,
2005. |
Waivers
Any
provision of the merger agreement may be waived if the waiver is duly executed
and delivered by the party against whom the waiver is to be effective and will
only be applicable in the specific instance in which it is given.
-36-
Amendments
Any
provision of the merger agreement may be amended if the amendment is duly
executed and delivered by all of the parties to the merger
agreement.
Fees
and Expenses
We and
PyX will each pay our own respective fees, costs and expenses incurred in
connection with the transactions contemplated by the merger agreement, including
all fees and expenses incurred in connection with:
|
• |
our
investigation and review conducted with respect to PyX’s
business; |
|
• |
the
negotiation, preparation and review of the merger agreement and ancillary
agreements delivered or to be delivered in connection with the
transactions contemplated by the merger
agreement; |
|
• |
the
preparation and submission of any filing or notice required to be made or
given in connection with, and the obtaining of any consent required by,
any of the transactions contemplated by the merger
agreement; |
|
• |
our
preparation and audit of the PyX’s financial statements;
and |
|
• |
the
consummation of the merger. |
Accounting
Treatment of the Merger
The
merger will be accounted for by us under the purchase method of accounting in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by us in connection with the merger, together with
the direct costs of the merger, will be allocated to PyX’s tangible and
intangible assets and liabilities based on their fair market values. The assets
and liabilities of PyX will be consolidated into our assets and liabilities as
of the effective date of the merger. The stock options issued to the former
holders of options to purchase shares of PyX common stock will be assumed by us
and accounted for in accordance with Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees,
or APB 25.
Under APB 25, compensation expense is based on the difference, if any, on the
date of the grant between the fair value of the stock and the exercise price of
the option.
Shareholder
Agreement
At or
prior to the closing of the merger, we will enter into the shareholders
agreement with the PyX shareholders who will receive shares of our common stock
in the merger. The shareholder agreement is the agreement that governs the terms
under which we have agreed to register for resale the shares of our common stock
to be issued to these shareholders with the SEC.
Registration
Rights
We have
agreed to use our best efforts file a registration statement with the SEC within
90 days after the closing date of the merger registering the resale of such
shares of our common stock from time to time by these shareholders, and to cause
the registration statement to become effective within 120 days following the
closing date. Once effective, the registration statement will permit these
shareholders to sell the shares of our common stock issued to them in connection
with the merger from time to time using the methods of distribution to be
described in the registration statement. However, the shareholder agreement also
provides that, with respect to 95% of the shares of our common stock to be
received by such shareholders in connection with the merger, no sales will be
made until one year after the effective time of the merger. We have also agreed
not to have any other registration statements filed with the SEC with respect to
the issuance or resale of shares of our capital stock (other than a registration
statement on Form S-8 registering for resale shares of our common stock issued
pursuant to an equity compensation plan or arrangement) declared effective
unless the registration statement with respect to the shares to be issued in
connection with the merger has also been declared effective. We expect to
register these shares for resale concurrently with those issued in connection
with the private placement. The shareholder agreement also contains customary
obligations and indemnity provisions on the part of us and the PyX shareholders
relating to the registration process, and provides that we will pay the expenses
incurred by us in any registration pursuant to the shareholders
agreement.
-37-
Voting Agreement
Certain
members of our management are party to a voting agreement, dated ______, 2005,
pursuant to which they have agreed, subject to the terms and conditions of the
voting agreement, to vote all of their shares of common stock in favor of
proposals 1 and 2 and any other matter necessary to effect the transactions. The
form of voting agreement is attached to this proxy statement as Annex D. You
should read the voting agreement carefully. It is the agreement that governs the
terms under which our management team has agreed to vote in favor of the
transactions. The shares subject to the voting agreement represent approximately
___% of the outstanding shares of our common stock, based on the number of
shares outstanding on _____, 2005.
Past
Contacts, Transactions or Negotiations
Other
than as described in the “Background of the Merger and the Private Placement,”
we and PyX have not had any past material contacts, transactions or
negotiations.
Recommendation
of our Board of Directors
Our board
of directors recommends that our stockholders vote FOR the merger, the merger
agreement, the issuance of shares of our common stock to the PyX shareholders
and the assumption of options to purchase shares of our common stock in the
merger.
-38-
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The
following table sets forth the historical per share information of us and PyX
and the combined per share data on an unaudited pro forma basis after giving
effect to the merger, as well as the issuance of the common stock in the private
placement. Also presented is PyX’s equivalent pro forma per share data for one
share of PyX common stock. The pro forma information is presented for
illustrative purposes only. You should not rely on the pro forma financial
information as an indication of the combined financial position or results of
operations of future periods or the results that actually would have been
realized had the entities been a single entity during the periods
presented.
The
unaudited pro forma combined per share information combines the financial
information of us for the three-month period ended January 31, 2005 with the
financial information of PyX for the three-month period ended December 31, 2004
and for our fiscal year ended October 31, 2004 and the PyX fiscal year
ended December 31, 2004, assuming the merger and the private placement had
occurred on the first day of the respective periods.
Historical
book value per common share for us is computed by dividing stockholders’ equity
(deficit) attributable to common stockholders by the number of shares of common
stock outstanding at January 31, 2005 and for PyX by dividing stockholders’
equity (deficit) attributable to common stockholders by the number of shares of
common stock outstanding at December 31, 2004. Our unaudited pro forma combined
per share data is derived from the unaudited pro forma combined financial
statements that are included elsewhere in this proxy statement. The PyX
equivalent pro forma per share data is calculated by applying the exchange ratio
of PyX common shares to our common shares received.
|
Three-Month
Period
Ended |
Year
Ended |
||||||
|
|
January
31, 2005
(SBE)
of
December
31, 2004 (PyX) |
October 31,
2004
(SBE)
or
December
31, 2004 (PyX) |
|||||
|
(Unaudited) |
|||||||
|
SBE
Historical Per Share Data: |
|||||||
|
Basic
and diluted net income (loss) per common share |
$ |
0.03 |
$ |
(0.33 |
) | ||
|
Book
value per common share |
$ |
0.91 |
$ |
0.83 |
|||
|
PyX
Historical Per Share Data: |
|||||||
|
Basic
and diluted net loss per share |
$ |
(0.02 |
) |
$ |
0.05 |
) | |
|
Book
value (deficiency) per common share |
$ |
(0.04 |
) |
$ |
(0.04 |
) | |
|
SBE
Pro Forma Combined: |
|||||||
|
Basic
and diluted net loss per common share |
$ |
(0.06 |
) |
$ |
(0.49 |
) | |
|
Book
value per share |
$ |
1.35 |
$ |
1.36 |
|||
|
PyX
Equivalent Pro Forma Combined: |
$ |
(0.03 |
) |
$ |
(0.23 |
) | |
|
Basic
and diluted net loss per common share |
$ |
0.62 |
$ |
0.63 |
|||
|
Book
value per share |
|||||||
Our
common stock is listed on the Nasdaq SmallCap Market, under the symbol “SBEI.”
For the periods indicated, the following table sets forth the high and low per
share closing prices for our common stock as reported by The Nasdaq SmallCap
Market through the close of business on March 31, 2005.
|
|
High |
Low |
|||||
|
Fiscal
2004 |
|
||||||
|
First
Quarter |
$ |
8.50 |
$ |
5.52 |
|||
|
(ended
January 31, 2004) |
|||||||
|
Second
Quarter |
7.38 |
3.63 |
|||||
|
(ended
April 30, 2004) |
|||||||
|
Third
Quarter |
4.40 |
2.81 |
|||||
|
(ended
July 31, 2004) |
|||||||
|
Fourth
Quarter |
4.10 |
2.54 |
|||||
|
(ended
October 31, 2004) |
|||||||
|
Fiscal
2005 |
5.09 |
2.89 |
|||||
|
First
Quarter |
|||||||
|
(ended
January 31, 2005) |
3.79 |
2.57 |
|||||
|
Second
Quarter |
|||||||
|
(through
March 31, 2005) |
|||||||
The
closing sale price for our common stock on the Nasdaq SmallCap Market on March
24, 2005, the last full trading day prior to the public announcement of the
merger, was $3.15, and on [_____], 2005, was
[_____]. There are no restrictions on our ability to pay dividends; however, it
is currently the intention of our Board of Directors to retain all earnings, if
any, for use in our business and we do not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of dividends
will depend, among other factors, upon our earnings, capital requirements,
operating results and financial condition.
No active
trading or public market exists for PyX common stock. The shares of PyX common
stock are not listed on any exchange and are not traded in the over-the-counter
market. As of April 29, 2005, the record date, there were 14 stockholders
of record who held shares of PyX common stock. PyX has never paid any cash
dividends on its common stock.
-39-
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF SBE
|
SBE,
Inc. Unaudited Pro Forma Consolidated Balance Sheet) |
|||||||||||||
|
January
31, 2005 |
December
31, 2004 |
||||||||||||
|
Historical |
Historical |
Combined |
|||||||||||
|
SBE
|
PyX
|
Adjustments
|
As
Adjusted |
||||||||||
|
(in
thousands) |
|||||||||||||
|
ASSETS
|
|||||||||||||
|
Current
assets: |
|||||||||||||
|
Cash
and cash equivalents |
$ |
1,564 |
$ |
5 |
$ |
6,500 |
(a) |
$ |
7,080 |
||||
|
|
(791 | )(b) | |||||||||||
|
|
(198 | )(c) | |||||||||||
|
Trade
accounts receivable, net |
2,048 |
-- |
2,048 |
||||||||||
|
Inventories
|
1,638 |
-- |
1,638 |
||||||||||
|
Other
|
276 |
24 |
276 |
||||||||||
|
Total
current assets |
4,879 |
29 |
5,511 |
11,066 |
|||||||||
|
Property
and equipment, net |
408 |
13 |
421 |
||||||||||
|
Capitalized
software, net |
41 |
-- |
41 |
||||||||||
|
Intellectual
property, net |
-- |
-- |
4,135 |
(d) |
4,135 |
||||||||
|
Other
|
33 |
-- |
33 |
||||||||||
|
Total
assets |
$ |
6,008 |
$ |
42 |
$ |
9,646 |
$ |
15,696 |
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|||||||||||||
|
Current
Liabilities: |
|||||||||||||
|
Loan
|
$ |
-- |
$ |
10 |
$ |
10 |
|||||||
|
Trade
accounts payable |
526 |
83 |
609 |
||||||||||
|
Accrued
payroll and employee benefits |
377 |
44 |
83 |
||||||||||
|
Other
accrued expenses |
260 |
-- |
421 |
||||||||||
|
Deferred
revenue |
-- |
83 |
260 |
||||||||||
|
Capital
lease obligations |
26 |
-- |
26 |
||||||||||
|
Total
liabilities |
1,189 |
220 |
1,409 |
||||||||||
|
Long
term liabilities |
146 |
-- |
146 |
||||||||||
|
Total
Liabilities |
1,335 |
220 |
1,555 |
||||||||||
|
Stockholders'
equity |
|||||||||||||
|
Common
Stock and additional paid in capital |
16,068 |
113 |
6,838 |
(e) |
29,769 |
||||||||
|
|
6,750 | (f) | |||||||||||
|
Deferred
compensation |
(120 |
) |
-- |
(120 |
) | ||||||||
|
Retained
deficit |
(11,275 |
) |
(291 |
) |
(3,942 |
)(g) |
(15,508 |
) | |||||
|
Total
stockholders' equity |
4,673 |
(178 |
) |
9,646 |
14,141 |
||||||||
|
Total
liabilities and stockholders' equity |
$ |
6,008 |
$ |
42 |
$ |
9,646 |
$ |
15,696 |
|||||
Footnotes
to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of January
31, 2005 for SBE and December 31, 2004 for PyX:
| (a) | Net cash received from selling 2,575,000 shares of SBE common stock, assuming a price per share of $2.00, and warrants to purchase 1,287,500 shares of SBE common stock, assuming an exercise price per share of $2.66, in the private placement, net of offering expenses and of expenses related to the PyX acquisition. |
| (b) | Adjustment to reflect the cash payments for the annual salaries plus benefits of the PyX employees hired by SBE. |
| (c) | Adjustment to reflect the cash payments for the quarterly salaries plus benefits of the PyX employees hired by SBE. |
| (d) | Adjustment to allocate $7,088,000 to Intellectual Property, which is the estimated fair value of the PyX intellectual property, associated with current and future products acquired in the acquisition of PyX. The intellectual property is estimated to have value for at least 36 months and will be amortized to expense over that period. This amount has been reduced by an adjustment of $2,953,000 to recognize the amortization expense that would have been recorded if the transaction had occurred on November 1, 2003. The retained deficit has been increased by an adjustment to reflect the $2,953,000 of amortization expense associated with the intellectual property acquired in the PyX acquisition. |
| (e) | The Com pany will issue 2,561,050 shares of SBE common stock valued at $2.67 per share for payment to the selling shareholders of PyX for the acquisition of PyX. |
| (f) | The Company will issue 2,575,000 shares of SBE common stock, assuming a price per share of $2.00, plus warrants to purchase an additional 1,287,500 shares of SBE common stock, assuming an exercise price per share of $2.66, to the purchasers in the private placement. |
| (g) | Adjustment to reflect the results of the pro forma adjustments net income (loss) as if the transaction had occurred on November 1, 2004. |
-40-
|
SBE,
Inc. Unaudited Pro Forma Condensed Combined Statement of Operations |
|||||||||||||
|
For
the three months ended |
|||||||||||||
|
January
31, 2005 |
December
31, 2004 |
||||||||||||
|
Historical
|
Historical
|
Combined
|
|||||||||||
|
SBE
|
PyX
|
Adjustments
|
Companies
|
||||||||||
|
(in
thousands, except for per share amounts) |
|||||||||||||
|
Net
Sales |
$ |
2,815 |
$ |
-- |
$ |
$2,815 |
|||||||
|
Cost
of Sales |
1,230 |
-- |
591 |
(a) |
1,821 |
||||||||
|
Gross
Profit |
1,585 |
-- |
591 |
994 |
|||||||||
|
Product
research and development |
473 |
47 |
113 |
(b) |
633 |
||||||||
|
Sales
and marketing |
559 |
18 |
84 |
(d) |
661 |
||||||||
|
General
and administrative |
369 |
26 |
-- |
395 |
|||||||||
|
Total
operating expense |
1,401 |
91 |
198 |
1,690 |
|||||||||
|
Operating
income (loss) |
184 |
(91 |
) |
(788 |
) |
(695 |
) | ||||||
|
Interest
income (expense) |
(2 |
) |
-- |
-- |
(2 |
) | |||||||
|
Net
income (loss) before income taxes |
182 |
(91 |
) |
(788 |
) |
(697 |
) | ||||||
|
Provision
for income taxes |
5 |
-- |
-- |
5 |
|||||||||
|
Net
income (loss) |
$ |
189 |
$ |
(91 |
) |
$ |
(788 |
) |
$ |
(702 |
) | ||
|
Basic
income (loss) per share |
$ |
0.03 |
$ |
$ |
|
$ |
(0.07 |
) | |||||
|
Diluted
income (loss) per share |
$ |
0.03 |
$ |
$ |
|
$ |
(0.06 |
) | |||||
|
Basic
- shares used in per share computations
|
5,136 |
5,361 |
(d) |
10,497 |
|||||||||
|
Diluted
- shares used in per share computations
|
5,869 |
5,361 |
(d) |
11,230 |
|||||||||
Footnotes
to the Unaudited Pro Forma Condensed Combined Statement of Operations for the
three months ended January 31, 2005 for SBE and December 31, 2004 for
PyX:
| (a) | The intellectual property acquired in the PyX acquisition is amortized to expense over 36 months. This adjustment reflects three months amortization of intellectual property originally valued at $7,088,000 acquired in the PyX acquisition. |
| (b) | Adjustment to reflect the quarterly salary and benefits for the Chief Technical Officer and two engineers hired by SBE from PyX. |
| (c) | Adjustment to reflect the annual salary and benefits of business development and one sales employee hired by SBE from PyX. |
| (d) | Combined pro forma shares include 2,561,050 shares of SBE common stock that the Company will be issuing to the selling shareholders of PyX plus 2,575,000 shares of SBE common stock, assuming a price per share of $2.00, and warrants to purchase 1,287,500 that the Company will be selling to the purchasers in the private placement equity transaction. |
-41-
|
SBE,
Inc.
Unaudited
Pro Forma Condensed Combined State of Operations |
|||||||||||||||||||
|
For
the year ended |
|||||||||||||
|
October
31, 2004 |
December
31, 2004 |
||||||||||||
|
Historical |
Historical |
Combined |
|||||||||||
|
SBE |
PyX |
Adjustments |
Companies |
||||||||||
|
(in
thousands, except for per share amounts) |
|||||||||||||
|
Net
Sales |
$ |
11,066 |
$ |
-- |
$ |
$ |
11,066 |
||||||
|
Cost
of Sales |
6,646 |
-- |
2,363
|
(a) |
9,009 |
||||||||
|
Gross
Profit |
4,420 |
-- |
-- |
2,057 |
|||||||||
|
Product
research and development |
2,411 |
143 |
454
|
(b) |
3,008 |
||||||||
|
Sales
and marketing |
2,177 |
125 |
338 |
(c) |
2,640 |
||||||||
|
General
and administrative |
1,755 |
-- |
1,755 |
||||||||||
|
Loan
reserve |
(239 |
) |
-- |
(239 |
) | ||||||||
|
Total
operating expense |
6,104 |
268 |
791 |
11,265 |
|||||||||
|
Operating
loss |
(1,684 |
) |
(268 |
) |
(3,154 |
) |
(5,106 |
) | |||||
|
Interest
income (expense) |
5 |
- |
5 |
||||||||||
|
Net
loss before income taxes |
(1,679 |
) |
(268 |
) |
(3,154 |
) |
(5,101 |
) | |||||
|
Benefit
for income taxes |
-- |
-- |
|||||||||||
|
Net
loss |
$ |
(1,679 |
) |
$ |
(268 |
) |
$ |
(3,154 |
) |
$ |
(5,101 |
) | |
|
Basic
loss per share |
$ |
(0.33 |
) |
$ |
$ |
$ |
(0.49 |
) | |||||
|
Diluted
loss per share |
$ |
(0.33 |
) |
$ |
$ |
$ |
(0.49 |
) | |||||
|
Basic
- shares used in per share computations
|
5,022 |
5,361 |
(d) |
10,383 |
|||||||||
|
Diluted
- shares used in per share computations |
5,022 |
5,361 |
(d) |
10,383 |
|||||||||
Footnotes
to the Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended October 31, 2004 for SBE and December 31, 2004 for PyX:
| (a) | The intellectual property acquired in the PyX acquisition is amortized to expense over 36 months. This adjustment reflects twelve months amortization of intellectual property originally valued at $7,088,000 acquired in the PyX acquisition. |
| (b) | Adjustment to reflect the annual salary and benefits for the Chief Technical Officer and two engineers hired by SBE from PyX. |
| (c) | Adjustment to reflect the annual salary and benefits of business development and one sales employee hired by SBE from PyX. |
| (d) | Combined pro forma shares include 2,561,050 shares of SBE common stock that the Company will be issuing to the selling shareholders of PyX plus 2,575,000 shares of SBE common stock, assuming a price per share of $2.00, that the Company will be selling to the purchasers in the private placement. |
-42-
SELECTED
FINANCIAL DATA OF PYX
The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations of PyX” and the financial statements and the notes thereto included
elsewhere in this proxy statement. PyX was incorporated on November 26, 2002.
The selected statements of operations data for the fiscal years ended
December 31, 2002, 2003 and 2004 and the selected balance sheet data as of
December 31, 2003 and 2004 are derived from the audited financial
statements that are included elsewhere in this proxy statement and represent the
financial data of PyX since its inception.
|
January
1, 2004 to
December
31, 2004 |
Period
from
Inception
to
December
31, 2003 |
||||||
|
Statements
of Operations Data: |
|||||||
|
Total
revenues |
$ |
-- |
$ |
5,000 |
|||
|
Total
operating expenses |
267,432 |
26,696 |
|||||
|
Operating
loss |
(267,432 |
) |
(21,696 |
) | |||
|
Net
loss |
$ |
(268,463 |
) |
$ |
(22,510 |
) | |
|
Basic
and diluted net loss per share |
$ |
(0.05 |
) |
$ |
(0.22 |
) | |
|
December
31, |
|||||||
|
2004 |
2003 |
||||||
|
Balance
Sheet Data: |
|||||||
|
Total
current assets |
$ |
4,869 |
$ |
392 |
|||
|
Total
assets |
41,449 |
11,982 |
|||||
|
Total
current liabilities |
$ |
219,922 |
$ |
1,992 |
|||
|
Total
liabilities |
219,922 |
1,992 |
|||||
|
Total
shareholders' equity (deficit) |
$ |
(178,473 |
) |
$ |
9,990 |
||
-43-
DESCRIPTION
OF PYX’S BUSINESS
The
following description of PyX’s business 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 not the exclusive means of identifying such
statements. Readers are cautioned that the forward-looking statements reflect
PyX’s analysis only as of the date hereof, and PyX assumes 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. The following
description should be read in conjunction with PyX’s consolidated financial
statements for the years ended December 31, 2003 and 2004 and the related
notes included in this proxy statement.
Overview
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception, PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page [___] represent those of a development stage
enterprise.
PyX’s
goal is to develop a complete software-based, scalable storage solution via an
iSCSI Initiator and Target driver set for the NetBSD or LINUX OS. PyX believes
that its iSCSI software provides an efficient alternative for all environments
seeking interoperability in a software-based enterprise storage solution. A
Storage Area Network, or SAN, infrastructure with iSCSI capabilities can
continue to operate during the constant network changes and updates facing
network operators today.
PyX
currently has two products that have been completed, an iSCSI Initiator and an
iSCSI Target running on Linux. All PyX products conform to the iSCSI standard as
ratified by the Internet Engineering Task Force (“IETF”). PyX believes that it
is the first and only company in the world to complete development of a
universal iSCSI protocol that meets and exceeds the IETF standard for Error
Recovery Level Two (ERL2) with full Sync and Steering.
Strategy
PyX
expects its principal markets to be with the manufacturers, developers and
systems integrators of small-
and medium-sized companies
for whom
the costs of other high-performance storage transport technology, and in
particular fibre channel architectures, may be prohibitively expensive. As
companies see the number of servers and databases grow on their networks, they
are experiencing increasing storage-management complexity that can result in
inefficient storage utilization and increased cost of ownership. When the
expense and scarcity of qualified IT support staff are factored in, these issues
can be compounded significantly.
For
small- and medium-sized companies, iSCSI may be their best solution as it
utilizes the same IP infrastructure as network attached storage, but features
the block input/output protocol inherent in storage area networks, or SANs. PyX
believes that the adaptability of iSCSI to varied storage approaches likewise
increases the market potential for iSCSI software solutions. The bulk of PyX’s
iSCSI revenues for 2005 and 2006 are expected to come from sales in the SAN
market as described above. PyX also anticipates being able to market to the
developing consumer and military/government markets. Specifically, iSCSI
applications are expected to include Secure Mobile Computing, in the
military/government market, and the Global Personal SAN, in the consumer market.
While these markets will take longer to develop, they are expected to be a part
of PyX’s long-term strategy for growth and expansion beyond the traditional SAN
market.
Products
PyX’s
product development initiative for 2005 is expected to include several iSCSI
software products, two of which have been completed, the iSCSI Initiator and the
iSCSI Target software running on Linux. The iSCSI Initiator, the Linux version
of which is currently being shipped, is a product that resides on a client’s
computer, server or device that is connected to a network. PyX’s technology
allows the iSCSI Initiator to regard the target storage device as another local
disk, whether it is in a server in a nearby location or in another country. The
iSCSI Target is a product that resides on a storage server and is the
destination of The iSCSI Initiator. Recently, a graphical user interface was
added to the management features of this stack to enhance the ease-of-use
experience and broaden the appeal to a larger market.
-44-
All of
PyX’s current and planned products conform to the iSCSI standard as ratified by
the Internet Engineering Task Force, IETF. PyX believes that it is the first and
only company in the world to complete development of a universal iSCSI protocol
that meets, and exceeds, the IETF standard for Error Recovery Level Two, or
ERL2, with full Sync and Steering. At present, PyX is not aware of any other
iSCSI vendors that are offering both Initiator and Target solutions that provide
full error-recovery features.
This
advance in PyX’s technology offers enterprise level, multi-path migration with
error recovery previously available only in more expensive fibre channel
architectures. PyX believes that its software will enable original equipment
manufacturers, value-added resellers and independent software vendors to deliver
on iSCSI’s promise of providing multi-path linked enterprise data storage with
error recovery and failover at significantly less than the cost of fibre
channel.
PyX’s
roadmap for the further development of its iSCSI software products is expected
to include a number of initiatives in 2005 and 2006. The chart below presents
the current plan and an estimated timeline for projects that have been approved
or are being considered by PyX.
Intellectual
Property
PyX does
not hold and has not applied for or registered any patents or
trademarks.
Customers
As of the
date hereof, PyX is dependent on one customer, a leading video surveillance
company, for 100% of its revenue. PyX expects to execute agreements with
additional customers in 2005.
Employees
PyX
currently has five employees: Greg Yamamoto, its Chief Executive Officer; Andre
Hedrick, its President and Chief Technical Officer; Leo Fang, its Chief
Operating Officer); Nicholas Bellinger its Chief Software Architect; and Chris
Short its Vice President of North American Sales.
-45-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF PYX
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
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 neither we nor PyX assume any obligation to update these statements.
Actual events or results may differ materially from the results discussed in or
implied by the forward-looking statements. The following discussion should be
read in conjunction with PyX’s consolidated financial statements for the years
ended December 31, 2003 and 2004 and the related notes included in this
proxy statement.
Overview
PyX
Technologies, Inc., or PyX, is a technology company that was incorporated under
the laws of the State of California on November 26, 2002. Since inception, PyX's
efforts have been devoted to the development of software products for the
Internet Small Computer System Interface, or iSCSI, enterprise storage market
and raising capital. PyX has not received any significant revenues from the sale
of its products or services. Accordingly, through the date of this proxy
statement, PyX is considered to be in the development stage and the accompanying
financial statements on page ___ represent those of a development stage
enterprise.
PyX’s
revenues are derived primarily from the sale of iSCSI software licenses and
related consulting services associated with customer product development.
Currently, PyX has licensed its iSCSI Initiator and Target software to a single
customer. Revenues are recognized upon satisfying all generally accepted
accounting principles related to software revenue recognition. Cash received in
advance of revenue recognition is included in deferred revenue.
PyX’s
operating expenses consist primarily of research and development costs and
selling and marketing expenses. PyX’s research and development expenses consist
primarily of salaries of personnel, consulting expenses associated with new
technology development and testing costs. PyX’s selling and marketing expenses
consist primarily of sales personnel and public relations expenses.
PyX’s
general and administrative expenses consist primarily of salaries of personnel
engaged in corporate administration, finance and accounting, human resources,
and operations. General and administrative expenses also include professional
fees and other general corporate expenses.
Critical
Accounting Policies And Use Of Estimates
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires PyX to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Results
of Operations
The
following table sets forth our results of operations:
|
January
1, 2004 to |
Period
from Inception to |
||||||
|
December
31, 2004 |
December
31, 2003 |
||||||
|
Total
revenue |
--- |
5,000 |
|||||
|
Total
operating expenses |
267,442 |
26,696 |
|||||
|
Operating
loss |
(267,442 |
) |
(21,696 |
) | |||
|
Interest
expense |
200 |
--- |
|||||
|
Income
(loss) before income taxes |
(267,642 |
) |
(21,696 |
) | |||
|
Income
tax expense |
831 |
814 |
|||||
|
Net
loss |
$ |
(268,473 |
) |
$ |
(22,510 |
) | |
-46-
Comparison
of Years Ended December 31, 2004 and 2003
Revenues
Total
revenues for the year ended December 31, 2004 decreased to $0 from
$5,000 for the period from inception to December 31, 2003. The decrease in
revenues in 2004 resulted primarily from deferral to 2005 of all of PyX’s
revenue for 2004 in accordance with generally accepted accounting principles
related to software revenue recognition. PyX had $82,500 in deferred revenue for
2004.
Operating
Expenses
Operating
expenses for the year ended December 31, 2004 increased to $267,442 from $26,696
for the period from inception to December 31, 2003. The increase in operating
expenses was primarily due to an increase in salary payments during
2004.
Interest
Expense
Interest
expense for the year ended December 31, 2004 increased to US $200 from no
interest expense for the period from inception to December 31, 2003. The
increase was primarily due to the interest related to a $10,000 loan financed in
the fourth quarter of 2004.
Net
Loss
Net loss
for the year ended December 31, 2004 increased to $268,000 from $23,000 for the
period from inception to December 31, 2003. The increased loss in 2004 primarily
resulted from increased research and development spending on the iSCSI software
products and an increase in salary payments during 2004.
Stock-based
Compensation
From its
inception to December 31, 2004, PyX did not have any stock based compensation.
Liquidity
and Capital Resources
Since its
inception, PyX has financed its operations through sales of stock and a small
loan and, more recently, minimal amounts of internally generated cash flow from
operations. PyX’s cash and cash equivalents increased $76,504 to $81,373 at
March 31, 2005 from $4,869 at December 31, 2004. The increase was primarily a
result of an investment round of $250,000 in January 2005, offset by $65,900 for
retaining legal counsel, pre-paying future commission expenses and fixed asset
costs. PyX’s net cash and cash equivalents provided by financing activities
during the first quarter of 2005 totaled $250,000.
At
December 31, 2004, PyX had working capital of $4,869. This represented a $4,477
increase in working capital from $392 at December 31, 2003. The increase in
working capital resulted primarily from $90,000 in cash received from financing
activities, most notably $80,000 from the sale of stock and $10,000 from a
related party loan. The cash received from financing activities was partially
offset by losses from operations and purchases of computer equipment.
-47-
In
January of 2003, PyX sold 5,000,000 shares of PyX common stock for a per share
price of $0.002 with aggregate proceeds to PyX of $10,000. In June and August of
2003, PyX sold 22,500 shares of PyX common stock for a per share price of $1.00.
In March and April of 2004, PyX sold 80,000 shares of PyX common stock for a per
share price of $1.00. In January 2005, PyX sold 250,000 shares of PyX common
stock for a per share price of $1.00.
PyX’s
cash expenditures have been primarily related to operating expense, such as
payroll, marketing and travel, in addition to purchases of computer and
development equipment.
Recent
Accounting Pronouncements
PyX
derives revenues from the following sources: (1) software, which includes new
iSCSI Target and Initiator software licenses and (2) services, which includes
consulting.
New
software license revenues represent all fees earned from granting customers
licenses to use PyX’s iSCSI software. While the basis for software license
revenue recognition is substantially governed by the provisions of Statement of
Position No. 97-2, Software Revenue Recognition, or SOP 97-2, issued by the
American Institute of Certified Public Accountants, PyX exercises judgment and
uses estimates in connection with the determination of the amount of software
and services revenues to be recognized in each accounting period.
For
software license arrangements that do not require significant modification or
customization of the underlying software, PyX recognizes new software license
revenue when: (1) it enters into a legally binding arrangement with a customer
for the license of software; (2) it delivers the products; (3) customer payment
is deemed fixed or determinable and free of contingencies or significant
uncertainties; and (4) collection is reasonably assured. Substantially all of
PyX’s new software license revenue is recognized in this manner. No software
license revenue has been recognized to date.
Certain
of PyX’s software arrangements include consulting implementation services sold
separately under consulting engagement contracts. Consulting revenues from these
arrangements are generally accounted for separately from new software license
revenues because the arrangements qualify as service transactions as defined in
SOP 97-2. The more significant factors considered in determining whether the
revenue should be accounted for separately include the nature of services (i.e.,
consideration of whether the services are essential to the functionality of the
licensed product), degree of risk, availability of services from other vendors,
timing of payments and impact of milestones or acceptance criteria on the
realizability of the software license fee. Revenues for consulting services are
generally recognized as the services are performed. If there is a significant
uncertainty about the project completion or receipt of payment for the
consulting services, revenue is deferred until the uncertainty is sufficiently
resolved. Service revenues of $0 and $5,000 were recognized in the year ended
December 31, 2004 and the period from inception (November 26, 2002) to December
31, 2003, respectively.
-48-
INDEX
TO PyX TECHNOLOGIES, INC.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Page
| |
|
Report
of Independent Registered Public Accounting Firm |
F-2 |
|
Balance
Sheets |
F-3 |
|
Statements
of Operations |
F-4 |
|
Statements
of Shareholders’ Equity |
F-5 |
|
Statements
of Cash Flows |
F-6 |
|
Summary
of Accounting Policies |
F-7 |
|
Notes
to Financial Statements |
F-7 |
F-1
Report of Independent Registered Public Accounting Firm
Board of
Directors
PyX
Technologies, Inc.
San
Ramon, California
We have
audited the accompanying balance sheets of PyX Technologies, Inc. (the
“Company”) as of December 31, 2004 and 2003 and the related statements of
operations, stockholders’ equity (deficit), and cash flows for the year ended
December 31, 2004, the period from inception (November 26, 2002) through
December 31, 2003, and the period from inception (November 26, 2002) through
December 31, 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PyX Technologies, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the year ended December 31, 2004, the period from inception (November 26,
2002) through December 31, 2003, and the period from inception (November 26,
2002) through December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO
Seidman, LLP
March 3,
2005
San
Francisco, California
F-2
PYX
TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
|
December
31, |
|||||||
|
2004 |
2003 |
||||||
ASSETS |
|||||||
Current
assets: |
|||||||
|
Cash |
$ |
4,869 |
$ |
392 |
|||
Total
current assets |
4,869 |
392 |
|||||
|
Property
and equipment, net |
12,580 |
11,590 |
|||||
|
Other
assets |
24,000 |
--- |
|||||
|
Total
assets |
$ |
41,449 |
$ |
11,982 |
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY (DEFICIT) |
|||||||
Current
liabilities: |
|||||||
|
Loans |
$ |
10,200 |
$ |
--- |
|||
Accounts
payable |
82,870 |
1,992 |
|||||
|
Accrued
payroll and employee benefits |
44,352 |
--- |
|||||
|
Deferred
revenues |
82,500 |
--- |
|||||
|
Total
current liabilities |
219,922 |
1,992 |
|||||
|
Total
liabilities |
219,922 |
1,992 |
|||||
|
Commitments
and contingencies |
--- |
--- |
|||||
Stockholders'
equity (deficit): |
|||||||
|
Common
stock |
|||||||
|
($0.001
par value); authorized 10,000,000 and 200,000 |
|||||||
|
shares;
issued and outstanding 5,102,500 and 100,450 |
1,084 |
1,004 |
|||||
Additional
paid-in capital |
111,416 |
31,496 |
|||||
|
Deficit
accumulated during the development stage |
(290,973 |
) |
(22,510 |
) | |||
|
Total
shareholders' equity (deficit) |
(178,473 |
) |
9,990 |
||||
|
Total
liabilities and shareholders' equity (deficit) |
$ |
41,449 |
$ |
11,982 |
|||
The
accompanying notes are an integral part of these financial
statements.
F-3
PYX
TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
|
January
1, |
Period
from |
Cumulative |
||||||||
|
2004
to |
Inception
to |
from
Inception |
||||||||
|
December
31, |
December
31, |
to
December, 31 |
||||||||
|
2004 |
2003 |
2004 |
||||||||
|
Service
contract revenues |
$ |
--- |
$ |
5,000 |
$ |
5,000 |
||||
|
Total
revenues |
--- |
5,000 |
5,000 |
|||||||
|
Costs
and expenses: |
||||||||||
|
Product
research and development |
142,625 |
13,808 |
156,433 |
|||||||
|
Selling,
general and administrative |
124,807 |
12,888 |
137,695 |
|||||||
|
Total
operating expenses |
267,432 |
26,696 |
294,128 |
|||||||
|
Operating
loss |
(267,432 |
) |
(21,696 |
) |
(289,128 |
) | ||||
|
Interest
expense |
200 |
---
|
200 |
|||||||
|
Loss
before income taxes |
(267,632 |
) |
(21,696 |
) |
(289,328 |
) | ||||
|
Income
tax expense |
831 |
814 |
1,645 |
|||||||
|
Net
loss |
$ |
(268,463 |
) |
$ |
(22,510 |
) |
$ |
(290,973 |
) | |
The
accompanying notes are an integral part of these financial
statements.
F-4
PYX TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF SHAREHOLDERS' EQUITY (DEFICIT)
|
Common
Stock and Additional
Paid-in
Capital |
||||||||||||||||
|
Shares |
Par
Value |
Additional
Paid-in
Capital |
Accumulated
Deficit |
Total |
||||||||||||
|
Balance,
November 26, 2002 |
$ |
--- |
$ |
--- |
$ |
--- |
$ |
--- |
$ |
--- |
||||||
|
Stock
issued to founders |
100,000 |
1,000 |
9,000 |
--- |
10,000 |
|||||||||||
|
Stock
issued in connection with private placement |
450 |
4 |
22,496 |
--- |
22,500 |
|||||||||||
|
Net
loss |
--- |
--- |
--- |
(22,510 |
) |
(22,510 |
) | |||||||||
|
Balance,
December 31, 2003 |
100,450 |
1,004 |
31,496 |
(22,510 |
) |
9,990 |
||||||||||
|
1
to 50 stock split |
4,922,050 |
--- |
--- |
--- |
--- |
|||||||||||
|
Stock
issued in connection with private placement |
80,000 |
80 |
79,920 |
--- |
80,000 |
|||||||||||
|
Net
loss |
-- |
--- |
-- |
(268,463 |
) |
(268,463 |
) | |||||||||
|
Balance,
December 31, 2004 |
5,102,500 |
$ |
1,084 |
$ |
111,416 |
$ |
(290,973 |
) |
$ |
(178,473 |
) | |||||
The
accompanying notes are an integral part of these financial
statements.
F-5
PYX TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF CASH FLOWS
|
Year
Ended December 31, 2004 |
Period
from Inception (November 26, 2002) through December 31,
2003 |
Period
from Inception (November 26, 2002) through December 31,
2004 |
||||||||
|
Cash
flows from operating activities: |
||||||||||
|
Net
loss |
$ |
(268,463 |
) |
$ |
(22,510 |
) |
$ |
(290,973 |
) | |
|
Adjustments
to reconcile net loss to net cash used
in operating activities: |
||||||||||
|
Depreciation |
5,447
|
1,812
|
7,259 |
|||||||
|
Changes
in operating assets and liabilities: |
||||||||||
|
Other
assets |
(24,000 |
) |
-- |
(24,000 |
) | |||||
|
Accounts
payable |
80,879 |
1,992 |
82,871 |
|||||||
|
Accrued
payroll and commissions |
44,351 |
-- |
44,351 |
|||||||
|
Deferred
revenues |
82,500
|
-- |
82,500 |
|||||||
|
Net
cash used in operating activities |
(79,286 |
) |
(18,706 |
) |
(97,992 |
) | ||||
|
Cash
flows from investing activities: |
||||||||||
|
Purchases
of property and equipment |
(6,437 |
) |
(13,402 |
) |
(19,839 |
) | ||||
|
Net
cash used in investing activities |
(6,437 |
) |
(13,402 |
) |
(19,839 |
) | ||||
|
Cash
flows from financing activities: |
||||||||||
|
Loan |
10,200 |
-- |
10,200 |
|||||||
|
Proceeds
from issuance of common stock |
80,000 |
32,500 |
112,500 |
|||||||
|
Net
cash provided by financing activities |
90,200 |
32,500 |
122,700 |
|||||||
|
Net
increase in cash and cash equivalents |
4,477 |
392 |
4,869 |
|||||||
|
Cash
at beginning of year |
392 |
--
|
-- |
|||||||
|
Cash
at end of year |
$ |
4,869 |
$ |
392 |
$ |
4,869 |
||||
|
Interest
paid |
-- |
-- |
--- |
|||||||
|
Income
tax paid |
800 |
-- |
800 |
|||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements. |
||||||||||
F-6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company and Basis of Presentation:
PyX
Technologies, Inc. (the Company) is a technology company incorporated under the
laws of the State of California on November 26, 2002 (inception). The Company is
in the research and development stage of software products for the Internet
Small Computer System Interface (“iSCSI”) Enterprise Storage
market.
Since
inception, the Company's efforts have been devoted to the development of iSCSI
software and raising capital. The Company has not received any significant
revenues from the sale of its products or services since inception. Accordingly,
through the date of these financial statements, the Company is considered to be
in the development stage and the accompanying financial statements represent
those of a development stage enterprise.
The
financial statements present the results of operations for the period from
inception to December 31, 2004.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires the Company to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash:
Substantially
all of the Company’s cash is held with one large financial institution and may
at times be above insured limits.
Property
and Equipment:
Property
and equipment are carried at cost. The Company records depreciation charges on a
straight-line basis over the assets' estimated useful lives of three years for
computers and related equipment used to develop its software products.
When
assets are sold or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any gain or loss on sale or disposal is
recognized in operations. Maintenance, repairs and minor renewals are charged to
expense as incurred.
The
Company reviews property and equipment for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable.
In performing the review for recoverability, The Company estimates the future
gross cash flows expected to result from the use of the asset and its eventual
disposition. If such gross cash flows are less than the carrying amount of the
asset, the asset is considered impaired. The amount of the impairment loss, if
any, would then be calculated based on the excess of the carrying amount of the
asset over its fair value.
Revenue
Recognition:
The
Company will derive revenues from the following sources: (1) software, which
includes new iSCSI Target and Initiator software licenses and (2) services,
which include consulting.
When the
Company exits the development stage, new software license revenues will
represent all fees earned from granting customers licenses to use the Company’s
iSCSI software. While the basis for software license revenue recognition is
substantially governed by the provisions of Statement of Position No. 97-2,
Software Revenue Recognition, issued by the American Institute of Certified
Public Accountants, The Company exercises judgment and uses estimates in
connection with the determination of the amount of software and services
revenues to be recognized in each accounting period.
F-7
For
software license arrangements that do not require significant modification or
customization of the underlying software, the Company will recognize new
software license revenue when: (1) it enters into a legally binding arrangement
with a customer for the license of software; (2) it delivers the products; (3)
customer payment is deemed fixed or determinable and free of contingencies or
significant uncertainties; and (4) collection is reasonably assured.
Substantially all of the Company’s new software license revenue is recognized in
this manner. No software license revenue has been recognized to
date.
Certain
of the Company’s software arrangements include consulting implementation
services sold separately under consulting engagement contracts. Consulting
revenues from these arrangements are generally accounted for separately from new
software license revenues because the arrangements qualify as service
transactions as defined in SOP 97-2. The more significant factors considered in
determining whether the revenue should be accounted for separately include the
nature of services (i.e., consideration of whether the services are essential to
the functionality of the licensed product), degree of risk, availability of
services from other vendors, timing of payments and impact of milestones or
acceptance criteria on the realizability of the software license fee. Revenues
for consulting services are generally recognized as the services are performed.
If there is a significant uncertainty about the project completion or receipt of
payment for the consulting services, revenue is deferred until the uncertainty
is sufficiently resolved. Service revenues of $0 and $5,000 were recognized in
the year ended December 31, 2004 and the period from inception (November 26,
2002) to December 31, 2003, respectively.
Product
Research and Development Expenditures:
Research
and development costs are expensed as incurred.
Income
Taxes:
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No.
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the financial
statements or tax returns. Deferred income taxes represent the future net tax
effects resulting from temporary differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
recorded against net deferred tax assets where, in our opinion, realization is
uncertain. The provision for income taxes represents the net change in deferred
tax amounts, plus income taxes payable for the current period.
As of
December 31, 2004 the Company had net operating loss (NOL) carryforwards of
approximately $99,000 and $2,000 for federal and state income tax purposes
expiring in varying amounts from 2023 through 2024. Because management could not
determine it was more likely than not that deferred tax assets, primarily
relating to the NOLs, would be realized, a valuation allowance has been provided
to eliminate all of the deferred tax assets of approximately $40,000 at December
31, 2004. The Company did pay the required California state minimum income taxes
in 2003 and 2004.
Pursuant
to the provision of the Tax Reform Act of 1986, utilization of the NOL
carryforwards may also be subject to an annual limitation if a greater than 50%
change in the ownership of the Company occurs within a three-year
period.
2. PROPERTY
AND EQUIPMENT
Property
and equipment at December 31 are comprised of the following:
|
2004 |
2003 |
||||||
|
Computer
hardware |
$ |
19,839 |
$ |
13,402 |
|||
|
Less
accumulated depreciation and amortization |
(7,259 |
) |
(1,812 |
) | |||
$ |
12,580 |
$ |
11,590 |
||||
Depreciation
expense totaled $5,447 and $1,812 for the years ended December 31, 2004 and
2003, respectively.
F-8
3. SHAREHOLDERS' EQUITY
In
January 1, 2003, the Company sold 100,000 shares to the Company’s founders in
exchange for the assignment to the Company of certain technology and related
rights owned by the purchasers valued at $10,000. In July 2003, 450 shares of
common stock were sold to investors for $50.00 per share. On November 30, 2003,
the Company increased its authorized number of shares of common stock from
200,000 to 10,000,000 and simultaneously declared a 50 to 1 stock split of its
common stock. In March 2004, 80,000 shares of the Company’s Common Stock have
been sold to investors for $1.00 per share.
4. LOANS
On
September 27, 2004, the Company entered into a loan agreement with a relative of
one of the founders for $10,000 at an annual interest rate of 8% due October 31,
2005. As of December 31, 2004, the outstanding principal and interest totaled
$10,200.
5. SUBSEQUENT
EVENTS
On March
28, 2005, the Company entered into a definite agreement to be acquired by SBE,
Inc (“SBE”), a Delaware corporation listed on the Nasdaq SmallCap Market under
symbol SBEI. In the acquisition, the Company will be merged with and into a
wholly-owned subsidiary of SBE and each outstanding share of the Company’s
Common Stock will be automatically converted into 0.46 shares of SBE Common
Stock . The closing of the merger is subject to certain closing conditions
including approval by SBE’s stockholders, SBE entering into a definitive
agreement for raising at least $5 million in cash from investors (with the
closing being subject only to the closing of the merger), amendment of the
Company’s agreement with Pelco and customary closing conditions. The merger is
expected to close in SBE’s third fiscal quarter, ending July 31, 2005. An
officer of SBE, Inc. is also a shareholder of the Company.
On
January 20, 2005, the Company issued $250,000 of preferred stock for $250,000
cash. The preferred stock has a liquidation preference to the Company’s common
stock holders. The preferred stock is convertible into common stock
simultaneously with the sale of the Company to SBE. The Company also entered
into an employment agreement with two of the holders of the preferred stock. The
employees will receive 175,000 shares of the Company’s preferred stock vested
monthly over the period January 2005 though July 2005 in lieu of cash
compensation.
F-9
PROPOSAL
2
APPROVAL
OF THE UNIT SUBSCRIPTION AGREEMENT
AND
THE ISSUANCE OF SHARES OF SERIES A
PREFERRED
STOCK IN THE PRIVATE PLACEMENT
General
The unit
subscription agreement provides that, subject to satisfaction of certain
conditions, and assuming a price per share of $2.00, we will issue to the
purchasers:
| • | 2,575,000 shares of our common stock, or approximately _____% of the outstanding shares of our common stock after the closing of the merger and the private placement, assuming no further issuances of shares of our common stock and no exercise of outstanding stock options or warrants, based on the number of shares outstanding on _____, 2005; and |
| • | warrants to purchase up to an additional 1,287,500 shares of our common stock, or approximately _____% of the outstanding shares of our common stock after the closing of the merger and the private placement, assuming no further issuances of shares of our common stock and not exercise of outstanding stock options or warrants, based on the number of shares outstanding on _____, 2005. |
We refer
to the shares of our common stock and the warrants to purchase shares of our
common stock in this proxy statement as units. Each unit consists of one share
of our common stock and a warrant to purchase one-half of a share of our common
stock.
The
aggregate proceeds we will receive from the issuance of the units to the
purchasers in the private placement is $5,150,000.
We
entered into unit subscription agreements, each dated as of March 4, 2005, with
each of the purchasers set forth below. Together, these investors are referred
to as the purchasers. The purchasers have agreed to purchase units representing
aggregate gross proceeds to us of $5.0 million in the following amounts:
|
Name |
Investment |
|||
|
Herschel
Berkowitz |
$ |
150,000.00 |
||
|
Paul
Packer |
50,000.00 |
|||
|
Globis
Capital Partners |
500,000.00 |
|||
|
Globis
Overseas Fund Ltd. |
200,000.00 |
|||
|
Richard
Grossman |
50,000.00 |
|||
|
Joshua
Hirsch |
50,000.00 |
|||
|
James
Kardon |
17,000.00 |
|||
|
AIGH
Investment Partners LLC |
825,000.00 |
|||
|
Ellis
International LLC |
100,000.00 |
|||
|
Jack
Dodick |
200,000.00 |
|||
|
Stephen
Spira |
100,000.00 |
|||
|
Fame
Associates |
100,000.00 |
|||
|
Cam
Co |
350,000.00 |
|||
|
Anfel
Trading Limited |
650,000.00 |
|||
|
Ganot
Corporation |
350,000.00 |
|||
|
LaPlace
Group, LLC |
300,000.00 |
|||
|
F.
Lyon Polk |
60,000.00 |
|||
|
Paul
Tramontano |
50,000.00 |
|||
|
Hilary
Edson |
60,000.00 |
|||
|
Kevin
McCaffrey |
100,000.00 |
|||
|
William
Heinzerling |
100,000.00 |
|||
|
John
A. Moore |
100,000.00 |
|||
|
Mark
Giordano |
30,000.00 |
|||
|
Jeffrey
Schwartz |
8,000.00 |
|||
|
Norman
Pessin |
250,000.00 |
|||
|
Greg
Yamamoto |
200,000.00 |
|||
|
Tzu-Wang
Pan |
50,000.00 |
|||
|
Kurt
Miyatake |
50,000.00 |
|||
|
Greg
Yamamoto, as UTMA custodian for
Melanie
Yamamoto |
50,000.00 |
|||
|
Greg
Yamamoto, as UTMA custodian for
Nicholas
Yamamoto |
50,000.00 |
|||
|
Total |
$ |
5,150,000.00 |
||
-49-
The form
of unit subscription agreement is attached to this proxy statement as Annex C.
You should read the unit subscription agreement carefully. It is the agreement
that governs the terms of the private placement. The following information
summarizes the terms related to the private placement and the unit subscription
agreements.
Per
Unit Purchase Price
Each unit
will be issued at a price equal to the lowest of:
| • | $2.50; |
|
• |
92%
of the average closing sale price per share of our common stock, as
reported on the Nasdaq SmallCap Market, for each of the five consecutive
trading days on which our common stock trades ending on the date
immediately prior to the closing date of the private placement; and
|
|
• |
95%
of the closing sale price per share of our common stock, as reported on
the Nasdaq SmallCap Market, on the trading day on which our common stock
trades that immediately precedes the closing date of the private
placement. |
The
private placement will be significantly dilutive to current stockholders and the
PyX stockholders. We have the right to terminate the unit subscription agreement
and not close the transaction if the price per unit is less than
$2.00.
Closing
of the Private Placement
The unit
subscription agreements provide that the closing of the private placement will
take place as soon as practicable after the last condition precedent to closing
has been satisfied or waived and no later than 60 days after the date the unit
subscription agreements were entered into. However, if the SEC determines to
review this proxy statement, then the closing of the private placement must take
place no later than July 31, 2005, or such later date as the purchasers of a
majority of the units determine.
Closing
of the private placement could be delayed if there is a delay in satisfying the
closing conditions to the private placement. There can be no assurances as to
whether, and on what date, the conditions will be satisfied or that the parties
will complete the private placement at all. If the private placement is not
completed on or before 60 days after the unit subscription units were entered
into or July 31, 2005, as applicable, and the purchasers of a majority of
the units are unwilling to extend the closing date, the unit subscription
agreements will terminate.
Representations
and Warranties
The unit
subscription agreements contain customary representations and warranties made by
us to the purchasers and by the purchasers to us for purposes of allocating the
risks associated with the private placement. The assertions embodied in the
representations and warranties made by us are qualified by information set forth
in a confidential disclosure letter that was delivered in connection with the
execution of the unit subscription agreements. While we do not believe that the
disclosure letter contains information that securities laws require us to
publicly disclose, other than information that is being disclosed in this proxy
statement, the disclosure schedule may contain information that modifies,
qualifies and creates exceptions to the representations and warranties set forth
in the unit subscription agreements. Accordingly, you should not rely on any of
these representations and warranties as characterizations of the actual state of
facts, since they may be modified in important respects by the underlying
disclosure letter. Our disclosure letter contains information that in some cases
has been included in our general prior public disclosures, and also may contain
additional non-public information. Moreover,
information concerning the subject matter of the representations and warranties
may have changed since the date of the unit subscription agreements, which
subsequent information may or may not be fully reflected in the disclosure
letter we delivered to the purchasers at signing and which may not be delivered
by us until the closing date of the private placement.
-50-
The
representations and warranties in the unit subscription agreements include,
among other things:
|
• |
the
purchasers and our authority to enter into, and carry out the obligations
under, the unit subscription agreements and the enforceability of the unit
subscription agreements; and |
|
• |
retention
of brokers or finders in connection with the private
placement. |
In
addition, the unit subscription agreements contain additional representations
and warranties by us as to certain other matters, including:
|
• |
our
organization, qualification, corporate power and good
standing; |
|
• |
the
organization, qualification and good standing of each of our subsidiaries,
including, for purposes of the unit subscription agreements, of
PyX; |
|
• |
capitalization; |
|
• |
this
proxy statement and the special meeting; |
|
• |
the
authorization of shares of common stock and the warrants to purchase
shares of common stock to be issued pursuant to the unit subscription
agreements; |
|
• |
the
exemption of the units from the registration requirements of the
Securities Act of 1933, as amended; |
|
• |
the
absence of certain conflicts; |
|
• |
receipt
of all necessary governmental authorizations required in connection with
the private placement; |
|
• |
compliance
with applicable legal requirements and material
agreements; |
|
• |
the
accuracy of certain of our SEC filings and our financial
statements; |
|
• |
litigation
matters; |
|
• |
the
absence of certain changes since January 31,
2005; |
|
• |
our
intellectual property; |
|
• |
adverse
business developments; |
|
• |
outstanding
registration rights; |
|
• |
the
accuracy of our charter documents as provided to the purchasers; and
|
|
• |
our
use of the proceeds from the private
placement. |
-51-
All of
the representations and warranties set forth in the unit subscription agreements
survive for a period of one year following the closing of the private
placement.
Certain
Covenants
We have
agreed to cooperate with the purchasers in connection with their filings with
the SEC with respect to the units. Additionally, we have agreed to deliver to
the purchasers any reports that we deliver to our stockholders generally and to
reserve for issuance that number shares of our common stock issuable upon
exercise of the warrants issued to the purchasers in connection with the private
placement.
Indemnification
We have
agreed to indemnify the purchasers with respect to breaches of representations,
warranties and covenants contained in the unit purchase agreements. However, our
liability for such breaches is limited to the aggregate purchase price paid by
the purchasers in connection with the private placement. Further, the purchasers
are not entitled to recover any damages with respect to an indemnification claim
until the total damages incurred under the unit subscription agreements exceed
$25,000, after which they are entitled to be indemnified for the full amount of
the damages, subject to the cap mentioned above.
Conditions
Precedent
The
completion of the private placement depends on the satisfaction of a number of
conditions, including, among others, conditions relating to:
|
• |
execution
and delivery of the investor rights
agreement; |
|
• |
accuracy
of the representations and warranties of the parties and compliance by the
parties with their respective covenants; |
|
• |
the
approval of Proposals 1 and 2; |
|
• |
our
listing status on the Nasdaq SmallCap
Market; |
|
• |
completion
of the merger; and |
|
• |
entry
by PyX into a reseller agreement with LSI
Logic. |
Warrants
The
warrants issued in connection with the private placement have a term of five
years and are exercisable at a per share price equal to 133% of the unit price
described above under “Per Unit Purchase Price” subject to proportional
adjustments for stock splits, stock dividends, recapitalizations and the like.
In
addition, the shares of our common stock issuable upon exercise of the warrants
are subject to adjustment in the event we issue shares of our common stock at a
price less than the then applicable purchase price of the warrants, subject to
certain customary exceptions, including, among other things, issuances to
employees, officers and directors under our equity compensation plans. If not
exercised after five years, the right to purchase shares of our common stock
pursuant to the warrants will terminate. The warrants contain a cashless
exercise feature. The common stock underlying the warrants are entitled to the
benefits and subject to the terms of the Registration Rights described
below.
The form
of warrant is attached to this proxy statement as Annex E. You should read the
warrant carefully. It is the agreement that governs the terms of the warrant.
The following information summarizes the terms related to the private placement
and the unit subscription agreements.
Investor
Rights Agreement
We entered an investor rights agreement, dated as of _____, 2005, with the
purchasers in the private placement. The investor rights agreement is attached
to this proxy statement as Annex F. You should read the investor rights
agreement carefully. It is the agreement that governs the terms under which we
have agreed to register for resale the sale of the shares of common stock and
the shares of common stock to be issued upon exercise of the warrants that will
be issued to the purchasers in the private placement. The following summarizes
the terms of the registration rights agreement.
-52-
Registration
Rights
We have
agreed to file a registration statement with the SEC within 60 days after
the closing date of the private placement registering the resale of such shares
of common stock, including the shares underlying the warrants, from time to time
by these purchasers, and to use our best efforts to cause the registration
statement to become effective as within 90 days after filing the registration
statement. Once effective, the registration statement will permit the purchasers
to sell their shares of common stock in the open market from time to time using
the methods of distribution to be described in the registration statement. Our
obligation to maintain the effectiveness of the registration statement
terminates on the earlier of (i) two years after closing and (ii) the date that
all of the shares of our common stock issued to the purchasers, including any
shares purchased by the purchasers upon exercise of the preemptive rights
described below under “Preemptive Rights,” (a) have been sold or (iii) can be
sold under Rule 144(k) of the Securities Act of 1933, as amended. We have also
agreed not to grant any other registration rights senior to the rights granted
to the purchasers. We expect to register such shares for resale concurrently
with those issued in the merger. We have also agreed to certain customary
obligations and indemnity provisions relating to the registration process and to
pay the expenses incurred in connection with the registration of these
shares.
Rights
of Participation
Each
purchaser in the private placement will have the right to participate in any
future private placements of our equity for a period of two years following the
closing of the private placement. These rights are subject to certain customary
exceptions, including, among other things, issuances to employees, officers and
directors under our equity compensation plans. These rights are intended to
enable the purchasers to maintain their pro rata interest in us according to
their then-current ownership interest at the time of the applicable
issuances.
The
Voting Agreement
Certain
members of our management are party to a voting agreement, dated ______, 2005,
pursuant to which they have agreed, subject to the terms and conditions of the
voting agreement, to vote all of their shares of common stock in favor of
proposals 1 and 2 and any other matter necessary to effect the transactions. The
form of voting agreement is attached to this proxy statement as Annex D. You
should read the voting agreement carefully. It is the agreement that governs the
terms under which our management team has agreed to vote in favor of the
transactions. The shares subject to the voting agreement represent approximately
___% of the outstanding shares of our common stock, based on the number of
shares outstanding on _____, 2005.
Recommendation
of our Board of Directors
Our board
of directors recommends that our stockholders vote FOR the unit subscription
agreement and the issuance of units consisting of one share of our common stock
and a warrant to purchase an additional one-half share of our common stock, for
aggregate gross proceeds to us of $5,150,000, to the purchasers in the private
placement.
-53-
OTHER
MATTERS
Incorporation
By Reference Of Annual Report On Form 10-K
Concurrently
with this proxy statement, we are sending you a copy of our annual report on
Form 10-K for the year ended October 31, 2004 and our quarterly report on
Form 10-Q for the quarter ended January 31, 2005. This proxy statement
incorporates by reference Items 7, 7A, 8 and 9 of the Form 10-K, which
contains important information about us and our financial condition that is not
included in this proxy statement. A copy of the Form 10-K has also been
filed with the SEC and may be accessed from the SEC's homepage (www.sec.gov).
Accountants
Representatives
of BDO Seidman, LLP are not expected to be present at the Special Meeting will
have an opportunity to make a statement if they so desire and will not be
available to respond to appropriate questions.
|
|
|
|
|
By
Order of the Board of Directors, |
|
|
|
|
|
|
|
|
/s/
David W. Brunton |
|
|
|
|
|
David
W. Brunton |
|
|
Secretary |
San
Ramon, California
[May 6],
2005
-54-
ANNEX A
HOULIHAN
LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. OPINION
Annex
A
ANNEX B
AGREEMENT
AND PLAN OF MERGER
Annex
B
ANNEX
C
UNIT
SUBSCRIPTION AGREEMENT
Annex
C
ANNEX D
VOTING
AGREEMENT
Annex
D
ANNEX E
FORM
OF WARRANT
Annex
E
ANNEX F
INVESTOR
RIGHTS AGREEMENT
Annex
F